<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SECURITY CAPITAL ATLANTIC INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
----------------
SIX PIEDMONT CENTER
ATLANTA, GEORGIA 30305
(404) 237-9292
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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JEFFREY A. KLOPF, SECRETARY
SECURITY CAPITAL ATLANTIC INCORPORATED
SIX PIEDMONT CENTER
ATLANTA, GEORGIA 30305
(404) 237-9292
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
EDWARD J. SCHNEIDMAN PATRICIA A. CERUZZI
MAYER, BROWN & PLATT SULLIVAN & CROMWELL
190 SOUTH LASALLE STREET 125 BROAD STREET
CHICAGO, ILLINOIS 60603 NEW YORK, NEW YORK 10004
(312) 782-0600 (212) 558-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this registration statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF SECURITIES PROPOSED MAXIMUM AGGREGATE
BEING REGISTERED(1) OFFERING PRICE(2) AMOUNT OF REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value
$.01 per share........ $115,000,000 $39,656
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Preferred Share Purchase
Rights................ None None
</TABLE>
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(1) Purchasers of the Registrant's common stock registered hereunder (or
subsequent transferees who are holders of the Registrant's common stock
registered hereunder on the applicable record date) will also receive a
distribution of shares of common stock and warrants to purchase shares of
common stock of Homestead Village Properties Incorporated described in
Appendix A contained herein which have been registered on Registration
Statement No. 333-4455.
(2) Estimated solely for the purpose of determining the registration fee.
Includes shares issuable upon exercise of an overallotment option granted
to the Underwriters.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
----------------------- ---------------------------------
<S> <C>
1.Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover Page.
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front Cover Page; Additional
Information; Outside Back Cover Page.
3.Summary Information, Risk
Factors and Ratio of Earnings Prospectus Summary; Risk Factors; Security
to Fixed Charges.............. Capital Atlantic Incorporated.
4.Determination of Offering Price. Underwriting.
5.Dilution........................ Dilution.
6.Selling Security Holders........ Not applicable.
7.Plan of Distribution............ Outside Front Cover Page; Underwriting.
8.Use of Proceeds................. Use of Proceeds.
9.Selected Financial Data......... Prospectus Summary; Selected Financial
Information.
10.Management's Discussion and
Analysis of Financial
Condition and Results of Management's Discussion and Analysis of
Operations.................... Financial Condition and Results of
Operations.
11.General Information as to Prospectus Summary; Security Capital
Registrant.................... Atlantic Incorporated; REIT Management;
Certain Provisions of Maryland Law and of
ATLANTIC's Articles of Incorporation and
Bylaws.
12.Policy with Respect to Certain Risk Factors; Policies With Respect to
Activities.................... Certain Activities.
13.Investment Policies of Security Capital Atlantic Incorporated;
Registrant.................... Business; REIT Management; Properties;
Policies With Respect to Certain
Activities.
14.Description of Real Estate...... Business; Properties.
15.Operating Data.................. Business; Properties.
16.Tax Treatment of Registrant and
its Security Holders.......... Federal Income Tax Considerations.
17.Market Price of and Dividends on
the Registrant's Common Equity
and Related Stockholder Risk Factors; Distributions; REIT
Matters....................... Management; Shares Available for Future
Sale.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
----------------------- ---------------------------------
<S> <C>
18.Description of Registrant's Description of Capital Stock; Certain
Securities...................... Provisions of Maryland Law and of
ATLANTIC's Articles of Incorporation and
Bylaws.
19.Legal Proceedings................. Risk Factors; Business.
20.Security Ownership of Certain
Beneficial Owners and
Management...................... Principal Shareholders.
21.Directors and Executive Officers.. REIT Management.
22.Executive Compensation............ REIT Management.
23.Certain Relationships and Related
Transactions.................... Risk Factors; Homestead Transaction;
Business; REIT Management; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Certain Relationships and Transactions;
Policies With Respect to Certain
Activities.
24.Selection, Management and Custody
of Registrant's Investments..... Risk Factors; Business; REIT Management;
Certain Relationships and Transactions.
25.Policies with Respect to Certain Policies With Respect to Certain
Transactions.................... Activities.
26.Limitations of Liability.......... Description of Capital Stock; REIT
Management.
27.Financial Statements and Selected Financial Information; Financial
Information..................... Statements.
28.Interests of Named Experts and
Counsel......................... Validity of Shares.
29.Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities...... REIT Management.
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 28, 1996
SHARES
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
Security Capital Atlantic Incorporated ("ATLANTIC") is a highly focused real
estate operating company which engages in the development, acquisition,
operation and long-term ownership of multifamily properties in the southeastern
United States. ATLANTIC has elected to be taxed as a real estate investment
trust (a "REIT") for federal income tax purposes and expects to pay regular
quarterly distributions to its shareholders.
All of the shares of ATLANTIC's common stock, par value $.01 per share (the
"Shares"), offered hereby are being sold by ATLANTIC. Prior to this offering
(the "Offering"), there has been no public market for the Shares. It is
currently anticipated that the initial public offering price will be between
$ and $ per Share. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price.
Each purchaser of Shares in the Offering (or each subsequent transferee who
is the holder of such Shares on the record date for the Homestead transaction
described herein) will also receive a distribution per Share of at least
shares of common stock, par value $.01 per share, of Homestead Village
Properties Incorporated ("Homestead") and warrants to purchase at least
shares of Homestead common stock. See "Homestead Transaction".
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SHARES.
The risk factors include:
. The value of ATLANTIC's assets is not based on third-party appraisals;
therefore, the value of the Shares may not accurately reflect the fair
market value of ATLANTIC's portfolio.
. The ability of Security Capital Group Incorporated ("SCG") to exercise
significant influence over the business and policies of ATLANTIC.
. Conflicts of interest between ATLANTIC and the REIT Manager and its
affiliates which could result in decisions that do not fully represent the
interests of all shareholders.
. Possible inability of ATLANTIC to sustain its proposed 1996 distribution
level.
. General real estate investment considerations, such as the effect of local
economic and other conditions on real estate values and the possible
inability to refinance revolving credit and mortgage indebtedness.
. Taxation of ATLANTIC as a corporation if it fails to continue to qualify
as a REIT for federal income tax purposes.
. The possibility that ATLANTIC's being externally managed by an affiliate
of its principal shareholder may adversely affect the market price of the
Shares.
In addition, there are certain risks associated with securities of Homestead
and the Homestead transaction which prospective investors should consider, as
described under the caption "Risk Factors" in the Prospectus of Homestead
attached hereto as Appendix A.
Application will be made to list the Shares on the New York Stock Exchange
(the "NYSE") under the symbol " ".
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT (1) ATLANTIC(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total(3)............................. $ $ $
</TABLE>
- -----
(1) ATLANTIC and Homestead have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting".
(2) Before deducting estimated expenses of $ payable by ATLANTIC.
(3) ATLANTIC has granted the Underwriters an option for days to purchase up
to an additional Shares at the initial public offering price per Share,
less the underwriting discount, solely to cover over-allotments. If such
option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to ATLANTIC will be $ , $ and $ ,
respectively. See "Underwriting".
----------
The Shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the Shares will be ready for delivery in New York, New York on
or about , 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
----------
The date of this Prospectus is , 1996.
<PAGE>
(MAP TO COME)
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus assumes (i)
an estimated initial public offering price of $ per Share (the midpoint of
the range of estimated initial public offering prices set forth on the cover
page of this Prospectus) and (ii) no exercise of the Underwriters' over-
allotment option. Pro forma information regarding properties owned at March 31,
1996 includes all properties acquired through May 31, 1996 at their cost plus
budgeted renovations, and excludes Homestead Village(R) properties owned or
under development by ATLANTIC, which will be contributed to Homestead prior to
the closing of the Offering (see "Homestead Transaction"). All references to
Homestead's operations include ATLANTIC, SCG and Security Capital Pacific Trust
operations with respect to Homestead Village(R) properties. For a complete
description of the Homestead transaction, prospective investors should
carefully review the Prospectus of Homestead which is attached as Appendix A to
this Prospectus and is hereby incorporated by reference into this Prospectus.
All information contained in this Prospectus assumes that the Homestead
transaction has been completed. Homestead Village(R) is a registered trademark
of SCG, which will be assigned to Homestead as part of the Homestead
transaction. The term "Homestead Village" as used herein shall include a
reference to such registered trademark. See "Glossary" for the definitions of
certain other terms used in this Prospectus.
SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC, through its research-based investment strategy, engages in the
development, acquisition, operation and long-term ownership of multifamily
properties in the southeastern United States. ATLANTIC's objective is to be the
preeminent real estate operating company focusing on moderate income
multifamily properties in its primary target market. ATLANTIC, through its REIT
manager, Security Capital (Atlantic) Incorporated (the "REIT Manager" or "REIT
Management"), is an Atlanta-based, fully integrated operating company with 75
professionals dedicated to implementing its highly focused operating strategy.
At May 31, 1996, ATLANTIC's portfolio consisted of 23,979 multifamily units,
including 6,870 units under construction and in planning, in 16 metropolitan
areas and 39 submarkets in premier growth areas of the southeastern United
States. The aggregate investment cost of these 85 properties, including planned
renovations and total budgeted development expenditures, is approximately $1.26
billion.
Purchasers of Shares in the Offering will also have the opportunity to
receive an ownership interest in Homestead. Specifically, each purchaser of
Shares in the Offering (or each subsequent transferee who is the holder of such
Shares on the Distribution Record Date (as defined below)) will also receive a
distribution per Share of at least shares of Homestead common stock and
warrants to purchase at least shares of Homestead common stock. Homestead
will develop, own and manage moderate priced, purpose-built, extended-stay
lodging facilities designed to appeal to value-conscious customers on temporary
assignment, undergoing relocation or in training. The first Homestead Village
facility was opened in 1992 by Security Capital Pacific Trust ("PTR"), which
has since built and placed into operation 26 additional Homestead Village
facilities. Homestead expects to have a total of 31 facilities operational and
41 facilities under construction by the end of 1996 and plans to continue an
active development program thereafter. PTR's stabilized Homestead Village
facilities have produced annual returns (based on funds from operations over
actual investment cost) in excess of 14% for 1994 and 1995. No assurance can be
given that Homestead will be able to achieve or sustain such returns in the
future. See "Homestead Transaction".
ATLANTIC seeks to achieve long-term sustainable growth in cash flow by
maximizing the operating performance of its core portfolio through value-added
operating systems, developing industry-leading, multifamily product in targeted
submarkets that exhibit strong job growth prospects and demographic trends and
implementing its asset optimization strategy of redeploying capital into assets
that meet ATLANTIC's long-term investment criteria and have significant long-
term cash flow growth prospects.
3
<PAGE>
REIT Management believes that ATLANTIC's future growth will be driven by the
following operating characteristics:
. STRONG PRIMARY TARGET MARKET. At ATLANTIC's inception in late 1993, the
REIT Manager's research indicated that the southeastern United States
demonstrated the best prospects for multifamily properties which would
contribute to long-term cash flow growth. Because ATLANTIC was in the
formation stage, its investment strategy did not need to be influenced by
an existing portfolio of properties, but instead focused on markets and
submarkets exhibiting the strongest demographic trends and job growth
prospects. Based on this research-oriented approach, ATLANTIC believes
the southeastern United States is geographically and economically diverse
and, therefore, ATLANTIC does not rely on any single target market city
for future growth. ATLANTIC's primary target market cities are Atlanta,
Georgia; Birmingham, Alabama; Charlotte, North Carolina; Jacksonville,
Florida; Memphis, Tennessee; Nashville, Tennessee; Raleigh, North
Carolina; Richmond, Virginia; Southeast Florida (which includes Ft.
Lauderdale and West Palm Beach); and Tampa, Florida. Based on forecasts
published by Woods & Poole Economics, Inc., the projected population
growth in ATLANTIC's primary target market is 34.4% for the years 1995
through 2015, whereas the projected population growth of the United
States as a whole for the same period is 16.9%. For the same period, job
growth is projected to be 28.1% in ATLANTIC's primary target market,
compared to 19.7% for the United States as a whole. Through its research,
ATLANTIC continues to evaluate new target market cities and submarkets
and identifies those that meet its long-term investment objectives.
. EXPERIENCED MANAGEMENT TEAM. The REIT Manager provides ATLANTIC with both
strategic and day-to-day management, including research, investment
analysis, acquisition and due diligence, development, asset management,
capital markets, accounting and legal services. The REIT Manager's
operations are characterized by an experienced investment committee that
provides a disciplined and structured approach to approving new
acquisition and development expenditures. ATLANTIC's five senior
executives that comprise the investment committee have an average of 23
years of industry experience developing and managing multifamily
properties, thus providing ATLANTIC with several senior officers with the
leadership, operational, investment and financial skills and experience
to oversee the entire operations of ATLANTIC. Through the REIT Manager,
ATLANTIC functions as a fully integrated operating company.
. RESEARCH AND DEVELOPMENT. ATLANTIC is dedicated to ongoing research and
development. ATLANTIC utilizes Security Capital Investment Research
Incorporated ("Security Capital Investment Research"), which is owned by
SCG, to conduct comprehensive evaluations of its target market on a
submarket-by-submarket basis to identify those submarkets that will offer
continued opportunities for long-term cash flow growth. In addition to
market research, considerable resources are devoted to product research.
The REIT Manager along with its property management affiliate, SCG Realty
Services Atlantic Incorporated ("SCG Realty Services"), continually
evaluates and refines ATLANTIC's multifamily product to incorporate
technologies and designs that will enhance long-term livability for its
residents. These evaluations, combined with ATLANTIC's extensive market
knowledge as one of the largest multifamily property owners in the
southeastern United States, enable ATLANTIC to identify the submarkets
and product types that will offer continued opportunities for long-term
cash flow growth. Moreover, this research is fully integrated into the
operations of ATLANTIC's existing portfolio which enables ATLANTIC to
adjust its operating strategies to reflect market conditions in an effort
to achieve sustained growth in cash flow.
. MODERATE INCOME DEVELOPMENTS. ATLANTIC believes that moderate income
households (those earning 65% to 90% of a submarket's median household
income) represent the most underserved segment of the renter population.
Despite the fact that moderate income residents
4
<PAGE>
make up the largest segment of the renter population, ATLANTIC believes
that less than 10% of the 1995 multifamily construction starts in
ATLANTIC's primary target market cities were targeted to moderate income
residents. ATLANTIC believes that its strategy of providing this
underserved market with well built communities in convenient locations
will provide a significant source of long-term sustainable cash flow
growth. In ATLANTIC's experience, moderate income residents are typically
longer-term renters due, in part, to the financial resources required to
purchase single family homes. As a result, moderate income communities
benefit from a significant reduction in turnover expenses as compared to
upper middle or middle income product. Because turnover costs are a
significant component of a property's operating expenses, a measurable
reduction in turnover can result in meaningful increases in operating
income.
At May 31, 1996, ATLANTIC had 22 properties under construction or in
planning comprising 6,870 units at a total budgeted investment cost of
$399.8 million. Of such properties, ATLANTIC expects to start construction
on 2,513 units with an expected investment cost of approximately $140.8
million between June 1, 1996 and December 31, 1996. In 1997, ATLANTIC
expects to start between $175 million and $225 million of multifamily
property developments. In 1996 and 1997, approximately 62% of ATLANTIC's
total development activities are expected to constitute moderate income
product, based on expected investment cost.
. HIGH QUALITY PORTFOLIO. ATLANTIC believes a high quality portfolio is one
that produces long-term growth in cash flow. Internal growth from
ATLANTIC's core portfolio operations is expected to be a significant
component in achieving ATLANTIC's objective of long-term growth in cash
flow. Net operating income on a "same store" basis increased 8.04% from
the six-month period ended December 31, 1994 to the six-month period
ended December 31, 1995 for the 39 properties that were operating during
both of such periods. At May 31, 1996, ATLANTIC's stabilized properties
were 95.6% occupied. See "Business--Investment Analysis". ATLANTIC
believes that this strong performance reflects the quality of its
portfolio and strength of its primary target market. In addition, at May
31, 1996, ATLANTIC's portfolio of multifamily properties consisted of
46.5% of stabilized operating properties, 21.8% of pre-stabilized
operating properties and 31.7% of properties under development, based on
expected investment cost. As the development properties are completed and
the pre-stabilized properties achieve stabilization, they are expected to
contribute significantly to ATLANTIC's objective of long-term growth in
cash flow.
. PORTFOLIO AND ASSET OPTIMIZATION. ATLANTIC develops and acquires
properties with a long-term ownership perspective. Each year, REIT
Management, with the support of Security Capital Investment Research,
reviews ATLANTIC's asset base and generates operating and capital plans.
In an effort to optimize the performance of its portfolio, ATLANTIC may
from time to time seek to dispose of assets that in management's view do
not meet ATLANTIC's long-term investment criteria. As of May 31, 1996,
ATLANTIC disposed of or exchanged three properties.
. RESOURCES AND EXPERIENCE OF PRINCIPAL SHAREHOLDER. SCG, ATLANTIC's
largest shareholder and the owner of the REIT Manager, owns 64.1% of
ATLANTIC's outstanding Shares ( % after giving effect to the Offering).
ATLANTIC benefits from the substantial resources available to it through
its affiliation with SCG, including capital markets, research, accounting
and legal services. Moreover, ATLANTIC benefits from SCG's significant
experience in managing two publicly traded REITs, PTR, in which SCG has a
37.9% ownership interest, and Security Capital Industrial Trust ("SCI"),
in which SCG has a 48.3% ownership interest.
. CONSERVATIVE BALANCE SHEET STRATEGY. ATLANTIC employs a conservative
balance sheet strategy. Long-term debt as a percentage of long-term
undepreciated book capitalization was 17.5% at March 31, 1996 on an
historical basis and 14.8% at March 31, 1996 on a pro forma
5
<PAGE>
basis as adjusted to give effect to the Offering and other sales of Shares
subsequent to March 31, 1996 and the application of the proceeds therefrom
and to the Homestead transaction. In the future, ATLANTIC intends to
access the public equity and debt markets. ATLANTIC's objective is to
achieve an investment-grade debt rating and to access the debt markets
through issuing long-term, fixed rate, fully amortizing unsecured
corporate debt in order to limit ATLANTIC's exposure to floating rate or
balloon financing. ATLANTIC's $350 million line of credit enables ATLANTIC
to take advantage of investment opportunities in its target market without
investing significant funds in short-term investments by providing a
short-term source of funding between securities offerings. As of June 27,
1996, $194 million of borrowings were outstanding under the line of credit
(and approximately $ million in borrowings are expected to be
outstanding at the time of the closing of the Offering). This conservative
balance sheet strategy is expected to provide ATLANTIC with significant
incremental debt capacity and allow ATLANTIC to take advantage of future
investment opportunities on a non-dilutive basis which will contribute to
ATLANTIC's objective of long-term growth in cash flow.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE SHARES
OFFERED HEREBY. THESE RISKS INCLUDE:
. The value of ATLANTIC's assets is not based on third-party appraisals;
therefore, the value of the Shares may not accurately reflect the fair
market value of ATLANTIC's portfolio.
. The ability of SCG to exercise significant influence over the business
and policies of ATLANTIC due to its ownership of 64.1% of ATLANTIC's
outstanding Shares ( % after giving effect to the Offering), its right to
nominate up to three Directors and its right to prior approval over
certain matters, including ATLANTIC's operating budget and substantial
deviations therefrom.
. Conflicts of interest between ATLANTIC and the REIT Manager and its
affiliates as to management agreements and fees (which must be reviewed
and approved at least annually by ATLANTIC's Independent Directors (as
defined below)), which could result in decisions that do not fully
represent the interests of all shareholders.
. ATLANTIC's proposed 1996 distribution level is based on a number of
assumptions, any change in which could affect ATLANTIC's ability to
sustain the proposed distribution level, which the ATLANTIC Board of
Directors (the "Board") is evaluating in light of the Homestead
transaction.
. General real estate investment considerations, such as (i) the effect of
local economic and other conditions on real estate values and the ability
of residents to make rental payments, along with the general illiquidity
of equity real estate investments, which may limit the ability of
ATLANTIC to change its asset base; (ii) possible inability to refinance
revolving credit and mortgage indebtedness; (iii) the risks inherent in
development activities, including the risk that construction may not be
completed on schedule; and (iv) competition in seeking residents for
properties owned, properties for acquisition and land for development.
. Ability of the Board, which will be comprised of a majority of
Independent Directors prior to the consummation of the Offering, to
change certain policies of ATLANTIC, including investment, financing and
distribution policies, without a vote of the shareholders, which could
result in policies that do not fully reflect the interests of all
shareholders.
. Concentration of properties representing 37.9% of ATLANTIC's pro forma
revenues as of March 31, 1996 in the Atlanta, Georgia metropolitan area,
which thus may be affected by changes in the economic conditions of that
area.
. Taxation of ATLANTIC as a corporation if it fails to continue to qualify
as a REIT for federal income tax purposes, and ATLANTIC's liability for
certain federal, state and local taxes on its income and property.
6
<PAGE>
. Limitations on the shareholders' ability to change control of ATLANTIC
due to (i) restrictions on ownership of more than 9.8% of the outstanding
Shares and possible redemption of Shares acquired or voidance of the
transfer of Shares acquired in excess of 9.8% of the outstanding Shares;
(ii) ATLANTIC's shareholder rights plan; (iii) ATLANTIC's classified
Board; and (iv) the Board's ability to issue preferred stock.
. The possibility that ATLANTIC's being externally managed by an affiliate
of its principal shareholder may adversely affect the market price of the
Shares.
. Possible adverse effects of increases in market interest rates on Share
prices.
. Potential liability of ATLANTIC for unanticipated or future environmental
liabilities and the potential expense of compliance with the Fair Housing
Amendments Act of 1988 and the Americans with Disabilities Act of 1990.
. Lack of a prior market for the Shares, the possibility that the initial
public offering price of the Shares will not accurately reflect the
market prices of the Shares and the Homestead common stock and warrants
which will be distributed to holders of Shares and the possible effect on
the market price of the future sale of a substantial number of Shares.
. Dilution of net tangible book value of the Shares.
In addition, purchasers of Shares in the Offering (or subsequent transferees
who are holders of such Shares on the Distribution Record Date) will receive
shares of common stock and warrants to purchase shares of common stock of
Homestead. There are certain risks associated with securities of Homestead and
the Homestead transaction which prospective investors should consider, as
described under the caption "Risk Factors" in the Prospectus of Homestead
attached hereto as Appendix A. Prospective investors are advised that the
Distribution will result in a taxable dividend to shareholders of ATLANTIC,
even if ATLANTIC shareholders do not sell the Homestead common stock and
warrants received in the Distribution. See "Federal Income Tax Considerations--
Tax Consequences of the Homestead Transaction".
For a discussion of ATLANTIC's transactions with related parties and the
compensation therefor, see "Certain Relationships and Transactions".
HOMESTEAD TRANSACTION
Homestead was organized to continue the operations of ATLANTIC, PTR and SCG
with respect to their respective moderate priced, purpose-built, extended-stay
lodging facilities. Homestead will develop, own and manage moderate priced,
purpose-built, extended-stay lodging facilities designed to appeal to value-
conscious customers on temporary assignment, undergoing relocation or in
training. The first Homestead Village facility was opened in 1992 by PTR, which
has since built and placed into operation 26 additional Homestead Village
facilities. PTR's stabilized Homestead Village facilities have produced annual
returns (based on funds from operations over actual investment cost) in excess
of 14% for 1994 and 1995. No assurance can be given that Homestead will be able
to achieve or sustain such returns in the future.
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, purpose-built, extended-stay
lodging business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead's facilities are designed and built to uniform plans developed by
Homestead. Homestead expects to have a total of 31 facilities operational and
41 facilities under construction by
7
<PAGE>
the end of 1996 and plans to continue an active development program thereafter.
Homestead's plans call for the average facility to have approximately 136
extended-stay rooms and take approximately eight to ten months to construct.
The average length of stay for a customer in Homestead's facilities is in
excess of four weeks. For the quarter ended March 31, 1996, average economic
occupancy and average weekly rate for PTR's stabilized properties were 87% and
$217 per week, respectively.
In March 1996, the Board began considering ways for ATLANTIC to maximize
shareholder value with respect to its Homestead Village properties. In May
1996, ATLANTIC, PTR, SCG and Homestead entered into the Merger Agreement (as
defined below). Pursuant to the Merger Agreement, each of ATLANTIC, PTR and SCG
will contribute, through a series of merger transactions (the "Mergers"), all
of their respective assets related to Homestead Village properties to Homestead
and ATLANTIC and PTR will enter into the Funding Commitment Agreements (as
defined below), which will result in ATLANTIC (a) owning 4,201,220 shares of
Homestead common stock, (b) owning 2,818,517 warrants to purchase one share of
Homestead common stock at $10.00 per share which will expire one year after the
date of closing of the Mergers (the "Merger Closing Date"), (c) owning up to
$98,028,471 in convertible mortgage notes which will have a term of
approximately ten years, will bear interest at 9% per year, will not be
callable for five years and will be convertible into shares of Homestead common
stock after March 31, 1997 on the basis of one share of Homestead common stock
for every $11.50 of principal amount outstanding, subject to antidilution
adjustments and (d) providing a cash payment estimated to be $18.6 million to
Homestead at the Merger Closing Date. The $18.6 million payment is required
because ATLANTIC's Homestead Village properties, only one of which is currently
operating, are in earlier stages of development than PTR's Homestead Village
properties, therefore, ATLANTIC has not funded the same percentage of total
costs as PTR. This payment also assures that ATLANTIC receives all of its
shares of Homestead common stock at the Merger Closing Date rather than being
received in smaller increments over time as funds are expended for Homestead
Village properties contributed by ATLANTIC.
The Homestead common stock and warrants received by ATLANTIC will be
distributed, pro rata, to ATLANTIC shareholders (the "Distribution"). The
Distribution will be made to holders of Shares of record at the close of
business on the record date established by ATLANTIC for the Distribution (the
"Distribution Record Date"). The amount of Homestead common stock and warrants
to be received by each ATLANTIC shareholder in the Distribution will depend on
the number of Shares outstanding on the Distribution Record Date. Based on the
number of Shares expected to be outstanding on the Distribution Record Date
assuming that the Underwriters fully exercise their over-allotment option in
the Offering, each ATLANTIC shareholder will receive shares of Homestead
common stock and warrants to purchase shares of Homestead common stock for
each Share held on the Distribution Record Date. If the Underwriters do not
fully exercise their over-allotment option, it will result in a proportionate
increase in the amount of Homestead common stock and warrants to be received by
each ATLANTIC shareholder. Prospective investors are advised that the
Distribution will result in a taxable dividend to shareholders of ATLANTIC,
even if ATLANTIC shareholders do not sell the Homestead common stock and
warrants received in the Distribution. See "Federal Income Tax Considerations--
Tax Consequences of the Homestead Transaction". For a more complete description
of the Homestead transaction, see "Homestead Transaction" and the Prospectus of
Homestead attached hereto as Appendix A.
TAX STATUS OF ATLANTIC
ATLANTIC has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), effective for the taxable year ended December
31, 1994. As a REIT, ATLANTIC generally will not be taxed on income it
currently distributes to its shareholders so long as it distributes at least
95% of its taxable income currently. REITs are subject to a number of
organizational and operational requirements. Even if ATLANTIC continues to
qualify for taxation as a REIT, ATLANTIC will be subject to certain federal,
state and local taxes on its income and property. See "Federal Income Tax
Considerations" and "Risk Factors--Taxation of ATLANTIC".
8
<PAGE>
PROPERTIES
The following table sets forth certain information with respect to ATLANTIC's
properties owned or under control at May 31, 1996. The information is as of
March 31, 1996 for properties owned or under control at March 31, 1996. For
properties acquired or put under control subsequent to March 31, 1996, the
information is as of May 31, 1996. The table excludes ATLANTIC's Homestead
Village properties, which will be contributed to Homestead on the Merger
Closing Date.
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PROPERTIES OWNED AT MARCH 31, 1996:
PROPERTIES STABILIZED AT MARCH 31,
1996(3):
Atlanta, Georgia:
Camden at
Ashford(4)......... 1994 97.3% 365 $24,792 $24,886
Camden at
Briarcliff(5)...... 1994 97.3 220 14,210 14,261
Camden at
Dunwoody(4)........ 1994 95.8 238 16,798 16,842
Camden Creek I(4)... 1994 96.3 404 24,436 24,596
Camden Crest(4)..... 1994 97.4 377 23,760 23,833
Cameron Brook(6)(7). 1994 97.1 440 22,412 22,447
Clairmont
Crest(6)(8)........ 1994 95.8 213 10,925 11,009
The Greens(6)(9).... 1994 95.1 304 13,730 13,751
Lenox Villa(4)...... 1994 95.5 176 11,821 11,956
Morgan's Landing(4). 1993 95.8 165 8,353 8,631
Oaks at Sandy
Springs(4)......... 1993 93.2 250 9,457 9,646
Old Salem(4)........ 1994 95.9 172 7,875 8,136
Trolley Square...... 1994 97.4 270 13,843 13,954
Vinings Landing(4).. 1994 96.5 200 9,794 10,036
Birmingham, Alabama:
Morning Sun
Villas(4).......... 1994 94.0 184 9,180 9,275
Charlotte, North
Carolina:
Cameron Oaks(4)..... 1994 94.3 264 15,321 15,392
Columbia, South
Carolina:
Greenbrier(4)(10)... 1994 93.3 358 14,681 14,681
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing
I(6)(11)........... 1994 94.9 408 18,464 18,686
Spencer Run(5)...... 1994 94.3 384 19,450 19,483
Sun Pointe
Cove(6)(12)........ 1994 93.2 221 9,355 9,365
Ft. Myers, Florida:
Forestwood(6)(13)... 1994 95.2 397 13,744 13,769
Jacksonville, Florida:
Bay Club(4)......... 1994 98.6 220 12,186 12,217
Memphis, Tennessee:
Cameron at Kirby
Parkway(4)......... 1994 92.9 324 10,037 10,064
Stonegate(4)........ 1994 91.8 208 6,938 6,987
Miami, Florida:
Park Hill(4)........ 1994 95.1 264 11,255 11,353
Nashville, Tennessee:
Arbor Creek(4)...... 1994 93.6 360 18,102 18,197
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Orlando, Florida:
Camden Springs(4)... 1994 95.3% 340 $ 17,282 $ 17,350
Cameron Villas
I(14).............. 1994 96.4 192 7,964 8,008
Wellington(5)....... 1994 94.8 192 7,974 8,005
Raleigh, North
Carolina:
Cameron Square(4)... 1994 94.0 268 15,920 15,972
Richmond, Virginia:
Camden at
Wellesley(4)....... 1994 92.9 340 19,363 19,418
Potomac Hunt(5)..... 1994 98.2 220 10,091 10,156
Sarasota, Florida:
Camden at Palmer
Ranch(4)........... 1994 96.8 432 23,993 24,095
Tampa, Florida:
Camden Downs(4)..... 1994 95.6 250 12,499 12,551
Cameron Lakes(4).... 1995 95.2 207 8,581 8,598
Foxbridge(6)(15).... 1994 94.4 358 10,888 10,959
Summer Chase(5)..... 1994 97.9 96 3,723 3,748
Washington, D.C.:
Arbors at
Landmark(4)........ 1994 96.3 400 23,702 23,909
Camden at Kendall
Ridge(4)........... 1994 94.6 184 11,605 11,700
Camden at
Saybrooke(4)....... 1994 94.8 252 18,825 18,927
---- ------ -------- --------
Subtotals/Average. 95.3% 11,117 $563,329 $566,849
---- ------ -------- --------
PROPERTIES PRE-STABILIZED AT MARCH
31, 1996(3):
Atlanta, Georgia:
Azalea Park......... 1995 86.8% 447 $ 25,276 $ 25,435
Cameron Forest(16).. 1995 90.1 152 6,002 6,241
Cameron Place(16)... 1995 94.3 212 7,571 7,977
Cameron
Station(6)(17)..... 1995 92.5 348 15,684 16,152
Lake Ridge(4)....... 1993 87.3 268 16,542 17,122
WintersCreek
(6)(18)............ 1995 97.0 200 7,689 7,792
Woodlands(4)........ 1995 95.2 644 25,426 25,741
Birmingham, Alabama:
Cameron on the
Cahaba(19)......... 1995 95.3 400 18,649 18,887
Colony Woods I(4)... 1994 90.7 216 10,555 10,579
Colony Woods
II*(16)............ 1995 (20) 198 10,489 10,506
Charlotte, North
Carolina:
Waterford
Hills*(16)......... 1995 (20) 270 12,609 14,062
Ft. Lauderdale/W. Palm
Beach, Florida:
Cypress Lakes(4).... 1995 95.5 176 8,362 8,455
Trails at Meadow
Lakes(4)........... 1995 94.2 189 8,733 8,851
Nashville, Tennessee:
The Enclave at
Brentwood(4)....... 1995 95.8 380 15,966 16,270
Orlando, Florida:
Cameron Villas
II(5).............. 1995 95.2 42 1,743 1,766
Kingston Village(4). 1995 99.2 120 5,917 5,986
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Raleigh, North
Carolina:
Waterford
Point*(16)......... 1996 (20) 336 $ 15,800 $ 17,542
Tampa, Florida:
Country Place
Village(21)........ 1995 97.3% 188 8,247 8,309
Washington, D.C.:
Sheffield
Forest(16)......... 1995 94.1 256 15,182 15,618
---- ----- -------- --------
Subtotals/Average. 93.4% 5,042 $236,442 $243,291
---- ----- -------- --------
DEVELOPMENTS UNDER CONSTRUCTION AT MARCH 31,
1996:
Atlanta, Georgia:
Camden Creek II*.... 1996 N/A 260 $ 12,247 $ 18,289
Charlotte, North
Carolina:
Waterford Square I*. 1996 N/A 408 18,836 21,051
Jacksonville, Florida:
Cameron Deerwood*... 1997 N/A 336 3,759 16,909
Cameron Lakes*...... 1996 N/A 302 14,957 16,065
Cameron Timberlin
Parc I*............ 1997 N/A 320 5,585 16,572
Raleigh, North
Carolina:
Cameron Brook*...... 1997 N/A 228 2,397 11,985
Waterford Forest*... 1997 N/A 384 11,482 19,839
Richmond, Virginia:
Cameron Crossing I*. 1997 N/A 280 2,186 16,566
Washington, D.C.:
Milestone*.......... 1997 N/A 444 18,286 29,492
Woodway at Trinity
Center*............ 1997 N/A 504 19,936 37,835
---- ----- -------- --------
Subtotals......... N/A 3,466 $109,671 $204,603
---- ----- -------- --------
DEVELOPMENTS IN PLANNING--OWNED AT MARCH 31,
1996(3):
Birmingham, Alabama:
Cameron at the
Summit I*.......... 1997 N/A 372 $ 3,108 $ 20,034
Charlotte, North
Carolina:
Waterford Square
II*................ 1998 N/A 286 2,418 17,181
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing
II*................ 1997 N/A 152 2,067 9,454
Jacksonville, Florida:
Cameron Timberlin
Parc II*........... 1998 N/A 200 1,294 10,500
Nashville, Tennessee:
Hickory Hollow*..... 1998 N/A 442 2,837 23,848
Richmond, Virginia:
Cameron at Wyndham*. 1997 N/A 312 2,623 18,339
---- ----- -------- --------
Subtotals......... N/A 1,764 $ 14,347 $ 99,356
---- ----- -------- --------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LAND HELD FOR FUTURE MULTIFAMILY
DEVELOPMENT AT MARCH 31, 1996:
Birmingham, Alabama:
Cameron at the
Summit II(22)...... N/A N/A -- $ 1,902 --
---- ------ -------- ----------
Total Properties
Owned at March
31, 1996......... 94.8% 21,389 $925,691 $1,114,099
---- ------ -------- ----------
DEVELOPMENTS IN PLANNING--UNDER
CONTROL AT MARCH 31, 1996(3):
Atlanta, Georgia:
Stockbridge*........ N/A N/A 400 (23) $ 21,592
Richmond, Virginia:
Cameron Crossing
II*................ N/A N/A 144 (23)(24) 8,703
---- ------ -------- ----------
Total Properties
Under Control at
March 31, 1996... N/A 544 N/A $ 30,295
---- ------ -------- ----------
Total Properties
Owned or Under
Control at
March 31, 1996... 94.8% 21,933 $925,691 $1,144,394
==== ====== ======== ==========
PROPERTIES ACQUIRED FROM MARCH 31,
1996 TO MAY 31, 1996:
PROPERTIES PRE-STABILIZED AT MAY 31,
1996(3):
Atlanta, Georgia:
Cameron Pointe(16).. 1996 96.3% 214 $ 14,362 $ 14,682
Charlotte, North
Carolina:
Cameron at Hickory
Grove.............. 1996 94.6 202 8,034 8,293
Ft. Lauderdale/W. Palm
Beach, Florida:
Park Place at Turtle
Run(16)............ 1996 90.0 350 14,591 15,627
Pointe at Bayberry
Lake............... 1996 90.9 308 16,453 17,075
Greenville, South
Carolina:
Paces Court(16)..... 1996 86.8 234 11,028 11,374
---- ------ -------- ----------
Subtotals/Average. 91.4% 1,308 $ 64,468 $ 67,051
---- ------ -------- ----------
PROPERTIES DISPOSED OF FROM MARCH 31, 1996
TO MAY 31, 1996:
Columbia, South
Carolina:
Greenbrier(10)...... N/A N/A (358) $(14,681) $ (14,681)
---- ------ -------- ----------
Subtotals......... N/A (358) $(14,681) $ (14,681)
---- ------ -------- ----------
DEVELOPMENTS IN PLANNING--PUT UNDER
CONTROL FROM MARCH 31, 1996 TO MAY 31, 1996(3):
Atlanta, Georgia:
Cameron Park*....... N/A N/A 288 N/A $ 14,573
Northpoint Mall*.... N/A N/A 264 N/A 20,270
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nashville, Tennessee:
Breckenridge*....... N/A N/A 264 N/A $ 14,136
Richmond, Virginia:
Cameron at Virginia
Center*............ N/A N/A 280 N/A 16,543
---- ------ -------- ----------
Subtotals......... N/A 1,096 N/A $ 65,522
---- ------ -------- ----------
Total Properties
Acquired,
Disposed of or
Put Under Control
from March 31,
1996 to May 31,
1996............. 91.4% 2,046 $ 49,787 $ 117,892
==== ====== ======== ==========
Total Properties
Owned or Under
Control at May
31, 1996......... 94.5% 23,979 $975,478 $1,262,286
==== ====== ======== ==========
</TABLE>
- --------
* Property developed by ATLANTIC.
(1) With respect to developments under construction and developments in
planning and owned, represents expected completion date.
(2) For operating properties, represents cost, including planned renovations.
For properties under construction and in planning, represents budgeted
development cost, which includes the cost of land, fees, permits, payments
to contractors, architectural and engineering fees and interest and
property taxes to be capitalized during the construction period.
(3) The term "stabilized" means that renovation, repositioning, new management
and new marketing programs (or development and marketing in the case of
newly-developed properties) have been completed and in effect for a
sufficient period of time (but in no event longer than 12 months, except
for major rehabilitations) to achieve 93% occupancy at market rents. Prior
to being "stabilized", a property is considered "pre-stabilized". The term
"in planning" means developments owned or under control (land which is
under control through contingent contract or letter of intent) with
construction anticipated to commence within 12 months.
(4) Property is pledged as collateral for ATLANTIC's $350 million line of
credit. For discussion of the line of credit, see "Business--Building
ATLANTIC's Operating System--Capital Markets/Finance/ Legal".
(5) Property is pledged as additional security under ATLANTIC's thirty-year
credit enhancement agreement with FNMA. For discussion of the FNMA credit
enhancement agreement, see "Business--Building ATLANTIC's Operating
System--Capital Markets/Finance/Legal".
(6) Tax-exempt bond issue associated with this property is included in
ATLANTIC's credit enhancement agreement with FNMA.
(7) The Cameron Brook Apartments are subject to a deed of trust securing a
mortgage note related to $19.5 million of tax-exempt bonds.
(8) The Clairmont Crest Apartments are subject to a deed of trust securing a
mortgage note related to $11.6 million of tax-exempt bonds.
(9) The Greens Apartments are subject to a deed of trust securing a mortgage
note related to $10.4 million of tax-exempt bonds.
(10) The Greenbrier Apartments were disposed of on April 9, 1996. A gain of
approximately $670,000 was recognized at disposition.
(11) The Parrot's Landing Phase I Apartments are subject to a deed of trust
securing a mortgage note related to $15.8 million of tax-exempt bonds.
13
<PAGE>
(12) The Sun Pointe Cove Apartments are subject to a deed of trust securing a
mortgage note related to $8.5 million of tax-exempt bonds.
(13) The Forestwood Apartments are subject to a deed of trust securing a
mortgage note related to $11.5 million of tax-exempt bonds.
(14) The Cameron Villas I Apartments are subject to a deed of trust securing
long-term mortgage debt of $6.4 million.
(15) The Foxbridge Apartments are subject to a deed of trust securing a
mortgage note related to $10.4 million of tax-exempt bonds.
(16) ATLANTIC intends to pledge this property as collateral for its $350
million line of credit.
(17) The Cameron Station Apartments are subject to a deed of trust securing a
mortgage note related to $14.5 million of tax-exempt bonds.
(18) The WintersCreek Apartments are subject to a deed of trust securing a
mortgage note related to $5.0 million of tax-exempt bonds.
(19) Phase I consists of 150 units and is pledged as collateral for ATLANTIC's
$350 million line of credit. Phase II consists of 250 units and is subject
to a deed of trust securing long-term mortgage debt of $8.1 million.
(20) Property is in lease-up, therefore percentage leased is not given because
it is not representative of a fully-operating property.
(21) Phase I consists of 88 units and is subject to a deed of trust securing
long-term mortgage debt of $2.0 million. Phase II consists of 100 units
and is pledged as collateral for ATLANTIC's $350 million line of credit.
(22) Consists of 25.2 acres of undeveloped land.
(23) As of March 31, 1996, ATLANTIC's investment in these developments was $0.1
million. This amount is reflected in the "Other Asset" caption of
ATLANTIC's balance sheet as of March 31, 1996.
(24) Land was acquired by ATLANTIC in June 1996.
THE OFFERING
<TABLE>
<C> <S>
Shares offered hereby.......................
Shares to be outstanding after the Offering.
Use of proceeds............................. To retire revolving credit debt.
See "Use of Proceeds".
Proposed NYSE Symbol........................ " ".
</TABLE>
DISTRIBUTIONS
ATLANTIC's policy is to establish the following year's distribution level in
December of each year, after a review of the operating plan for the following
year. At its December 19, 1995 meeting, the Board established a proposed
distribution level of $0.84 per Share for 1996, payable in quarterly
installments. On March 28, 1996, ATLANTIC paid a quarterly distribution of
$0.21 per Share for Shares outstanding throughout the first quarter and on June
27, 1996, ATLANTIC paid a quarterly distribution of $0.21 per Share for Shares
outstanding throughout the second quarter. ATLANTIC's 1996 operating results
may be adversely affected if occupancy levels decrease, if revolving credit
borrowing costs increase or if any other adverse changes occur. No assurances
can be given that ATLANTIC's estimates of cash available for distribution will
prove accurate, and therefore the actual distribution level may differ. In
light of the Homestead transaction (including the Distribution of the Homestead
common stock and warrants), the Board is evaluating the proposed 1996
distribution level. See "Risk Factors--Risk of Inability to Sustain
Distribution Level" and "Distributions".
14
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information on a pro forma
basis for ATLANTIC (the "Pro Forma Financial Results") as of March 31, 1996 and
for the three months ended March 31, 1996 and the year ended December 31, 1995
and on an historical basis for ATLANTIC (the "Historical Financial Results") as
of and for the three months ended March 31, 1996 and 1995 and as of and for the
years ended December 31, 1995 and 1994 and the period from October 26, 1993
(the date of ATLANTIC's inception) through December 31, 1993. 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 financial statements and notes thereto included in this Prospectus.
The Pro Forma Financial Results are not necessarily indicative of what the
actual financial position and results of operations of ATLANTIC would have been
as of and for the periods indicated, nor do they purport to represent the
financial position and results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS PERIOD ENDED
ENDED YEAR ENDED ENDED MARCH 31, DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $ 32,941 $125,118 $ 30,809 $ 22,952 $ 103,634 $ 55,071 $ 156
General and
administrative
expenses.............. 168 583 187 105 646 266 1
REIT management fee.... 2,457 9,481 2,123 1,515 6,923 3,671 12
Net earnings........... 8,141 30,560 6,650 4,175 19,639 9,926 38
Net earnings per Share. 0.12 0.11 0.45 0.41 0.07
Distributions declared
and paid.............. 11,667 35,119 11,667 7,426 35,119 14,648 --
Distributions declared
and paid per Share.... $ 0.21 $ 0.80 $ 0.21 $ 0.20 $ 0.80 $ 0.60 $ --
Weighted average Shares
outstanding........... 55,555 37,133 43,889 24,454 572
OTHER DATA:
Funds from
operations(2)......... $ 13,219 $ 49,220 $ 11,454 $ 7,780 $ 35,564 $ 18,696 $ 66
Net cash provided
(used) by operating
activities............ 19,776 58,891 18,011 12,954 45,235 26,205 (492)
Net cash used by
investing activities.. (47,201) (321,082) (47,201) (39,177) (240,652) (392,718) (31,005)
Net cash provided by
financing activities.. 28,743 273,032 29,249 24,579 195,649 372,638 31,634
<CAPTION>
HISTORICAL
--------------------------------------------------
PRO FORMA MARCH 31, DECEMBER 31,
MARCH 31, ------------------ ------------------------------
1996 1996 1995 1995 1994 1993
------------ -------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at
cost.................. $975,463 $936,129 $678,564 $ 888,928 $ 631,260 $ 31,005
Total assets........... 963,909 929,318 678,683 885,824 637,846 31,850
Line of credit(3)...... 91,568 226,000 181,000 190,000 153,000 --
Mortgages payable...... 129,291 123,291 115,317 118,524 107,347 --
Total liabilities...... 247,201 376,967 310,334 328,886 271,216 178
Total shareholders'
equity................ $716,708 $552,351 $368,349 $ 556,938 $ 366,630 $ 31,672
Number of Shares
outstanding........... 55,570 37,588 55,526 37,133 3,163
</TABLE>
- --------
(1) For the period from October 26, 1993 (the date of ATLANTIC's inception) to
December 31, 1993.
(2) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments and general operating expenses. For an explanation of funds from
operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Funds from operations should not be considered as an alternative to net
income or any other generally accepted accounting principles ("GAAP")
measurement of performance as an indicator of ATLANTIC's operating
performance or as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity. On January 1, 1996,
ATLANTIC adopted the National Association of Real Estate Investment Trusts'
("NAREIT") new definition of funds from operations. Under this new
definition, loan cost amortization is not added back to net earnings in
determining funds from operations. For comparability, funds from operations
for the periods prior to January 1, 1996 give effect to this new
definition.
(3) At June 27, 1996, ATLANTIC had $194 million of debt outstanding under its
$350 million line of credit.
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RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below. Each of these factors could adversely affect the
ability of ATLANTIC to make expected distributions to shareholders. In
addition, purchasers of Shares in the Offering (or subsequent transferees who
are holders of such Shares on the Distribution Record Date) will receive
shares of common stock and warrants to purchase shares of common stock of
Homestead. There are certain risks associated with securities of Homestead and
the Homestead transaction which prospective investors should consider, as
described under the caption "Risk Factors" in the Prospectus of Homestead
attached hereto as Appendix A.
LACK OF INDEPENDENT VALUATION OF ASSETS
The value of ATLANTIC has not been determined on a property-by-property
basis because ATLANTIC is an ongoing business enterprise. Accordingly, no
appraisals, independent valuations or fairness opinions from a financial point
of view of the properties have been obtained in connection with the valuation
of ATLANTIC. Furthermore, the valuation of ATLANTIC is not based upon the
historical cost of assets or the current market value thereof. Accordingly,
there can be no assurance that the value of the Shares (based on the initial
public offering price) accurately reflects the fair market value of ATLANTIC's
portfolio.
INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT SHAREHOLDER
SCG beneficially owns approximately 64.1% of the issued and outstanding
Shares ( % after giving effect to the Offering). See "Principal Shareholders".
Through its ownership of Shares, SCG controls approximately 64.1% ( % after
giving effect to the Offering) of the vote on matters submitted for
shareholder action, including the election of Directors, and no other
shareholder may hold more than 9.8% of the outstanding Shares. See
"Description of Capital Stock--Restriction on Size of Holdings of Shares". SCG
has the right to nominate up to three Directors, depending on its level of
ownership of Shares. See "Certain Relationships and Transactions--SCG Investor
Agreement". The Directors so elected are in a position to exercise significant
influence over the affairs of ATLANTIC. Additionally, SCG has the right to
approve (i) ATLANTIC's annual operating budget and substantial deviations
therefrom, (ii) acquisitions or dispositions in a single transaction or group
of related transactions where the purchase price exceeds $5 million and (iii)
property management arrangements. Accordingly, due to the foregoing, for so
long as it continues to own at least 10% of the outstanding Shares, SCG will
retain significant influence over the business and policies of ATLANTIC which
may result in decisions that do not fully represent the interests of all
shareholders of ATLANTIC.
CONFLICTS OF INTEREST
ATLANTIC does not have any employees and relies on the REIT Manager for all
strategic and management services. An affiliate of the REIT Manager also
provides property management services for approximately 81% of ATLANTIC's
properties.
Four officers of the REIT Manager and its affiliates (Jeffrey A. Klopf,
Senior Vice President of SCG, ATLANTIC and the REIT Manager (securities
offerings, corporate acquisitions and legal), Ariel Amir, Vice President of
SCG (securities offerings, corporate acquisitions and legal), John H. Gardner,
Jr., Senior Vice President of ATLANTIC and the REIT Manager (multifamily
dispositions) and Kathy B. Farr, Vice President of ATLANTIC and the REIT
Manager (multifamily dispositions)) may have conflicts of interest in
allocating their time and efforts between activities on behalf of ATLANTIC and
other activities of the REIT Manager's affiliates. Affiliates of the REIT
Manager also provide management services to PTR, a NYSE listed REIT which
focuses on multifamily residential properties in the western
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United States, and SCI, a NYSE listed REIT which focuses on industrial real
estate in the United States. Security Capital Markets Group Incorporated
("Capital Markets Group"), the REIT Manager's capital markets affiliate,
devotes a substantial portion of its time to these other REITs and SCG. Messrs.
Klopf and Amir provide centralized securities offering, corporate acquisition
and legal services to ATLANTIC and other affiliated real estate companies,
including PTR, SCI and SCG, and, as a result, do not focus their full efforts
and attention on ATLANTIC. Mr. Gardner and Ms. Farr provide multifamily
disposition services to ATLANTIC and PTR. In addition, the REIT Manager and its
affiliates share a common senior investment committee, which approves all
acquisition and development proposals before they are submitted to the
respective REIT boards for approval. C. Ronald Blankenship, a Director of
ATLANTIC and the REIT Manager and the Chairman of PTR and a Director of
Homestead, spends about ten hours per month on this senior investment committee
evaluating investment opportunities for ATLANTIC and other REITs which are
managed by affiliates of the REIT Manager. PTR acquires multifamily properties
but operates in a different market than ATLANTIC. See "Policies With Respect to
Certain Activities--Conflict of Interest Policies" and "--Policies Applicable
to the REIT Manager and Officers and Directors of ATLANTIC".
The officers of ATLANTIC may also be subject to certain conflicts of interest
arising out of their positions with ATLANTIC and the REIT Manager and its
affiliates. These relationships may create conflicts between the promotion of
ATLANTIC's investment policies and those of the REIT Manager and its
affiliates. See "Policies With Respect to Certain Activities--Conflict of
Interest Policies".
Ned S. Holmes, a Director of ATLANTIC, is also Chairman and President of
Parkway Investments/Texas Inc., President and Chief Executive Officer of Laing
Properties, Inc. ("Laing") and an executive officer of certain of Laing's
affiliates. Laing and its affiliates engage in the acquisition, development and
management of multifamily properties and Mr. Holmes may therefore have
conflicts of interest in presenting acquisition or development opportunities to
ATLANTIC.
The owner of the REIT Manager, SCG, is ATLANTIC's principal shareholder and
could influence decisions regarding the REIT Management Agreement, property
management agreements between ATLANTIC and affiliates of the REIT Manager and
fees relating to such agreements. Although all agreements with the REIT Manager
and its affiliates must be reviewed and approved at least annually by
ATLANTIC's Independent Directors, no assurance of arm's-length negotiations can
be given.
RISK OF INABILITY TO SUSTAIN DISTRIBUTION LEVEL
ATLANTIC's proposed 1996 distribution level is based on a number of
assumptions, including assumptions relating to the future operations of
ATLANTIC. These assumptions encompass, among other matters, continued property
occupancy, capital expenditures and other costs relating to ATLANTIC's
properties, the level of leasing activity and decisions by ATLANTIC to reinvest
rather than distribute cash available for distribution. Some of the assumptions
described above are beyond the control of ATLANTIC, and a change in any such
assumption could cause a reduction in cash available for distribution, which
could affect ATLANTIC's ability to sustain the proposed distribution level.
Moreover, in light of the Homestead transaction (including the Distribution),
the Board is evaluating the proposed distribution level. Hence, no assurance
can be given that ATLANTIC will be able to maintain the proposed distribution
level. See "Distributions".
GENERAL REAL ESTATE INVESTMENT RISKS
GENERAL
Real property investments 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
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conditions (such as an oversupply of multifamily properties or a reduction in
rental demand in an area), the quality and philosophy of management,
competition from other available multifamily properties and the ability of the
owner to provide adequate maintenance and insurance and to control operating
costs. Although ATLANTIC seeks to minimize these risks through the REIT
Manager's market research and asset management capabilities, these risks
cannot be eliminated entirely. Real estate cash flows and values are also
affected by such factors as government regulations, including zoning and tax
laws, interest rate levels, the availability of financing and potential
liability under, and changes in, environmental and other laws. Since a
significant portion of ATLANTIC's income will be derived from rental income
from real property, ATLANTIC's income and distributable cash flow would be
adversely affected if a significant number of ATLANTIC's residents were unable
to meet their obligations to ATLANTIC, or if ATLANTIC were unable to lease, on
economically favorable terms, a significant number of units in its multifamily
properties.
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of ATLANTIC 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
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investments. Like other REITs, ATLANTIC must
comply with safe harbor rules which enable a REIT to avoid punitive taxation.
Thus, ATLANTIC's ability to sell assets to change its asset base is restricted
by tax rules which impose holding periods for assets and potential
disqualification as a REIT upon certain asset sales.
DEBT FINANCING
To the extent it or its subsidiaries incur debt, ATLANTIC will be subject to
the risks associated with debt financing, including the risks that ATLANTIC's
cash flow from operations will be insufficient to meet required payments of
principal and interest, that ATLANTIC will be unable to refinance the
revolving line of credit secured by many of ATLANTIC's properties or current
or future mortgage indebtedness on its properties, that the terms of such
refinancings will not be as favorable as the terms of existing indebtedness
and that ATLANTIC will be unable to make necessary capital expenditures for
such purposes as renovations and releasing units due to lack of available
funds. If a property is mortgaged to secure payment of indebtedness and
ATLANTIC is unable to meet mortgage payments, the property could be
transferred to the mortgagee with a consequent loss of income and asset value
to ATLANTIC. Nevertheless, it will be ATLANTIC's policy generally to arrange
fully amortizing, fixed rate long-term debt. See "Policies With Respect to
Certain Activities--Financing Policies".
RISKS OF REAL ESTATE DEVELOPMENT
ATLANTIC has developed or commenced development of, or has executed
contracts or non-binding letters of intent where acquisition of development
land is likely for, 7,674 multifamily units and expects to develop additional
multifamily units in the future. Real estate development involves significant
risks in addition to those involved in the ownership and operation of
established multifamily 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) and that properties may not be leased
on profitable terms. Timely construction may be adversely affected by local
weather, local or national strikes and by local or national shortages in
materials, insulation, building supplies and energy and fuel for equipment.
ATLANTIC intends to finance future development with cash on hand or revolving
credit borrowings (which ATLANTIC expects to repay with long-term debt or
sales of equity securities); however, until such properties are developed and
leased, they will not generate any cash flow to ATLANTIC.
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LAND USE AND ZONING CONSIDERATIONS
Governmental authorities at the federal, state and local levels are actively
involved in the promulgation and enforcement of regulations relating to land
use and zoning restrictions. Regulations may be promulgated which could have
the effect of restricting or curtailing certain uses of existing structures or
requiring that such structures be renovated or altered in some fashion. The
establishment of such regulations could have the effect of increasing the
expenses and lowering the profitability of any of the properties affected
thereby.
CHANGES IN LAWS
Increased costs resulting from changes in real estate taxes or other
governmental requirements may generally not be passed through directly to
residents, inhibiting ATLANTIC's ability to recover such increased costs.
Substantial increases in rents, as a result of such increased costs, may
affect residents' ability to pay rent, causing increased vacancy. Increases in
income or transfer taxes generally are not passed through to residents and may
adversely affect ATLANTIC's ability to make distributions to shareholders.
Changes in laws increasing potential liability for environmental conditions or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures, which could adversely affect
ATLANTIC's ability to make distributions to shareholders.
RISKS OF INVESTMENTS IN MORTGAGES
Although ATLANTIC's current policy is not to invest in mortgages unrelated
to its properties, ATLANTIC may invest in mortgages in connection with the
construction and development of new multifamily properties for ATLANTIC by
third parties. See "Policies With Respect to Certain Activities--Financing
Policies". In connection with the Homestead transaction, ATLANTIC will invest
in convertible mortgage notes issued by Homestead. See "Homestead
Transaction". In addition, ATLANTIC from time to time will invest in mortgage
loans to ATLANTIC Development Services Incorporated ("ATLANTIC Development
Services"), an entity in which ATLANTIC owns substantially all of the economic
interest, to fund the acquisition and development of certain properties that
meet ATLANTIC's investment criteria. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--REIT Management Agreement".
Mortgage investments are subject to certain risks, including that borrowers
may not be able to make debt service payments or pay principal when due, that
the value of mortgaged property may be less than the amounts owed, and that
interest rates payable on the mortgages may be lower than ATLANTIC's cost of
funds. If ATLANTIC invested in mortgages and if any of the above occurred,
cash flows and ATLANTIC's ability to make expected distributions to
shareholders could be adversely affected.
UNINSURED LOSS
ATLANTIC will initially carry comprehensive liability, fire, flood,
earthquake, extended coverage and rental loss insurance with respect to its
properties with policy specifications and insured limits customarily carried
for similar properties. There are, however, certain types of losses (such as
from wars) that may be either uninsurable or not economically insurable.
Should an uninsured loss occur, ATLANTIC could lose both its capital invested
in and anticipated profits from one or more properties.
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate, including those that operate in the regions in which
ATLANTIC's properties are located, that compete with ATLANTIC in seeking land
for development, properties for acquisition and disposition and residents for
properties. All of ATLANTIC's multifamily properties are located in developed
areas that include other multifamily properties. The number of competitive
multifamily properties in a particular area could have a material adverse
effect on ATLANTIC's ability to lease apartment units
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and on the rents charged. In addition, other forms of single family and
multifamily residential properties provide housing alternatives to residents
and potential residents of ATLANTIC's multifamily properties.
CHANGES IN POLICIES
The major policies of ATLANTIC, including its policies with respect to
investments, financing, growth, debt capitalization, REIT qualification and
distributions, are determined by the Board. Although it has no present
intention to do so, the Board may amend or revise these and other policies
from time to time without a vote of the shareholders of ATLANTIC. See
"Policies With Respect to Certain Activities". Accordingly, shareholders will
have limited control over changes in policies of ATLANTIC.
CONCENTRATION OF PROPERTIES IN ATLANTA
At May 31, 1996, ATLANTIC owned $347.3 million of properties, based on cost,
that are located in the Atlanta, Georgia metropolitan area, representing 37.9%
of pro forma revenues as of March 31, 1996, and thus may be affected by
changes in the economic conditions of that area. Conditions in the Atlanta
market, including the possibility of an economic downturn, could adversely
affect cash flows and ATLANTIC's ability to make expected distributions to
shareholders.
TAXATION OF ATLANTIC
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT
ATLANTIC has elected to be taxed as a REIT under the Code, commencing with
its taxable year ending December 31, 1994. A qualified REIT generally is not
taxed on income it distributes to its shareholders as long as it distributes
at least 95% of its taxable income currently. ATLANTIC has qualified as a REIT
initially, but no assurance can be given that it will be able to remain so
qualified. No assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly
change the rules applicable to ATLANTIC with respect to qualification as a
REIT or the federal income tax consequences of such qualification.
If ATLANTIC fails to continue to qualify as a REIT, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, unless entitled to
relief under certain statutory provisions, ATLANTIC will be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. The additional tax could significantly reduce the cash
flow available for distribution.
OTHER TAX LIABILITIES
Even if ATLANTIC continues to qualify as a REIT, it is subject to certain
federal, state and local taxes on its income and property. See "Federal Income
Tax Considerations--Other Tax Considerations".
LIMITATIONS ON ACQUISITION OF SHARES AND CHANGE IN CONTROL
OWNERSHIP LIMIT
In order to maintain its qualification as a REIT, not more than 50% in value
of the outstanding Shares may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities).
Pursuant to the constructive ownership rules, SCG's ownership of Shares is
attributed to its shareholders for purposes of the 50% test. ATLANTIC's 9.8%
Share ownership limit for shareholders other than SCG, as well as the ability
of ATLANTIC to issue additional Shares or other classes or series of stock
(which may have rights and preferences senior to the Shares), may have
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the effect of delaying or preventing a change in control of ATLANTIC without
the consent of the Board even if a change in control were in the shareholders'
interests and may also (i) deter tender offers for the Shares, which offers may
be advantageous to shareholders and (ii) limit the opportunity for shareholders
to receive a premium for their Shares that might otherwise exist if an investor
were attempting to assemble a block of Shares in excess of 9.8% of the
outstanding Shares or otherwise effect a change in control of ATLANTIC.
SHAREHOLDER PURCHASE RIGHTS
On March 12, 1996, the Board declared a dividend of one preferred share
purchase right (a "Purchase Right") for each Share outstanding. Each purchaser
of a Share subsequent to March 12, 1996 (including purchasers of Shares in the
Offering) will also receive a Purchase Right with each Share purchased. Each
Purchase Right entitles the holder under certain circumstances to purchase from
ATLANTIC one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Participating Preferred
Shares"), at a price of $40 per one one-hundredth of a Participating Preferred
Share, subject to adjustment. Purchase Rights are exercisable when a person or
group of persons (other than certain affiliates of ATLANTIC) acquires 20% or
more of the outstanding Shares or announces a tender offer for 25% or more of
the outstanding Shares. Under certain circumstances, each Purchase Right
entitles the holder to purchase, at the Purchase Right's then current exercise
price, a number of Shares having a market value of twice the Purchase Right's
exercise price. The acquisition of ATLANTIC pursuant to certain mergers or
other business transactions would entitle each holder to purchase, at the
Purchase Right's then current exercise price, a number of the acquiring
company's common shares having a market value at that time equal to twice the
Purchase Right's exercise price. The Purchase Rights held by certain 20%
shareholders (other than certain affiliates of ATLANTIC) would not be
exercisable.
The Purchase Rights may have the effect of delaying or preventing a change in
control of ATLANTIC without the consent of the Board even if a change in
control were in the shareholders' interests and may also adversely affect the
voting and other rights of shareholders. See "Description of Capital Stock--
Purchase Rights".
CLASSIFIED BOARD
The Board has been divided into three classes of Directors. The terms of the
classes will expire in 1997, 1998 and 1999, respectively. Beginning in 1997, as
the term of a class expires, Directors for that class will be elected for a
three-year term and the Directors in the other two classes will continue in
office.
PREFERRED STOCK
ATLANTIC's Second Amended and Restated Articles of Incorporation, as amended
(the "Articles of Incorporation"), authorize the Board to issue preferred stock
and to establish the preferences and rights of any preferred stock issued. See
"Description of Capital Stock--General" and "--Preferred Stock". No such
preferred stock is currently issued and outstanding.
The classified Board and the issuance of preferred stock discussed in the
preceding paragraphs each could have the effect of delaying or preventing a
change in control of ATLANTIC even if a change in control were in the
shareholders' interests.
POSSIBLE ADVERSE CONSEQUENCE OF LIMITS ON OWNERSHIP OF SHARES
As noted above under "--Limitations on Acquisition of Shares and Change in
Control", under the REIT tax rules, not more than 50% in value of the
outstanding Shares may be owned, directly or indirectly, by five or fewer
individuals. ATLANTIC has restricted ownership of more than 9.8% of the issued
and outstanding Shares by any single shareholder. The ownership limitation does
not apply to
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SCG. See "Certain Relationships and Transactions--SCG Investor Agreement". The
Board, in its sole discretion, may waive this restriction if it is satisfied
that ownership in excess of this limit will not jeopardize ATLANTIC's status
as a REIT. Shares acquired in breach of the limitation may be redeemed by
ATLANTIC for the average daily per Share closing sales price during the 30-day
period ending on the business day prior to the redemption date. A transfer of
Shares to a person who, as a result of the transfer, violates the ownership
limit may be void under some circumstances. See "Description of Capital
Stock--Restriction on Size of Holdings of Shares" for additional information
regarding the ownership limit.
EXTERNAL MANAGEMENT
ATLANTIC is externally managed by the REIT Manager, which is owned by SCG,
which also owns approximately 64.1% of the outstanding Shares ( % after giving
effect to the Offering). The REIT Manager's indirect Share ownership provides
it with economic interests comparable to other shareholders, but ATLANTIC's
being externally managed may adversely affect the market price of the Shares.
EFFECT OF MARKET INTEREST RATES ON SHARE PRICES
One of the factors that may influence the price of the Shares in public
markets will be the annual yield on the price paid for Shares from
distributions by ATLANTIC. Thus, an increase in market interest rates may lead
purchasers of Shares to demand a higher annual yield, which could adversely
affect the market price of the Shares.
REGULATORY COMPLIANCE
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL LAWS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of such removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials, which may result in increased costs in connection with renovations
at ATLANTIC's properties.
ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability or other claim in connection with any of the properties
currently owned or being acquired by ATLANTIC, and ATLANTIC is not aware of
any environmental condition with respect to any of such properties, which is
likely to be material. ATLANTIC has subjected each of its properties to a
Phase I environmental assessment (which does not involve invasive procedures
such as soil sampling or ground water analysis) by independent consultants.
While some of these assessments have led to further investigation and
sampling, none of the environmental assessments has revealed, nor is ATLANTIC
aware of, any environmental liability (including asbestos related liability)
that the REIT Manager believes would have a material adverse effect on
ATLANTIC's business, financial condition or results of operations. No
assurance can be given, however, that these assessments and
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investigations reveal all potential environmental liabilities, that no prior
owner or operator created any material environmental condition not known to
ATLANTIC or the independent consultants or that future uses and conditions
(including, without limitation, resident actions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities.
COMPLIANCE WITH THE FAIR HOUSING AMENDMENTS ACT OF 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHA could result in the imposition of
fines or an award of damages to private litigants. ATLANTIC believes that its
properties that are subject to the FHA are in compliance with such law.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990
ATLANTIC's properties and any newly developed or acquired multifamily
properties must comply with Title III of the Americans with Disabilities Act
of 1990 (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requirements requires that public accommodations
"reasonably accommodate" individuals with disabilities, which includes removal
of structural barriers to handicapped access in certain public areas of
ATLANTIC's properties, where such removal is readily achievable and that new
construction or alterations made to "commercial facilities" conform to
accessibility guidelines unless "structurally impracticable" for new
construction, or in excess of 20% of the cost of the alteration for existing
structures. The ADA does not, however, consider multifamily residential
properties, such as ATLANTIC's properties, to be public accommodations or
commercial facilities except to the extent portions of such properties, such
as a leasing office, are open to the public. ATLANTIC believes that its
properties comply with all present requirements under the ADA and applicable
state laws. Noncompliance with the ADA could result in imposition of
injunctive relief, fines or an award of damages.
NO PRIOR MARKET FOR SHARES
Prior to the Offering, there has been no public market for the Shares.
Although application will be made to list the Shares on the NYSE, there can be
no assurance that an active trading market will develop or that the Shares
will be so listed. In addition, the initial public offering price may not
accurately reflect the market prices of the Shares and the Homestead common
stock and warrants which will be distributed to holders of Shares in the
Distribution after the Offering. See "Underwriting".
EFFECT ON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Shares, or the perception that such sales
could occur, could adversely affect the prevailing market price for the
Shares. At June 27, 1996, ATLANTIC had 65,903,161 Shares issued and
outstanding. All such Shares may be sold in the public market in the future
pursuant to registration rights or available exemptions from registration. See
"Shares Available for Future Sale". No prediction can be made regarding the
effect of future sales of Shares on the market prices of Shares. See
"Underwriting".
DILUTION
The pro forma net tangible book value per Share of ATLANTIC's assets after
the Offering will be lower than the initial public offering price per Share in
the Offering. Accordingly, persons acquiring Shares in the Offering will
experience immediate dilution of $ per Share in the net tangible book value
of Shares acquired in the Offering. See "Dilution". Purchasers of Shares sold
in the Offering will receive shares of Homestead common stock and warrants to
purchase shares of Homestead common stock in the Distribution for no
additional consideration, assuming that they continue to hold such Shares on
the Distribution Record Date.
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SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC, through its research-based investment strategy, engages in the
development, acquisition, operation and long-term ownership of multifamily
properties in the southeastern United States. ATLANTIC's objective is to be
the preeminent real estate operating company focusing on moderate income
multifamily properties in its primary target market. ATLANTIC, through the
REIT Manager, is an Atlanta-based, fully integrated operating company with 75
professionals dedicated to implementing its highly focused operating strategy.
At May 31, 1996, ATLANTIC's portfolio consisted of 23,979 multifamily units,
including 6,870 units under construction and in planning, in 16 metropolitan
areas and 39 submarkets in premier growth areas of the southeastern United
States. The aggregate investment cost of these 85 properties, including
planned renovations and total budgeted development expenditures, is
approximately $1.26 billion.
ATLANTIC seeks to achieve long-term sustainable growth in cash flow by
maximizing the operating performance of its core portfolio through value-added
operating systems, developing industry-leading, multifamily product in
targeted submarkets that exhibit strong job growth prospects and demographic
trends and implementing its asset optimization strategy of redeploying capital
into assets that meet ATLANTIC's long-term investment criteria and have
significant long-term cash flow growth prospects. See "Business--Key
Components Driving ATLANTIC's Growth".
ATLANTIC's REIT Manager believes that the southeastern United States
presents attractive investment opportunities because of the region's growing
population and job market. ATLANTIC's investment activity is focused primarily
on the following metropolitan areas: Atlanta, Georgia; Birmingham, Alabama;
Charlotte, North Carolina; Jacksonville, Florida; Memphis, Tennessee;
Nashville, Tennessee; Raleigh, North Carolina; Richmond, Virginia; Southeast
Florida (which includes Ft. Lauderdale and West Palm Beach); and Tampa,
Florida.
REIT Management believes that growth in cash flow requires an intensive
focus on resident service, marketing and the operation and development of
functional and cost effective multifamily properties in growing cities. To
enhance ATLANTIC's cash flow growth, REIT Management believes ATLANTIC should
achieve significant market presence and enjoy the benefits that typically
accrue to the major owners of multifamily properties in its markets. The REIT
Manager provides a fully integrated company with expertise in market research,
multifamily property acquisitions and due diligence, development of
multifamily properties, leasing and asset management, capital markets and
financial operations.
REIT Management believes that the multifamily real estate industry has
traditionally attracted developers and operators who decentralized decision
making and developed properties based upon the availability and preferences of
external sources of capital rather than on market demand, as discussed more
fully below. The REIT Manager has organized itself differently from many
traditional multifamily real estate companies, as follows:
. Each operating professional specializes in a particular discipline (such
as research, marketing, development, acquisitions, due diligence, asset
management, capital markets or financial operations) rather than being
responsible for all functions on a project-by-project basis;
. Local investments must be approved by the REIT Manager's senior
investment committee, using uniform criteria, rather than being subject
to autonomous decisions by local market representatives;
. Capital markets and financing decisions are centrally made and executed,
enabling ATLANTIC to lower its cost of capital, optimize its financial
structure and focus on the needs of residents, rather than the
preferences of capital sources or the restrictions imposed by lenders,
and thereby increase financial control; and
24
<PAGE>
. ATLANTIC officers who own an interest in ATLANTIC own Shares, not carried
interests in specific assets, meaning that their incentive is for the
entire company to do well.
See "REIT Management".
ATLANTIC's executive offices are located at Six Piedmont Center, Atlanta,
Georgia 30305, and its telephone number is (404) 237-9292. ATLANTIC is a
Maryland corporation. Its predecessor was formed in October 1993 as a Delaware
corporation, and ATLANTIC was re-formed as a Maryland corporation in April
1994.
USE OF PROCEEDS
The proceeds to ATLANTIC from the sale of the Shares offered hereby, net of
all expenses of the Offering, are expected to be approximately $ million.
The net proceeds will be used to retire revolving credit debt which was
incurred for (i) the acquisition and development of multifamily properties,
(ii) capital improvements to properties, (iii) general corporate purposes and
(iv) the purchase of shares of Homestead common stock on the Merger Closing
Date. If the Underwriters' over-allotment option to purchase Shares is
exercised in full, the additional net proceeds of approximately $ million
will be used for the same purpose. At June 27, 1996, ATLANTIC had $194 million
in outstanding borrowings under its $350 million revolving line of credit with
Morgan Guaranty Trust Company of New York, as agent for a syndicate of banks,
and such outstanding borrowings are expected to be approximately $ million
at the time of the closing of the Offering. Borrowings under the line of
credit bear interest at prime (8.25% at June 27, 1996) or, at ATLANTIC's
option, LIBOR plus 1.5% (7.00% at June 27, 1996) or the certificate of deposit
rate plus 1.625% (7.01% at June 27, 1996). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of ATLANTIC as of March
31, 1996 and as adjusted to give effect to the Offering and other sales of
Shares subsequent to March 31, 1996 and the application of the proceeds
therefrom and to the Homestead transaction. The table should be read in
conjunction with the financial statements of ATLANTIC included herein.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage notes.................................... $123,291 $129,291
Shareholders' Equity:
Shares of common stock, $0.01 par value;
250,000,000 Shares authorized; 55,569,635
Shares issued; Shares issued as adjusted... 556 659
Additional paid-in capital...................... 576,976 788,183
Distributions in excess of net earnings......... (25,181) (72,134)(1)
-------- --------
Total Shareholders' Equity.................... $552,351 $716,708
-------- --------
Total Capitalization(2)....................... $675,642 $845,999
======== ========
</TABLE>
- --------
(1) The increase in distributions in excess of net earnings on an as adjusted
basis will result primarily from the Distribution.
(2) Does not include borrowings under ATLANTIC's $350 million line of credit.
At March 31, 1996, $226.0 million of borrowings were outstanding under the
line of credit ($91.6 million on an as adjusted basis).
DISTRIBUTIONS
ATLANTIC intends to pay regular quarterly distributions to its shareholders.
In 1995, ATLANTIC paid quarterly cash distributions of $0.20 per Share
outstanding throughout each quarter, equaling an annualized distribution of
$0.80 per Share. The Board has adopted a policy of announcing the following
year's proposed annual distribution level in December of each year after the
Board's annual review and approval of the operating plan for the following
year. At its December 19, 1995 meeting, the Board established a proposed
distribution level of $0.84 per Share for 1996, payable in quarterly
installments. On March 28, 1996, ATLANTIC paid a quarterly distribution of
$0.21 per Share for Shares outstanding throughout the first quarter and on
June 27, 1996, ATLANTIC paid a quarterly distribution of $0.21 per Share for
Shares outstanding throughout the second quarter. ATLANTIC's 1996 operating
results may be adversely affected if occupancy levels decrease, if revolving
credit borrowing costs increase or if any other adverse changes occur. No
assurances can be given that ATLANTIC's estimates of cash available for
distribution will prove accurate, and therefore the actual distribution level
may differ. In light of the Homestead transaction (including the Distribution
of the Homestead common stock and warrants), the Board is evaluating the
proposed 1996 distribution level. See "Risk Factors--Risk of Inability to
Sustain Distribution Level".
Cash available for distribution will be affected by a number of factors,
including rental revenues from existing and new residents, the level of
acquisition and new leasing activity, ATLANTIC's operating expenses, the
interest expense and other debt service costs of ATLANTIC, the ability of
residents to meet their obligations, taxes payable by ATLANTIC and
unanticipated capital expenditures. ATLANTIC's policy is to expense, rather
than capitalize, repairs and maintenance, in
26
<PAGE>
determining net earnings and cash available for distribution. Only major
renovations, replacements or improvements with a substantial expected economic
life (such as roofs, parking lots and additions) are capitalized. ATLANTIC has
budgeted $4.9 million for such purposes for the remainder of 1996. No
assurances can be given that cash available for distribution for the remainder
of 1996 will be sufficient to sustain the proposed distribution level. Although
ATLANTIC does not expect any future cash shortfalls, any such shortfalls which
do arise could result in reductions in ATLANTIC's cash available for
distribution which could result in lower than expected distributions.
In addition to the $4.9 million of budgeted capital expenditures, ATLANTIC
has $84.9 million of unfunded construction commitments and $17.3 million of
prospective acquisitions (not included in pro forma properties owned) under
letters of intent or contingent contracts. Additionally, at May 31, 1996,
ATLANTIC had $195.2 million of developments in planning (owned and under
control) of which $179.7 million had not been funded. In addition, pursuant to
its Funding Commitment Agreement, ATLANTIC has agreed to provide secured
financing of up to approximately $111 million to Homestead in exchange for
convertible mortgage notes. See "Homestead Transaction" and "Certain
Relationships and Transactions--Funding Commitment Agreements". ATLANTIC
expects to finance its renovation, acquisition and development investments and
its funding commitment under its Funding Commitment Agreement with borrowings
under its $350 million line of credit (which matures in June 1998) and future
offerings of debt and equity securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
Future distributions by ATLANTIC will be at the discretion of the Board and
will depend on the actual cash available for distribution of ATLANTIC, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax Considerations--
Taxation of ATLANTIC") and such other factors as the Board deems relevant. For
a discussion of the tax treatment of distributions to shareholders, see
"Federal Income Tax Considerations--Taxation of Shareholders".
27
<PAGE>
DILUTION
The initial public offering price per Share exceeds the net tangible book
value per Share. Therefore, the holders of Shares subscribed for or issued
prior to the Offering will realize an immediate increase in the net tangible
book value of their Shares, while purchasers of Shares sold in the Offering
will realize an immediate dilution in the net tangible book value of their
Shares. Net tangible book value per Share is determined by subtracting total
liabilities from total tangible assets and dividing the remainder by the
number of Shares that will be outstanding after the Offering. The following
table illustrates the dilution to purchasers of Shares sold in the Offering
and the effect of the Distribution.
<TABLE>
<S> <C>
Initial Public Offering Price(1).................................... $
Net pro forma tangible book value per Share issued prior to the
Offering, before giving effect to the Distribution(2)..............
Increase in net pro forma tangible book value per Share attributable
to payments by purchasers of Shares sold in the Offering...........
Net pro forma tangible book value per Share after the Offering,
before giving effect to the Distribution(2)........................
Decrease in net pro forma tangible book value per Share due to the
Distribution.......................................................
Net pro forma tangible book value per Share after the Offering,
after giving effect to the Distribution(2).........................
-----
Dilution per Share sold in the Offering............................. $
=====
</TABLE>
- --------
(1) Before deducting estimated expenses of the Offering.
(2) Based on the Pro Forma Financial Results contained elsewhere in this
Prospectus. Assumes no exercise of outstanding options to acquire Shares.
Purchasers of Shares sold in the Offering will receive shares of Homestead
common stock and warrants to purchase shares of Homestead common stock in the
Distribution for no additional consideration, assuming that they continue to
hold such Shares on the Distribution Record Date, as described under
"Homestead Transaction". Therefore, management of ATLANTIC does not believe
that the amount of dilution which will be experienced by purchasers of Shares
in the Offering is meaningful in evaluating a purchase of the Shares.
HOMESTEAD TRANSACTION
Homestead was organized to continue the operations of ATLANTIC, PTR and SCG
with respect to their respective moderate priced, purpose-built, extended-stay
lodging facilities. Homestead will develop, own and manage moderate priced,
purpose-built, extended-stay lodging facilities designed to appeal to value-
conscious customers on temporary assignment, undergoing relocation or in
training. The first Homestead Village facility was opened in 1992 by PTR,
which has since built and placed into operation 26 additional Homestead
Village facilities. PTR's stabilized Homestead Village facilities have
produced annual returns (based on funds from operations over actual investment
cost) in excess of 14% for 1994 and 1995. No assurance can be given that
Homestead will be able to achieve or sustain such returns in the future. See
"Homestead Transaction".
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, purpose-built, extended-stay
lodging business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead's facilities are designed and built to uniform plans developed by
Homestead. Homestead expects to have a total of 31 facilities operational and
41 facilities under construction by
28
<PAGE>
the end of 1996 and plans to continue an active development program
thereafter. Homestead's plans call for the average facility to have
approximately 136 extended-stay rooms and take approximately eight to ten
months to construct. The average length of stay for a customer in Homestead's
facilities is in excess of four weeks. For the quarter ended March 31, 1996,
average economic occupancy and average weekly rate for PTR's stabilized
properties were 87% and $217 per week, respectively.
In March 1996, the Board began considering ways for ATLANTIC to maximize
shareholder value with respect to its Homestead Village properties. In May
1996, ATLANTIC, PTR, SCG and Homestead entered into the Merger Agreement.
Pursuant to the Merger Agreement, each of ATLANTIC, PTR and SCG will
contribute, through the Mergers, all of their respective assets related to
Homestead Village properties to Homestead as follows:
. ATLANTIC will contribute 26 properties (or the rights to acquire such
properties) to Homestead in exchange for 4,201,220 shares of Homestead
common stock. Pursuant to the Merger and Distribution Agreement, dated as
of May 21, 1996 (the "Merger Agreement"), ATLANTIC will provide a cash
payment estimated to be $18.6 million to Homestead at the Merger Closing
Date. This payment is required because ATLANTIC's Homestead Village
properties, only one of which is currently operating, are in earlier
stages of development than PTR's Homestead Village properties, therefore
ATLANTIC has not funded the same percentage of total costs as PTR. This
payment also assures that ATLANTIC receives all of its shares of
Homestead common stock at the Merger Closing Date rather than being
received in smaller increments over time as funds are expended for
Homestead Village properties contributed by ATLANTIC.
. PTR will contribute 54 properties (or the rights to acquire such
properties) to Homestead in exchange for 9,485,727 shares of Homestead
common stock.
. SCG will contribute to Homestead its anticipated future cash flows from
the ATLANTIC REIT Management Agreement, a similar management agreement
with PTR and property management agreements relating to the Homestead
Village properties in exchange for 4,062,788 shares of Homestead common
stock, of which 2,243,038 shares will be placed in escrow and released as
funds are advanced under the Funding Commitment Agreements as described
below. In addition, SCG will contribute the Homestead Village trademark
and the operating system. No separate consideration was attributed to the
Homestead Village trademark or the operating system, as the trademark and
operating system would be necessary to achieve the anticipated fees.
There are additional Homestead Village facilities which are in early
stages of planning, but which are not owned or under control and are not
included in the 80 facilities which will be contributed in the Homestead
transaction, and are being planned outside the target markets of ATLANTIC
and PTR by SCG with its own funds. SCG will contribute to Homestead the
rights to these properties for no additional consideration.
. Simultaneous with the transactions described above, ATLANTIC and PTR will
receive 2,818,517 and 6,363,789 warrants, respectively, each to purchase
one share of Homestead common stock, in exchange for their entering into
the Funding Commitment Agreements as described below. Each Homestead
warrant will be exercisable at $10.00 per share and will expire one year
after the Merger Closing Date.
. Pursuant to the applicable Funding Commitment Agreement, ATLANTIC and PTR
will agree to provide secured financing to Homestead of up to
approximately $111 million and $133 million, respectively, which amounts
are anticipated to be sufficient to complete the development of the
respective Homestead Village facilities contributed by them. ATLANTIC and
PTR will receive convertible mortgage notes in respect of such fundings
in stated amounts of up to approximately $98 million and $144 million,
respectively. The effect of these provisions of the Funding Commitment
Agreement is that ATLANTIC will fund $1,133,535 for each $1,000,000 of
convertible mortgage loans. The difference between the funded amounts and
the stated amounts of the convertible mortgage loans arises because the
rate of return on the existing
29
<PAGE>
Homestead Village facilities contributed by PTR is projected to exceed the
rate of return on the Homestead Village facilities contributed by PTR and
ATLANTIC to Homestead which are under construction or in pre-development
planning. In calculating the relative ownership interests of ATLANTIC and
PTR, SCG took into account the fact that as of July 1, 1996, PTR will have
28 Homestead Village facilities in operation and generating income, while
ATLANTIC will have one. In addition, SCG expects that the average property
development costs for the existing PTR Homestead Village properties will,
on balance, be less than those for the PTR and ATLANTIC Homestead Village
properties projected to be built in the future because a large portion of
the existing PTR Homestead Village properties were in planning or under
development during 1992 and 1993 when land prices and construction costs
were less than they are now and are anticipated to be over the next 18
months. The convertible mortgage notes will have a term of approximately
ten years, will bear interest at 9% per year, will not be callable for
five years and will be convertible at the option of the holder into shares
of Homestead common stock after March 31, 1997 on the basis of one share
of Homestead common stock for every $11.50 of principal amount
outstanding, subject to antidilution adjustments. The ATLANTIC mortgage
loans and PTR mortgage loans will be used to finance the acquisition and
development of properties contributed by ATLANTIC and PTR, respectively.
In addition, PTR subsidiaries currently have $77,289,000 in convertible
mortgage loans from PTR which will be assumed by Homestead at the Merger
Closing Date. These loans have substantially the same terms as the
mortgage loans described above. If all such mortgage loans were made and
converted, an additional 8,524,215 and 19,246,402 shares of Homestead
common stock would be issued to ATLANTIC and PTR, respectively.
. SCG will receive 817,694 warrants to purchase one share of Homestead
common stock (on the same terms as ATLANTIC's and PTR's warrants) in
exchange for providing funding to Homestead during the time between the
execution of the Merger Agreement and the Merger Closing Date and the use
of office facilities for one year.
. The relative percentage ownership interests of ATLANTIC, PTR and SCG in
Homestead, giving effect to the issuance of the Homestead common stock at
the Merger Closing Date, the exercise of all warrants and the conversion
of all mortgage loans outstanding and which could be made under the
Funding Commitment Agreements, would be 28.0%, 63.2% and 8.8%,
respectively (and such percentages would be 25.3%, 57.1% and 17.6%,
respectively, assuming all of the foregoing except the conversion of any
of the mortgage loans).
. After giving effect to the Offering and the distribution of all Homestead
common stock and warrants by ATLANTIC and PTR, the exercise of all
Homestead warrants and the conversion of all mortgage loans and the
subsequent distribution of the Homestead common stock issuable upon such
conversion to the shareholders of ATLANTIC and PTR, SCG would own
approximately % of the outstanding Homestead common stock.
The Homestead common stock and warrants received by ATLANTIC will be
distributed, pro rata, to ATLANTIC shareholders in the Distribution. The
Distribution will be made to holders of Shares of record at the close of
business on the Distribution Record Date. The amount of Homestead common stock
and warrants to be received by each ATLANTIC shareholder in the Distribution
will depend on the number of Shares outstanding on the Distribution Record
Date. Based on the number of Shares expected to be outstanding on the
Distribution Record Date assuming that the Underwriters fully exercise their
over-allotment option in the Offering, each ATLANTIC shareholder will receive
shares of Homestead common stock and warrants to purchase shares of
Homestead common stock for each Share held on the Distribution Record Date. If
the Underwriters do not fully exercise their over-allotment option, it will
result in a proportionate increase in the amount of Homestead common stock and
warrants to be received by each ATLANTIC shareholder.
No certificates or scrip representing fractional shares of Homestead common
stock or warrants to purchase shares of Homestead common stock will be issued
directly to ATLANTIC shareholders as a
30
<PAGE>
part of the Distribution. The agent for the Distribution will, as soon as
practicable after the Distribution Record Date, aggregate and sell all
fractional shares of Homestead common stock and warrants to purchase shares of
Homestead common stock on any interdealer quotation system on which the
Homestead common stock and warrants are quoted at then prevailing market
prices and remit the net proceeds (after deduction of brokerage fees) to
ATLANTIC shareholders who would otherwise be entitled to receive fractional
shares or warrants.
The Distribution of the Homestead common stock and warrants will constitute
a taxable dividend to ATLANTIC shareholders, taxable as ordinary income to the
extent of the earnings and profits of ATLANTIC allocable to such Homestead
common stock and warrants, even if ATLANTIC shareholders do not sell the
Homestead common stock and warrants received in the Distribution. The amount
of the Distribution which exceeds the allocated earnings and profits of
ATLANTIC will be treated as a nontaxable reduction (although not below zero)
of a shareholder's tax basis in its Shares. To the extent that the
Distribution exceeds such shareholder's adjusted tax basis in its Shares, the
Distribution will be taxed as gain to such shareholder. See "Federal Income
Tax Considerations--Tax Consequences of the Homestead Transaction".
The Homestead transaction has been initiated and structured by individuals
who are executive officers or directors of ATLANTIC and PTR, the REIT Manager
and PTR's REIT manager and are affiliated with SCG. As a result, the terms of
the transaction have not been negotiated at arms' length. No independent
representatives have been retained to negotiate the terms of the transaction
on behalf of ATLANTIC. If such representatives had been retained, the terms of
the transaction might have been more favorable to the shareholders of
ATLANTIC. Although independent representatives were not retained by ATLANTIC,
the Board established a special committee of Independent Directors consisting
of Messrs. Ned S. Holmes and Manuel A. Garcia III. The special committee
engaged King & Spalding as its legal counsel and J.P. Morgan Securities Inc.
to advise it in analyzing and evaluating the fairness of the Homestead
transaction. Neither of the members of the special committee is an officer of
ATLANTIC or a director or officer of the REIT Manager. Mr. Holmes beneficially
owns 120,000 Shares, 1,055 common shares of beneficial interest of PTR and 67
shares of common stock of SCG. Mr. Garcia owns 20,000 Shares and does not own
any common shares of beneficial interest of PTR or shares of common stock of
SCG. Directors of ATLANTIC other than members of the special committee
beneficially own, in the aggregate, 48,839 Shares, 57,745 common shares of
beneficial interest of PTR and 6,449 shares of common stock of SCG.
31
<PAGE>
BUSINESS
HIGHLY FOCUSED BUSINESS STRATEGY GROUNDED IN RESEARCH
Since its inception in 1993, ATLANTIC has employed a research-driven
investment approach, deploying its capital in markets and submarkets which
exhibit strong market fundamentals. REIT Management believes that population
and employment growth are the primary demand generators for multifamily
product. The following chart indicates the expected population and job growth
in ATLANTIC's primary target market cities versus the United States as a
whole. The chart is based on forecasts published by Woods & Poole Economics,
Inc., which bases its historical information on U.S. Census Bureau
information. There can be no assurances that the forecasted population and job
growth shown below will in fact occur.
(CHART TO COME)
At May 31, 1996, ATLANTIC owned properties in 39 of the 143 submarkets
within its target market. REIT Management is continuously researching
additional submarkets and cities and may expand ATLANTIC's primary target
market in the future; however, ATLANTIC intends to remain regionally focused
in the southeastern United States.
Multifamily products are differentiated by the income levels of their
residents. In ascending order, the full multifamily spectrum includes
government subsidized housing, mobile home parks, and moderate income, middle
income and upper middle income apartments. ATLANTIC deploys capital into the
latter three categories. ATLANTIC's upper middle income product appeals to
residents whose incomes, which equal 115% to 140% of submarket median
household income, are often sufficient to purchase homes. These properties
typically feature large luxurious units and numerous amenities, including
large exercise facilities and attached garages. ATLANTIC's middle income
product appeals to residents whose incomes equal 90% to 115% of submarket
median household income. Middle income properties have smaller units and fewer
amenities than upper middle income properties. ATLANTIC's moderate income
product accommodates residents with incomes ranging from 65% to 90% of
submarket median household income. Residents in this category, which typically
include
32
<PAGE>
couples, single parents and families with one or two children, are value-driven
and focus on unit liveability and more practical amenities such as washer/dryer
hookups, storage space and playgrounds.
ATLANTIC's initial investment strategy focused on two components: the
acquisition of a substantial base of established multifamily properties to
provide operating cash flow and the creation of an internal development process
focused primarily on the development of moderate income multifamily properties.
ATLANTIC's initial acquisitions were comprised principally of upper middle and
middle income properties as a result of the difficulty in acquiring moderate
income properties due to existing moderate income inventory in the southeastern
United States consisting primarily of older properties (15-30 years old) which
have been poorly managed, are either dilapidated or approaching obsolescence
and would not compete effectively in ATLANTIC's market. Accordingly, ATLANTIC's
existing portfolio incudes a larger percentage of upper middle and middle
income properties than moderate income properties.
In the future, ATLANTIC will focus primarily on the moderate income category,
which comprises the largest segment of the renter population. This product
comprised 36% of ATLANTIC's 1995 development starts and by 1997 is expected to
make up approximately 64% of total starts, based on expected investment cost.
The balance of development starts are expected to consist of middle income
properties.
Few other real estate companies currently focus on the moderate income
segment within ATLANTIC's primary target market. Moreover, the REIT Manager
believes that less than 10% of the 1995 multifamily starts in ATLANTIC's
primary target market cities comprised moderate income product, the category
which ATLANTIC has targeted for future investment. Consequently, REIT
Management believes that the moderate income segment is a significantly
underserved market with limited competition.
Moderate income residents are typically longer-term residents due, in part,
to the financial resources required to purchase single-family homes. As a
result, resident turnover is often significantly lower in moderate income
properties than upper middle income or middle income properties. The total cost
of refurbishing and re-leasing a unit ranges from $700 to $1,500; therefore,
reducing resident turnover can have a material impact on an asset's
profitability. Due to market fundamentals and the operating characteristics of
moderate income properties, REIT Management believes that this product category
offers greater sustainable cash flow growth.
ATLANTIC expects to continue to selectively acquire upper middle income
assets and acquire and develop middle income assets; however, its future
primary investment activities will concentrate on developing moderate income
properties.
BUILDING ATLANTIC'S OPERATING SYSTEM
ATLANTIC, through the REIT Manager, is a fully integrated operating company
with 75 professionals dedicated to implementing its highly focused business
strategy. ATLANTIC's "Operating System" consists of six functional areas:
research, acquisitions, development, due diligence, property management and
capital markets/finance/legal. By focusing on a single discipline,
professionals within each of these areas develop substantial expertise.
Interaction and communication among these functional areas remain fluid; but
separation promotes certain checks and balances. For example, all acquisition
and development investments must be approved by a five-member investment
committee, a four-member senior investment committee and ultimately by the
investment committee of the Board.
33
<PAGE>
RESEARCH
ATLANTIC is dedicated to ongoing research and development. ATLANTIC utilizes
Security Capital Investment Research to conduct comprehensive evaluations of
its target market on a submarket-by-submarket basis to identify those
submarkets and product types that present above average prospects for long-
term cash flow growth. These evaluations, combined with ATLANTIC's experience
in development and ATLANTIC's position as one of the largest multifamily
property owners in the southeastern United States, enable ATLANTIC to identify
submarkets that will offer continued opportunities for long-term cash flow
growth. In addition to market research, considerable resources are devoted to
product research. The REIT Manager along with SCG Realty Services continually
evaluates and refines ATLANTIC's multifamily product to incorporate
technologies and designs that will enhance long-term livability for its
residents.
ACQUISITIONS
Since its inception in 1993, ATLANTIC has selectively acquired multifamily
properties where land costs, demographic trends and market trends indicate a
high likelihood of achieving expected operating results. This system has
resulted in multifamily property acquisitions on favorable terms. As of May
31, 1996, ATLANTIC's portfolio of properties acquired, net of dispositions,
aggregated 16,305 operating units representing a total cost, including planned
renovations, of $820.4 million. At May 31, 1996, ATLANTIC had letters of
intent or contingent contracts, subject to ATLANTIC's final due diligence, for
the acquisition of 390 units with an aggregate investment cost of $17.3
million, including planned renovations.
DEVELOPMENTS
ATLANTIC has selectively developed multifamily properties where land costs
and demographic and market trends indicate a high likelihood of achieving
expected operating results. This system has resulted in multifamily property
developments on favorable terms. At May 31, 1996, ATLANTIC's completed
developments and properties under development aggregated 35.0% of its
multifamily portfolio, based on expected investment cost. As of May 31, 1996,
the development multifamily portfolio consisted of the following:
<TABLE>
<CAPTION>
NUMBER
OF UNITS TOTAL COST(1)
-------- -------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Developments Completed(2)........................... 804 $ 42,110
Developments Under Construction..................... 3,466 204,603
Developments in Planning(3)......................... 3,404 195,173
----- --------
Totals.......................................... 7,674 $441,886
===== ========
</TABLE>
- --------
(1) Represents budgeted development cost, which includes the cost of land,
fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period, for properties in development. Does not include land held for
future development, which is less than 1% of assets based on cost.
(2) These properties are classified as pre-stabilized operating properties at
May 31, 1996.
(3) The term "in planning" means developments owned or under control (land
which is under control through contingent contract or letter of intent)
with construction anticipated to commence within 12 months.
ATLANTIC carefully manages development risks by obtaining zoning and public
approvals prior to purchasing land. ATLANTIC does not take construction risk,
but instead uses qualified third party general contractors to build its
properties, using guaranteed maximum price contracts. To enhance its
34
<PAGE>
flexibility in developing and acquiring properties, ATLANTIC may also from
time to time enter into pre-sale agreements with third party owner-developers
to acquire properties developed by such owner-developers when the developments
meet ATLANTIC's investment criteria. ATLANTIC targets development for markets
with high occupancy rates where population and job growth trends indicate
increasing future demand. ATLANTIC cannot eliminate all development risk, but
believes that the opportunities to better control product and realize higher
returns from development properties compensate for the retained risk.
ATLANTIC traditionally has commenced development immediately after acquiring
a tract of land. However, in cases where land prices are favorable, ATLANTIC
has acquired and will acquire, on an unleveraged basis, prudent amounts of
zoned land for multifamily developments in the foreseeable future. In
addition, to provide for growth, ATLANTIC may utilize options and rights of
first refusal in order to control land for future developments.
DUE DILIGENCE
The REIT Manager believes that a REIT should have experienced personnel
dedicated to performing intelligent and thorough due diligence. The REIT
Manager has three full-time due diligence professionals. The REIT Manager's
professionals utilize due diligence information systems and procedures in
screening potential acquisitions and developments.
PROPERTY MANAGEMENT
The REIT Manager believes that a successful REIT must actively manage its
properties in order to increase cash flow and enhance the long-term economic
performance of the properties. Approximately 81% of ATLANTIC's operating
multifamily units are managed by SCG Realty Services, a property management
firm headquartered in Atlanta, Georgia, with the balance in various stages of
transition to SCG Realty Services' management. SCG Realty Services' address is
the same as ATLANTIC's. For a description of fees paid to SCG Realty Services,
see "Certain Relationships and Transactions--Property Management Company".
SCG Realty Services has over 450 employees. SCG Realty Services emphasizes
locally-based management of ATLANTIC's properties and has opened seven local
offices to serve ATLANTIC's target market. This network improves SCG Realty
Services' ability to respond to changes in local market conditions and
resident needs. The REIT Manager believes that SCG Realty Services has
developed superior operating procedures, financial controls, information
systems and training programs, which it expects to positively affect rental
returns and occupancy rates. In addition, incentive compensation programs have
been implemented for on-site property managers to further improve the
performance of the properties.
The REIT Manager has taken an active role in overseeing SCG Realty Services'
management of ATLANTIC's multifamily properties. The owner of the REIT
Manager, SCG, also owns SCG Realty Services.
CAPITAL MARKETS/FINANCE/LEGAL
REIT Management believes that a successful REIT must have the ability to
access the equity and debt markets efficiently, expeditiously and cost
effectively. ATLANTIC's capital markets ability permits it to capitalize on
the development and acquisition opportunities which ATLANTIC believes exist in
its target market. In order to maximize this function and enhance
relationships with major institutional sources of capital, SCG, the REIT
Manager's owner, formed Capital Markets Group, a registered broker-dealer
affiliate. Capital Markets Group's services are included in the REIT Manager's
fee and
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do not result in a separate charge to ATLANTIC. Capital Markets Group and the
REIT Manager have arranged private offerings for ATLANTIC, including:
. In August 1994, ATLANTIC received approximately $10 million in gross
proceeds from a private offering of Shares at a price of $10 per Share;
. During the period March 1995 through June 1995, ATLANTIC received
approximately $160 million in gross proceeds from a private offering of
Shares at a price of $11.00 per Share; and
. During the period November 1995 through May 1996, ATLANTIC received
approximately $250 million in gross proceeds (at a commission cost of
less than 1% paid to an unaffiliated third party) from a private offering
of Shares at a price of $11.50 per Share (including approximately $28.9
million of Shares sold to SCG at a price of $11.568 per Share).
In June 1994, the REIT Manager arranged a three-year, $225 million revolving
credit facility for ATLANTIC, at an interest rate of prime or, at ATLANTIC's
option, LIBOR plus 2% or the certificate of deposit rate plus 2.125%. In
August 1995, the REIT Manager arranged for an increase in this line to $300
million and for a reduction in the interest rates to LIBOR plus 1.75% and the
certificate of deposit rate plus 1.875%. In March 1996, the REIT Manager
arranged for a further reduction in the line of credit's interest rates to
LIBOR plus 1.50% and the certificate of deposit rate plus 1.625%. In June
1996, the REIT Manager arranged for an increase in the line of credit to $350
million and an extension of the term to June 1998. ATLANTIC's increased
borrowing capacity enables it to acquire properties prior to equity and long-
term debt offerings and to eliminate or minimize the amount of cash it must
invest in short-term investments at low yields. REIT Management believes
ATLANTIC's current leverage provides considerable flexibility to prudently
utilize long-term debt as a financing tool in the future. After it has
achieved a substantial equity base, ATLANTIC expects to arrange fully
amortizing, fixed rate 15 year to 25 year unsecured debt, the proceeds of
which will be used for revolving credit repayments related to multifamily
acquisition and development. This long-term financing strategy is expected to
allow ATLANTIC to prudently increase its capital base with debt and equity.
In July 1995, the REIT Manager negotiated a credit enhancement agreement
with FNMA which covers all of ATLANTIC's tax-exempt bond issues ($107.2
million at March 31, 1996). Under the agreement with FNMA, ATLANTIC makes
monthly principal payments, based upon a thirty-year amortization, into a
principal reserve account. Of these bond issues, $92.7 million have variable
interest rates. To mitigate the variable interest rate exposure, ATLANTIC
entered into interest rate protection agreements. Under these interest rate
protection agreements, ATLANTIC pays and receives interest on the aggregate
principal amount of the underlying bonds outstanding, net of the amount held
in the principal reserve account. These agreements effectively mitigate
ATLANTIC's variable interest rate exposure by ensuring that ATLANTIC pays
interest on a fixed rate as provided in such agreements. ATLANTIC has three
interest rate protection agreements: (i) an agreement expiring in June 2002 on
approximately $23.1 million of bonds that fixes the interest rate at 6.31%
(including the cost of the interest rate protection agreement); (ii) an
agreement expiring in June 2005 on approximately $64.6 million of bonds that
fixes the interest rate at 6.59% (including the cost of the interest rate
protection agreement); and (iii) an agreement expiring in March 2006 on $5.0
million of bonds that fixes the interest rate at 4.82% (including the cost of
the interest rate protection agreement). To the extent the deposits in the
principal reserve account with FNMA have not been used to redeem any of the
outstanding bonds, ATLANTIC pays interest at the variable rates as provided by
the mortgage agreements on that portion of bonds outstanding which is
equivalent to the balance in the principal reserve fund.
KEY COMPONENTS DRIVING ATLANTIC'S GROWTH
In addition to ATLANTIC's strong primary target market, REIT Management
believes that the following key factors will drive ATLANTIC's future growth:
continued research and development, moderate income developments, "same store"
net operating income growth, portfolio and asset optimization and a
conservative balance sheet.
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RESEARCH AND DEVELOPMENT
ATLANTIC is dedicated to ongoing research and development. ATLANTIC utilizes
Security Capital Investment Research to conduct comprehensive evaluations of
its target market on a submarket-by-submarket basis to identify those
submarkets and product types that present above average prospects for long-term
cash flow growth. These evaluations, combined with ATLANTIC's experience in
development and ATLANTIC's position as one of the largest multifamily property
owners in the southeastern United States, enable ATLANTIC to identify
submarkets that will offer continued opportunities for long-term cash flow
growth. In addition to market research, considerable resources are devoted to
product research. The REIT Manager along with SCG Realty Services continually
evaluates and refines ATLANTIC's multifamily product to incorporate
technologies and designs that will enhance long-term livability for its
residents.
MODERATE INCOME DEVELOPMENT
ATLANTIC's research-driven development strategy is to focus on developing
state of the art product in attractive submarkets to meet renter preferences
and demographic trends. ATLANTIC believes that developing communities designed
for long-term appeal to the largest portion of the renter population (moderate
income households) will allow ATLANTIC to achieve more consistent rental
increases and higher occupancies over the long term and, thereby, realize cash
flow growth. Development, principally of moderate income product, is a critical
factor driving ATLANTIC's long-term growth. By year-end 1997, REIT Management
anticipates that approximately 41% of ATLANTIC's total portfolio will consist
of properties ATLANTIC has developed or is in the process of developing and
approximately 55% of these development properties will be moderate income
product, based on expected investment cost. Over an extended period, management
believes that operating results from ATLANTIC's development starts will
contribute significantly to ATLANTIC's cash flow growth.
Development opportunities also permit ATLANTIC to incorporate into
multifamily communities proprietary technologies and designs aimed at enhancing
long-term rental growth while reducing ongoing maintenance costs. ATLANTIC has
had the opportunity to evaluate and refine its multifamily product through its
history of development. ATLANTIC, unlike a typical merchant builder, intends to
own long term the properties which it develops. Hence, ATLANTIC emphasizes
long-term durability by using materials and designs with an added view towards
minimizing long-term operation and maintenance costs.
"SAME STORE" GROWTH
"Same store" comparisons of a portfolio's net operating income are generally
utilized as a measurement tool in evaluating growth. However, considering
ATLANTIC's short operating history and the significant acquisitions made since
its inception in October 1993, "same store" comparisons are not as meaningful
in measuring ATLANTIC's portfolio performance as they would be in measuring a
stabilized portfolio. For example, ATLANTIC had only three properties
aggregating 683 units in operation for both 1994 and 1995. In particular,
comparisons of rental expenses between these periods is not meaningful because
properties that have been operating in both periods being compared may have
been classified as both pre-stabilized and stabilized in the periods being
compared. Due to the more conservative accounting treatment for stabilized
properties, costs that may have been capitalized during the pre-stabilized
period would be expensed in the stabilized period.
ATLANTIC has 39 properties that were fully operational throughout both the
six-month period ended December 31, 1994 and the six-month period ended
December 31, 1995. Net operating income on a "same store" basis for these
properties increased by 8.04% from the six-month period ended December 31, 1994
to the six-month period ended December 31, 1995. The underlying conditions of
ATLANTIC's primary target market, a function of its strong job growth and
restricted supply of new product, should continue to support high occupancy
levels and allow for consistent increases in rental
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income. In addition, REIT Management believes that operating efficiencies and
lower resident turnover resulting from ATLANTIC's increasing focus on moderate
income product are expected to reduce operating costs and improve profit
margins.
PORTFOLIO AND ASSET OPTIMIZATION
ATLANTIC acquires and develops properties with a view to effective long-term
operation and ownership. REIT Management actively reviews ATLANTIC's asset
base. These reviews generate operating and capital plans and, with guidance
from its affiliate Security Capital Investment Research, identify submarkets
and product types that ATLANTIC believes will generate above average long-term
growth opportunities. In evaluating each multifamily community owned or being
considered for acquisition or development, the REIT Manager focuses on those
components which it believes provide the greatest opportunity for consistent
rental increases and high occupancies over the long term. Submarket locations
and demographics, unit mix, density and amenities of each community are
important contributors to long-term income growth. ATLANTIC may from time to
time dispose of assets that in management's view are not consistent with
ATLANTIC's long-term investment objectives and redeploy the invested capital,
preferably through like-kind exchanges, into assets that it believes meet
ATLANTIC's long-term investment objectives. ATLANTIC's asset optimization
strategy is based on the premise that it has a finite amount of investment
capital and that this capital should be deployed where it can produce maximum
cash flow growth. REIT Management believes that many of its existing upper
middle income properties will be candidates for exchange or disposition as
development of this product type by third parties continues. Consistent with
its current strategy, ATLANTIC expects to redeploy the proceeds into moderate
income assets with superior growth prospects. For example, ATLANTIC may
dispose of an upper middle or middle income property and reinvest the proceeds
through a tax-deferred exchange into a moderate income property. ATLANTIC
consummated a tax-deferred exchange of a middle income property for a moderate
income property in April 1996 and REIT Management believes that such exchanges
will contribute to growth in the future.
CONSERVATIVE BALANCE SHEET STRATEGY
ATLANTIC employs a conservative balance sheet strategy. Long-term debt as a
percentage of long-term undepreciated book capitalization was 17.5% at March
31, 1996 on an historical basis and 14.8% at March 31, 1996 on a pro forma
basis as adjusted to give effect to the Offering and other sales of Shares
subsequent to March 31, 1996 and the application of the proceeds therefrom and
to the Homestead transaction. In the future, ATLANTIC intends to access the
public equity and debt markets. ATLANTIC's objective is to achieve an
investment-grade debt rating and to access the debt markets through issuing
long-term, fixed rate, fully amortizing unsecured corporate debt, which will
limit ATLANTIC's exposure to floating rate or balloon financing. ATLANTIC's
$350 million line of credit enables ATLANTIC to take advantage of investment
opportunities in its target market without investing significant funds in
short-term investments by providing a short-term source of funding between
securities offerings. As of June 27, 1996, $194 million of borrowings were
outstanding under the line of credit (and approximately $ million in
borrowings are expected to be outstanding at the time of the closing of the
Offering). This conservative balance sheet strategy is expected to provide
ATLANTIC with significant incremental debt capacity and allow ATLANTIC to take
advantage of future investment opportunities on a non-dilutive basis which
will contribute to ATLANTIC's objective of long-term growth in cash flow.
INVESTMENT ANALYSIS
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's
investment decision is based upon the expected contribution of the property to
long-term cash flow growth on an unleveraged basis. The expected cash flow
contribution is based on an estimate of all cash revenues from leases and
other revenue sources, minus expenses incurred in
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operating the property (generally, real estate taxes, insurance, maintenance,
personnel costs and utility charges, but excluding depreciation, debt service
and amortization of loan costs) and a reserve for capital expenditures.
ATLANTIC categorizes operating multifamily properties (which include all
properties not under development) as either "stabilized" or "pre-stabilized".
The term "stabilized" means that renovation, repositioning, new management and
new marketing programs (or development and marketing in the case of newly-
developed properties) have been completed and in effect for a sufficient
period of time (but in no event longer than 12 months, except for major
rehabilitations) to achieve 93% occupancy at market rents. Prior to being
"stabilized", a property is considered "pre-stabilized". Due to its active
investment program since inception, 21.8% of ATLANTIC's multifamily portfolio
($275.3 million) was classified by ATLANTIC as pre-stabilized as of May 31,
1996, based on expected investment cost. By September 30, 1996, an additional
$93.2 million of these pre-stabilized properties are expected to be classified
as stabilized. At May 31, 1996, ATLANTIC's operating multifamily properties
(excluding properties in lease-up) were 95.6% leased. For operating properties
which ATLANTIC has acquired, stabilized operations generally have been
achieved six to 12 months after acquisition. For properties which ATLANTIC is
developing, REIT Management expects stabilized operations generally to be
achieved 12 to 18 months after construction commences.
The cash flow contribution of properties cannot be predicted with certainty,
and no assurance can be given that developed or acquired properties will
contribute to increased cash flow, or that development and acquisitions will
be available on comparable terms in the future.
EMPLOYEES
ATLANTIC has no employees. The REIT Manager, whose sole activity is advising
ATLANTIC, manages the day-to-day operations of ATLANTIC. The REIT Manager has
assembled a team of 75 operating professionals in the REIT Manager and its
affiliates, collectively possessing extensive experience in multifamily real
estate. The majority of these persons are employed directly by and focused
entirely on the services provided by the REIT Manager, with the balance
providing centralized research, senior investment committee, capital markets,
legal and accounting services.
LEGAL PROCEEDINGS
ATLANTIC is, from time to time, a party to a variety of legal proceedings
arising in the ordinary course of its business. Existing matters are not
expected to have a material adverse impact on ATLANTIC.
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate, including those that operate in the regions in which
ATLANTIC's properties are located, that compete with ATLANTIC in seeking land
for development, properties for acquisition and disposition and residents for
properties. All of ATLANTIC's multifamily properties are located in developed
areas that include other multifamily properties. The number of competitive
multifamily properties in a particular area could have a material adverse
effect on ATLANTIC's ability to lease apartment units and on the rents
charged. In addition, other forms of single family and multifamily residential
properties provide housing alternatives to residents and potential residents
of ATLANTIC's multifamily properties.
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REIT MANAGEMENT
GENERAL
The REIT Manager provides ATLANTIC with strategic and day-to-day management,
research, investment analysis, acquisition, development, marketing,
disposition of assets, asset management and due diligence, capital markets,
and legal and accounting services, all of which are included in the REIT
Management fee. Hence, ATLANTIC depends upon the quality of the management
provided by the REIT Manager. ATLANTIC believes that its relationship with the
REIT Manager provides ATLANTIC with access to high quality and depth of
management personnel and resources, savings from a dedicated capital markets
group, and access to centralized research, accounting and legal support. As of
June 27, 1996, 75 operating professionals were employed by the REIT Manager
and its specialized service affiliates. The REIT Manager also provides office
and other facilities for ATLANTIC's needs. The REIT Manager's address is the
same as ATLANTIC's.
The owner of the REIT Manager has a substantial shareholder interest in
ATLANTIC, creating commonality of interest with ATLANTIC's shareholders, and
the REIT Management Agreement prohibits self-dealing principal transactions
between ATLANTIC and the REIT Manager and its affiliates. The Homestead
transaction would be prohibited by the terms of the REIT Management Agreement;
the REIT Manager and ATLANTIC have waived this prohibition. Furthermore, the
REIT Manager provides all its services for one fee, and an affiliate provides
property management services at market rates in a competitive environment. The
REIT Manager does not receive additional fees for investment banking,
financing, asset sales or similar services. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--REIT Management
Agreement".
REIT Management believes that the quality of management should be assessed
in light of the following factors:
MANAGEMENT DEPTH/SUCCESSION
Management should have several senior executives with the leadership,
operational, investment and financial skills and experience to oversee the
entire operations of the REIT. The REIT Manager believes that several of its
senior officers could serve as the principal executive officer and continue
ATLANTIC's performance. See "--Directors and Officers of ATLANTIC, the REIT
Manager and Relevant Affiliates" below.
STRATEGIC VISION
Management should have the strategic vision to determine an investment focus
which provides favorable initial yields and long-term growth prospects. The
REIT Manager has demonstrated its strategic vision by focusing ATLANTIC on
multifamily properties in the southeastern United States, where demographic
and supply factors have permitted high occupancies at increasing rents,
conditions which are consistent with the long-term demographic forecast for
the target market cities.
RESEARCH CAPABILITY
Management should have the means for researching markets to determine
appropriate investment opportunities. ATLANTIC divides its target market
cities into numerous submarkets for analysis purposes. The REIT Manager and
its affiliates have several persons devoting substantial time to research, on
a submarket-by-submarket basis, who are closely supervised by senior officers
of the REIT Manager; hence, the REIT Manager's research has supplemented
ATLANTIC's strategic focus and investment program.
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INVESTMENT COMMITTEE PROCESS
Investment committees should provide discipline and guidance to the
investment activities of the REIT in order to achieve its investment goals.
The five members of the REIT Manager's investment committee have a combined
115 years experience in the real estate industry. See "--Directors and
Officers of ATLANTIC, the REIT Manager and Relevant Affiliates" below. The
investment committee receives detailed written analyses and research, in a
standardized format, from the REIT Manager's personnel and evaluates all
prospective investments pursuant to uniform underwriting criteria prior to
submission of investment recommendations to the investment committee of the
Board. The quality of the REIT Manager's investment committee process is
evident from the ability of ATLANTIC to achieve its investment goals,
generally realizing its projected initial returns and growth from multifamily
investments.
DEVELOPMENT/REDEVELOPMENT AND ACQUISITION CAPABILITY
By internally developing projects and redeveloping well located operating
properties, management can capture for the REIT the value which normally
escapes through sales premiums paid to successful developers. The REIT
Manager's personnel have substantial development and redevelopment experience,
as described in "--Directors and Officers of ATLANTIC, the REIT Manager and
Relevant Affiliates" below. The REIT Manager has 22 full-time professionals
committed to development and acquisition activities. The REIT Manager has
arranged for over $820.4 million of successful acquisitions (net of
dispositions) for ATLANTIC. The REIT Manager is developing 6,870 multifamily
units for ATLANTIC as of May 31, 1996, with a total budgeted cost of $399.8
million. REIT Management has engaged in substantial development on behalf of
ATLANTIC at attractive yields which have exceeded projections and believes
that development will provide growth when the market for acquisitions becomes
less favorable. See "Business--Building ATLANTIC's Operating System".
DUE DILIGENCE PROCESS
Management should have experienced senior personnel dedicated to performing
intelligent and thorough due diligence. The REIT Manager has three full time
due diligence professionals and has developed uniform systems and procedures
for due diligence. The REIT Manager's due diligence personnel have screened
and selected a large volume of investments.
CAPITAL MARKETS CAPABILITY
Management must be able to effectively raise equity and debt capital for the
REIT in order for the REIT to achieve growth through investment. As set forth
under "Business--Building ATLANTIC's Operating System", REIT Management has
successfully arranged funding for ATLANTIC's investment program.
OPERATING CAPABILITY
Management can substantially improve funds from operations by actively and
effectively managing assets. As described under "Business--Building ATLANTIC's
Operating System", the REIT Manager and its affiliates have devoted
substantial personnel and financial resources to control and effectively
administer the management of ATLANTIC's multifamily portfolio.
COMMUNICATIONS/SHAREHOLDER RELATIONS CAPABILITY
A REIT's success in capital markets and investment activities can be
enhanced by management's ability to effectively communicate the REIT's
strategy and performance to investors, sellers of property and the financial
media. The REIT Manager provides at its expense full time personnel who
prepare informational materials for and conduct periodic meetings with the
investment community and analysts.
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Successfully combining the foregoing attributes significantly enhances a
REIT's ability to increase cash flow and the market valuation of the REIT's
portfolio. ATLANTIC's cash flow from operating activities and market valuation
have increased under the REIT Manager's administration.
DIRECTORS AND OFFICERS OF ATLANTIC, THE REIT MANAGER AND RELEVANT AFFILIATES
DIRECTORS AND SENIOR OFFICERS OF ATLANTIC AND THE REIT MANAGER
Members of the REIT Manager's Investment Committee are designated by an
asterisk.
C. RONALD BLANKENSHIP--46--Director of ATLANTIC and the REIT Manager since
April 1996, Chairman of PTR and PTR's REIT manager and Managing Director of
SCG since March 1991; from June 1988 to March 1991, Regional Partner, Trammell
Crow Residential, Chicago, Illinois (multifamily real estate development and
property management); prior thereto, Executive Vice President and Chief
Financial Officer, The Mischer Corporation, Houston, Texas (multibusiness
holding company with investments primarily in real estate). While with
Trammell Crow Residential, Mr. Blankenship was on the Management Board for
Trammell Crow Residential Services, a property management company that managed
approximately 90,000 multifamily units nationwide, and was chief executive
officer of Trammell Crow Residential Services-North, which managed 10,000
multifamily units in the Midwest and Northeast. In his various positions prior
to his affiliation with the REIT Manager, Mr. Blankenship supervised the
development of approximately 9,300 multifamily units. Mr. Blankenship
supervises the overall operations of PTR and PTR's REIT manager.
MANUEL A. GARCIA III--52--Director of ATLANTIC since December 1995; Chief
Executive Officer of Davgar Restaurants, Inc. where he is the owner/operator
of ten Burger King Restaurants in central Florida, five Pebbles Restaurants,
Harvey's Bistro and Manuel's on the 28th Restaurant in Orlando, Florida;
Director of Sprint/United Telephone, The Foundation for Orange County Public
Schools, Florida State University Seminole Boosters' Association, a Director
and Member of the Executive Committee of the Florida Citrus Sports
Association, and National Director of Cities in Schools. Mr. Garcia is also on
the Board of the National Conference of Christians and Jews and an Honorary
Director of the Boys' Clubs and Boy Scouts of Central Florida. In addition,
Mr. Garcia is a former member of former President Bush's Drug Advisory
Council.
NED S. HOLMES--51--Director of ATLANTIC since May 1994; President and Chief
Executive Officer of Laing; member of the Board of Directors of Pall Mall
Properties, Ltd., United Kingdom, and Chairman and President of Parkway
Investment/Texas Inc., a Houston-based real estate investment and development
company which specializes in residential (apartment and townhouse), commercial
(office and warehouse) and subdivision projects. Mr. Holmes is also Senior
Chairman of the Board of Heritage Bank and Chairman of the Port Commission of
the Port of Houston Authority.
*CONSTANCE B. MOORE--40--Co-Chairman, Chief Operating Officer and Director
of ATLANTIC and the REIT Manager since January 1996, where she has overall
responsibility for operations of ATLANTIC; from May 1994 to December 1995,
Managing Director of PTR, Director and Managing Director of PTR's REIT manager
from March 1994 to December 1995; Senior Vice President of SCG from March 1993
to May 1994; from January 1990 to December 1992, President and Director of
Kingswood Realty Advisors, Inc., investment advisor to ICM Property Investors,
a NYSE listed REIT, and from March 1991 to December 1992, President and
Director of ICM Property Investors; from April 1989 to December 1989,
consultant to Bedford Properties, a real estate development and management
firm where Ms. Moore was responsible for acquiring a controlling interest in
ICM Property Investors and Kingswood for Bedford; from January 1983 to
November 1988, Senior Vice President and Director of Consolidated Capital
Equities Corporation, where she was in charge of portfolio and asset
management for Consolidated Capital's $3.0 billion diversified debt and equity
portfolio.
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*JAMES C. POTTS--49--Co-Chairman and Chief Investment Officer of ATLANTIC
and the REIT Manager since January 1996 and Director of ATLANTIC and the REIT
Manager since October 1993, where he has overall responsibility for
investments of ATLANTIC; Chairman of ATLANTIC and the REIT Manager from May
1994 to January 1996; from December 1992 to April 1994, Managing Director of
PTR's REIT manager, where he supervised the asset management of all of PTR's
multifamily properties and oversaw the relationship of PTR's REIT manager with
SCG Realty Services Incorporated, which provides on-site management for these
properties; from 1989 to December 1992, Chief Executive Officer of four
regional multifamily management companies of Trammell Crow Residential
Services, which collectively managed approximately 52,000 units and employed
1,600 associates. Under Mr. Potts' direction, Trammell Crow Residential
Services supervised the lease-up of over 25,000 units, the assumption of
management of over 15,000 acquired units, and the increase in its third-party
asset management business from 14,000 to 30,000 units. Mr. Potts was also on
the Management Board of Trammell Crow Residential Services (managing 90,000
units nationwide).
*J. LINDSAY FREEMAN--50--Senior Vice President of ATLANTIC and the REIT
Manager since May 1994 and Director of the REIT Manager since March 1995,
where he has overall responsibility for investments and operations in the mid-
Atlantic region; from June 1980 to March 1994, Senior Vice President and
Operating Partner of Lincoln Property Group in Atlanta, Georgia, where he was
responsible for acquisitions, financing, construction and management of
multifamily properties within the Atlantic region and oversaw operations of
16,000 multifamily units.
JEFFREY A. KLOPF--48--Senior Vice President and Secretary of ATLANTIC, the
REIT Manager and SCG since January 1996, where he provides securities
offerings and corporate acquisition services and oversees the provisions of
legal services for affiliates of the firm; from January 1988 to December 1995,
partner of Mayer, Brown & Platt where he practiced corporate and securities
law.
*ROBERT J. HILDEBRAND--53--Senior Vice President of ATLANTIC and the REIT
Manager since December 1994 and Director of the REIT Manager since March 1995,
where he is responsible for multifamily development activities; from October
1977 to October 1994, Executive Vice President of Operations of The Casden
Company, one of the largest apartment and for-sale housing developers in
Southern California with sales in excess of $300 million per annum; prior
thereto, Senior Project Manager with Management Data Corp. for 10 years, a
firm specializing in management information systems and construction
management for large government institutions and private clients.
STEVEN R. LEBLANC--38--Senior Vice President of ATLANTIC and the REIT
Manager since July 1995, where he is responsible for special projects directed
at new market and product opportunities; from March 1992 to June 1995, Vice
President of PTR, where he was a member of its development group; from 1984 to
1992, Operating Partner and Senior Vice President of Lincoln Property Company,
Dallas, where he was responsible for the development of more than 2,000
multifamily units and the management of more than 17,000 multifamily units in
five states.
*BRADLEY C. MILLER--49--Senior Vice President of ATLANTIC and the REIT
Manager since June 1996, where he has overall responsibility for investments
and operations in the south-Atlantic region; from October 1979 to May 1996,
Senior Vice President and Operating Partner of Lincoln Property Group in
Tampa, Florida, where he was responsible for acquisitions, financing,
construction and management of multifamily properties within the Atlantic
region and oversaw the development of over 6,500 new multifamily units and
operations of 11,000 multifamily units.
OTHER OFFICERS
ARIEL AMIR--36--Vice President of SCG since June 1994; from September 1985
to April 1994, an attorney with the law firm of Weil, Gotshal & Manges, New
York, New York, where he practiced securities and corporate law for eight
years. Mr. Amir provides securities offerings and corporate acquisition
services to ATLANTIC and affiliated entities.
43
<PAGE>
RAYMOND D. BARROWS--34--Vice President of ATLANTIC and the REIT Manager
since May 1994, where he supervises the due diligence group; from January 1994
to December 1995, a member of ATLANTIC's asset management group and prior
thereto, a member of PTR's asset management group; from May 1990 to August
1993, Portfolio Manager with the First National Bank of Chicago where he was
responsible for underwriting and structuring transactions for both project and
corporate facilities.
LESLIE L. BIVINS--42--Vice President of ATLANTIC and the REIT Manager since
June 1996, where she is responsible for asset and property management for the
States of Georgia and Alabama and with SCG Realty Services since May 1994;
from January 1992 to May 1994, Senior Regional Manager of Laing Management
Company in Atlanta, Georgia, where she was responsible for management of over
2,000 units throughout the southeastern United States; from November 1987
through December 1991, District Manager of Trammell Crow Residential, Atlanta,
Georgia, where she supervised the management of approximately 2,000
multifamily units in the Atlanta market.
DARCY B. BORIS--33--Vice President of Security Capital Investment Research
since June 1995, and an associate from December 1994 to June 1995, where she
conducts strategic market analysis for ATLANTIC and affiliated companies; from
August 1993 to November 1994, Ms. Boris worked for Capital Markets Group; from
January 1987 to September 1991, Ms. Boris was associated with Summerhill
Development Company, the multifamily development subsidiary of Marcus &
Millichap Incorporated, where she managed the development of multifamily
housing, and prior thereto, she was an analyst for its property investment
subsidiary.
NEIL T. BROWN--39--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he is responsible for directing the development of new
multifamily properties in the mid-Atlantic region; from July 1992 to December
1995, Regional Vice President/Regional Partner of JPI where he was responsible
for all development activity in Florida; prior thereto, Partner of Trammell
Crow Residential where he was responsible for development of residential
projects in Dade and Broward Counties, Florida.
RICHARD O. CAMPBELL--33--Vice President of ATLANTIC and the REIT Manager
since May 1994, where he is a member of the development group; from June 1993
to April 1994, Vice President of PTR, and an associate since June 1991, where
he was a member of the acquisitions group; prior thereto, Development
Associate with the Chicago and Denver divisions of Trammell Crow Residential.
MARK J. CHAPMAN--39--Vice President of Security Capital Investment Research
since November 1995, where he is the director of the group and conducts
strategic market analysis for ATLANTIC and affiliated companies; from March
1995 to November 1995, Vice President of PTR, with asset management
responsibilities in five major markets; from November 1994 to March 1995, Vice
President of Security Capital Pacific Incorporated ("PACIFIC"); from July 1989
to November 1994, Vice President at Copley Real Estate Advisors, Inc., where
he directed asset management for Copley assets located from Connecticut to
Virginia, valued in excess of $1.5 billion; prior thereto, Director of Asset
Management for Liberty Real Estate, with responsibility for assets east of the
Mississippi River, including multifamily, office and retail properties.
JOSEPH J. DOMINGUEZ--36--Vice President of ATLANTIC and the REIT Manager
since April 1996, where he is a member of the development group, prior
thereto, he was an associate in the development group; from November 1984 to
August 1995, Vice President of Operations for The Casden Company, where he had
overall responsibility for the start-up and operations of a general
contracting subsidiary; prior thereto, Project Manager with Pacific Southwest
Construction Company where he oversaw the construction of various residential
projects.
44
<PAGE>
KATHY B. FARR--41--Vice President of ATLANTIC and the REIT Manager since
June 1995, where she is responsible for multifamily dispositions; from January
1994 to April 1995, Vice President of Corporate Finance with Irvine Apartment
Communities, where she was responsible for all aspects of financing, including
the company's working capital line of credit and construction financings for
all new development activity; prior thereto, Senior Director Project Finance
with The Irvine Company, where she was responsible for negotiating and closing
construction and permanent financings on residential and commercial
properties. Ms. Farr is also a Vice President of PTR and PTR's REIT manager
where she is responsible for multifamily dispositions.
JOHN H. GARDNER JR.--42--Senior Vice President of ATLANTIC and the REIT
Manager since September 1994, where he is responsible for overall multifamily
dispositions; Director of PTR's REIT manager since February 1995; Senior Vice
President of PTR and its REIT manager since September 1994, where he has
overall responsibility for multifamily dispositions; from December 1984 to
September 1994, Managing Director and Principal of Copley Real Estate Advisors
in Boston, where he had overall responsibility for the portfolio management
function for eight accounts valued at $7.5 billion.
GARRET C. HOUSE--31--Vice President of ATLANTIC and the REIT Manager since
September 1995, and a member of Capital Markets Group since August 1995, where
he provides capital markets services for affiliates of SCG; from May 1994 to
July 1995, he assisted with financing activities for affiliates of SCG, and
prior thereto, he was in the Management Development Program with SCG, working
in six-month rotational assignments with Managing Directors of SCG and its
affiliates; prior thereto, Mr. House was with Merrill Lynch Capital Markets in
New York and with Nansay USA, Incorporated.
WILLIAM KELL--40--Vice President and Controller of ATLANTIC and the REIT
Manager since January 1996, where he supervises accounting and financial
reporting for ATLANTIC; from June 1991 to December 1995, Vice President of
PTR, where he had overall responsibility for multifamily accounting and
financial reporting; from 1987 to 1991, Vice President and Treasurer, Bohanon
Development Corporation, El Paso, Texas (multifamily development); prior
thereto, Manager with KPMG Peat Marwick in its El Paso, Texas office.
MARY CAPERTON LESTER--41--Vice President of ATLANTIC and the REIT Manager
since July 1995, where she is involved in the investment and asset management
functions; prior thereto, she was a member of the asset management group; from
May 1993 to May 1994, she was with Summit Management Company, where she
specialized in new business development; prior thereto, Vice President of
Trammell Crow Residential Services, where she was responsible for property
operations, marketing and new business development.
RONALD C. MAYHEW--53--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is a member of the development group, prior thereto, he
was an associate in the development group; from January 1984 to January 1995,
Director of Community Development and Senior Project Manager for The Casden
Company/Casden Properties, where he had sole responsibility for project
management and coordination of consultant teams; prior thereto, project
manager at Psomas & Associates, where he managed civil engineering and land
planning.
JEFFREY G. MEGRUE--34--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is a member of the development group, prior thereto, he
was an associate in the development group; from March 1993 to May 1994, he was
a member of the acquisitions group of PTR; from June 1988 to February 1993,
Vice President of Trammell Crow Residential Services North; prior thereto,
Development Associate for the New Jersey/Pennsylvania division of Trammell
Crow Residential.
45
<PAGE>
CHRISTOPHER T. NOLAN--32--Vice President of ATLANTIC and the REIT Manager
since December 1995, where he manages the acquisition group, prior thereto, he
was a member of the asset management group; from February 1989 to May 1994,
member of USF&G Corporation's real estate division; from May 1986 to February
1989, Assistant Vice President and Acquisitions Officer of Perpetual Mortgage
Services; prior thereto a Mortgage Analyst for Reilly Mortgage Group.
KENT K. POULSEN--62--Vice President of ATLANTIC and the REIT Manager since
September 1995, where he is a member of the development group, prior thereto,
he was an associate in the development group; from April 1986 to May 1995,
Divisional Vice President for Construction of Trammell Crow Residential
Illinois Division; prior thereto, he held positions with responsibilities
ranging from design management through delivery of the final product. During
his career Mr. Poulsen has overseen the construction of over 9,000 residential
units as well as several commercial projects.
GLENN RAND--35--Vice President of ATLANTIC and of the REIT Manager since
June 1996, where he is responsible for asset and property management for the
State of Florida and with SCG Realty Services since May 1995; from August 1987
to April 1995, Vice President of Trammell Crow Residential and Avalon
Properties, where he was responsible for operations and third party management
solicitation in southern Florida and the northeastern United States.
ANN L. SCHUMACHER--37--Vice President of ATLANTIC and the REIT Manager since
July 1995 and a member of the accounting group since January 1994, where she
is responsible for accounting and financial reporting; from September 1988 to
October 1993, she was with Trammell Crow Company, most recently as Regional
Controller, where she managed the accounting department for the company's 26
million-square-foot industrial portfolio in Southern California and Arizona;
prior thereto, Senior Accountant for Price Waterhouse.
L. DOUGLAS SNIDER--42--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is responsible for directing the development of new
multifamily properties in the South Atlantic region, prior thereto, he was an
associate in the development group; from July 1993 to March 1995, Vice
President of Operations with American Constructors, where he was responsible
for all design/build activities; prior thereto, Vice President of Robert L.
Mayer Corporation, where he was responsible for residential and commercial
development activities.
MICHELLE TOUPS--42--Vice President of ATLANTIC and the REIT Manager since
June 1996 where she is responsible for asset and property management for the
mid-Atlantic region and with SCG Realty Services since May 1994; from
September 1989 to May 1994, Vice President of Laing Management Company in
Atlanta, Georgia, where she was responsible for asset and property management
of over 7,000 multifamily units throughout the southeastern United States;
from October 1985 through December 1988, Director of Real Estate Research and
Valuation with Johnstown American Companies, where she was responsible for
underwriting and appraisal of investment opportunities. Also served as
Portfolio Manager responsible for asset management of 25,000 apartment units
nationwide.
C. MELVIN WHITE--57--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he is a member of the development group and a member of the
development group from August 1995; from September 1991 to August 1995,
Founder/Partner of Sherrill and Associates, an interior specialty contracting
firm; prior thereto, Construction Manager of Laing where he was responsible
for construction of garden apartments, personal care retirement facilities and
mid-rise office space.
46
<PAGE>
SHAREHOLDER RELATIONS AND CAPITAL MARKETS
The following persons provide shareholder relations and capital markets
services to ATLANTIC:
K. SCOTT CANON--34--President of Capital Markets Group since January 1996;
Vice President of Capital Markets Group from August 1993 to January 1996 and a
member of Capital Markets Group since March 1992, where he participates in
capital markets and institutional investor relations; from September 1991 to
March 1992, a personal account director for Chase Manhattan Investment
Services; from August 1987 to September 1991, a member of private client
services for Goldman, Sachs & Co. Mr. Canon is registered with the National
Association of Securities Dealers, Inc.
JEFFREY A. COZAD--31--Senior Vice President of Capital Markets Group since
December 1994, Vice President from September 1992 to November 1994 (in its New
York office since June 1993) and a member of Capital Markets Group since March
1992; from August 1991 to August 1992, a member of SCG; in June 1991, Mr.
Cozad obtained an M.B.A. from The University of Chicago; prior thereto, an
analyst with LaSalle Partners Limited, where he provided corporate real estate
services to major institutions from 1986 to 1989. Mr. Cozad is registered with
the National Association of Securities Dealers, Inc.
JAMES J. EVANS, JR.--42--Senior Vice President of Capital Markets Group
since December 1994, where he provides capital markets services for affiliates
of the firm; from December 1992 to November 1994, Managing Director of Copley
Real Estate Advisors, where he was responsible for all acquisitions in the
western United States, and worked on new business initiatives (designing and
marketing business products), capital raising and asset management, and from
December 1988 to December 1992, Vice President and Principal of Copley, where
he was responsible for new investments in Southern California, and prior
thereto, Associate at Copley. Mr. Evans is registered with the National
Association of Securities Dealers, Inc.
ROBERT H. FIPPINGER--53--Vice President of Capital Markets Group since June
1995 and with SCG since October 1994, where he directs corporate
communications services for affiliates of the firm; from November 1991 to
October 1994, with Grubb & Ellis, where he represented corporate clients and
provided tenant advisory services; from October 1988 to January 1991,
Executive Director of Techmart in Santa Clara, California; prior thereto,
Principal of Affiliated Capital Corp., a real estate development company.
GERARD DE GUNZBURG--48--Vice President of Capital Markets Group in its New
York office since January 1993; from June 1988 to December 1992, a consultant
to American and European companies; prior thereto, Director and Partner of
Lincoln Property Company, Europe, where he arranged real estate financing from
1976 to 1988. Mr. de Gunzburg is registered with the National Association of
Securities Dealers, Inc.
ALISON C. HEFELE--37--Vice President of Capital Markets Group since February
1994, where she provides capital markets services for affiliates of the firm;
from January 1990 to February 1994, Vice President with Prudential Real Estate
Investors (strategic planning and business development for institutional real
estate investment management services); from September 1985 to January 1990, a
management consultant with McKinsey & Company; prior thereto, a financial
analyst with Morgan Stanley Realty Inc. Ms. Hefele is registered with the
National Association of Securities Dealers, Inc.
BRADFORD W. HOWE--31--Vice President of Capital Markets Group since January
1996, where he provides capital markets services for affiliates of the firm
and where he has been an associate since December 1994; from March 1993 to
December 1994, Assistant Vice President in the real estate investment banking
group of Kidder Peabody & Co., Incorporated; prior thereto, real estate
consultant at Coopers & Lybrand LLP. Mr. Howe is registered with the National
Association of Securities Dealers, Inc.
47
<PAGE>
JAMES H. POLK, III--53--Trustee of PTR since 1976; Managing Director of
Capital Markets Group since August 1992, where he provides capital markets
services for affiliates of the firm. Mr. Polk has been affiliated with PTR's
REIT manager since March 1991; prior thereto, he was President and Chief
Executive Officer of PTR for sixteen years. He is registered with the National
Association of Securities Dealers, Inc. and is a past President and Trustee of
NAREIT.
CLASSIFICATION OF DIRECTORS
Pursuant to the terms of ATLANTIC's Articles of Incorporation, the Directors
are divided into three classes. One class (consisting of Mr. Potts) will hold
office for a term expiring at the annual meeting of shareholders to be held in
1997, a second class (consisting of Messrs. Garcia and Holmes) will hold
office for a term expiring at the annual meeting of shareholders to be held in
1998, and a third class (consisting of Mr. Blankenship and Ms. Moore) will
hold office for a term expiring at the annual meeting of shareholders to be
held in 1999. Each Director will hold office for the term to which he or she
is elected and until his or her successor is duly elected and qualified. At
each annual meeting of shareholders of ATLANTIC, the successors to the class
of Directors whose terms expire at such meeting will be elected to hold office
for a term expiring at the annual meeting of shareholders held in the third
year following the year of their election. See "Certain Provisions of Maryland
Law and of ATLANTIC's Articles of Incorporation and Bylaws". SCG has a right
to nominate up to three Directors, depending upon its level of ownership of
Shares, as described under "Certain Relationships and Transactions". Messrs.
Blankenship and Potts and Ms. Moore are deemed to be the nominees of SCG.
COMMITTEES OF THE BOARD
The Board will establish an Audit Committee consisting solely of Independent
Directors prior to the consummation of the Offering. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews the plans and results of the audit engagement with the independent
public accountants, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of ATLANTIC's internal accounting controls.
The Board has established an Investment Committee consisting of Messrs.
Potts, Holmes and Blankenship. The Investment Committee is responsible for
reviewing and approving all asset acquisitions and other investment decisions
between meetings of the full Board. Any decisions made by the Investment
Committee are reported to the full Board at its next quarterly meeting. The
Investment Committee receives recommendations from the REIT Manager's
investment committee.
COMPENSATION OF DIRECTORS
ATLANTIC pays an annual retainer of $14,000 to Directors who are not
officers or employees of ATLANTIC, the REIT Manager or its affiliates. These
fees are currently paid to Directors in cash (quarterly on each meeting date)
and will be paid to the Directors in Shares (quarterly on each dividend
payment date) based on the then current market price of the Shares following
the adoption by ATLANTIC of a dividend reinvestment and share purchase plan as
described below. Such Directors also receive $1,000 for each meeting attended
(other than telephonic meetings), which is also paid in cash. Non-employee
chairpersons of Board committees (other than the Investment Committee) receive
an additional annual retainer of $1,000 payable in cash and non-employee
members of the Investment Committee receive an additional annual retainer of
$4,000 payable in cash. In the event that ATLANTIC adopts a dividend
reinvestment and share purchase plan, both the retainer and fees will be paid
directly into such plan. Officers of ATLANTIC, the REIT Manager or its
affiliates who are Directors are not paid any Director fees.
48
<PAGE>
In addition, pursuant to the Outside Directors Plan (as defined below), each
Director who is not an employee of ATLANTIC, the REIT Manager or its
affiliates will be entitled to receive, on the effective date of the
registration statement relating to the Offering and on the date of each
subsequent annual meeting of shareholders, an option to purchase 2,000 Shares
at a price per Share equal to the closing price of one Share on such annual
meeting date. See "--Outside Directors Plan".
Directors are reimbursed for any out-of-town travel expenses incurred in
connection with attendance at Board meetings. Messrs. Blankenship and Potts
and Ms. Moore are not separately compensated for serving as Directors.
OUTSIDE DIRECTORS PLAN
On March 12, 1996, the Board approved the Security Capital Atlantic
Incorporated Share Option Plan for Outside Directors (the "Outside Directors
Plan"). The Outside Directors Plan has been filed as an exhibit to the
registration statement of which this Prospectus forms a part and the following
summary of the material terms of the Outside Directors Plan is qualified in
its entirety by reference to the actual terms thereof.
The purpose of the Outside Directors Plan is to enable the Directors of
ATLANTIC who are not employees or officers of ATLANTIC or SCG or any of its
affiliates ("Outside Directors") to increase their ownership of ATLANTIC and
thereby further the identity of their interests with those of ATLANTIC's other
shareholders.
To achieve the foregoing objective, the Outside Directors Plan provides for
grants of options ("Options") to purchase Shares. The Secretary of ATLANTIC
(the "Administrator") administers the Outside Directors Plan with a view to
ATLANTIC's best interests and the Outside Directors Plan's objectives. The
Administrator has authority to adopt administrative guidelines, rules and
regulations relating to the Outside Directors Plan and to make all
determinations necessary or advisable for the implementation and
administration of the Outside Directors Plan.
The number of Shares reserved for issuance upon exercise of Options granted
under the Outside Directors Plan is 200,000. Shares that are forfeited will
again become available for awards under the Outside Directors Plan. The Shares
subject to the Outside Directors Plan may be currently authorized but unissued
Shares or treasury Shares held or subsequently purchased by ATLANTIC,
including Shares purchased in the open market or in private transactions.
In the event of changes in the outstanding Shares by reason of any increase
or decrease in the number of issued Shares resulting from a subdivision or
consolidation of Shares or the payment of a dividend in Shares, or any other
increase or decrease in the number of Shares, or merger or consolidation, or
other similar event, the Administrator shall make appropriate adjustments to
the aggregate number of Shares available under the Outside Directors Plan.
On the date of each annual meeting of shareholders of ATLANTIC for the years
1997 through and including 2006, each Outside Director serving on such date
(after the election of Directors in the meeting) will be granted an Option to
purchase 2,000 Shares at an exercise price equal to the fair market value of
the Shares on such date. Also, on the effective date of the Offering, each
Outside Director serving on such date will be granted an option to purchase
2,000 Shares at the initial public offering price.
Each Option will be immediately exercisable, but must be exercised before
the earliest of the following events to occur: the date that is three months
after the date that the optionee's position as a Director terminates, the date
that is twelve months after the date the Director becomes disabled or dies or
the date that is five years after the date the Option is granted.
49
<PAGE>
If fifty percent or more of the outstanding Shares are acquired by a cash
tender offer or exchange offer, each optionee shall have the right to exercise
his or her Option in full or surrender his or her outstanding Option in
exchange for a cash payment from ATLANTIC in an amount equal to the excess of
the offer price or value over the Option price. If ATLANTIC dissolves, each
optionee shall have the right to exercise his or her Option in full before the
date of the dissolution.
The Outside Directors Plan may be amended or terminated at any time by the
Board. The provisions relating to the amount, price and timing of grants under
the Outside Directors Plan may not be amended more than once every six months,
other than to comport with changes in the Code or the rules thereunder, unless
such amendment would not affect the exemption provided by Rule 16b-3
promulgated under Section 16 of the Exchange Act of 1934, as amended (the
"Exchange Act").
INDEMNIFICATION
ATLANTIC's officers and Directors are and will be indemnified under the
Articles of Incorporation against certain liabilities. The Articles of
Incorporation provide that ATLANTIC will, to the maximum extent permitted by
Maryland law in effect from time to time, indemnify and pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
individual who is a present or former Director or officer of ATLANTIC or (b)
any individual who, while a Director of ATLANTIC and at the request of
ATLANTIC, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
employee benefit plan or other enterprise. ATLANTIC has the power, with the
approval of the Board, to provide such indemnification and advancement of
expenses to a person who served a predecessor of ATLANTIC in any of the
capacities described in (a) or (b) above and to any employee or agent of
ATLANTIC or its predecessors.
A Director or officer of ATLANTIC shall not be liable for monetary damages
to ATLANTIC or its shareholders for any act or omission in the performance of
his or her duties unless: (a) the Director or officer actually received an
improper benefit in money, property or services (in which case, such liability
shall be for the amount of the benefit in money, property or services actually
received); (b) the Director's or officer's action or failure to act was the
result of active and deliberate dishonesty and was material to the cause of
action being adjudicated; (c) the Director's or officer's action or failure to
act constitutes willful misconduct or deliberate recklessness; or (d) such
liability to ATLANTIC is specifically imposed upon Directors or officers by
statute.
Additionally, ATLANTIC has entered into indemnity agreements with each of
its officers and Directors which provide for reimbursement of all expenses and
liabilities of such officer or Director, arising out of any lawsuit or claim
against such officer or Director due to the fact that he or she was or is
serving as an officer or Director, except for such liabilities and expenses
(a) the payment of which is judicially determined to be unlawful, (b) relating
to claims under Section 16(b) of the Exchange Act or (c) relating to
judicially determined criminal violations.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to Directors,
officers or persons controlling ATLANTIC pursuant to the foregoing provisions,
ATLANTIC has been informed that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
REIT MANAGER COMPENSATION
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--REIT Management Agreement" for a discussion of compensation of
the REIT Manager.
50
<PAGE>
PROPERTIES
PROPERTIES OWNED
The following table sets forth certain information with respect to
ATLANTIC's properties owned or under control at May 31, 1996. The information
is as of March 31, 1996 for properties owned or under control at March 31,
1996. For properties acquired or put under control subsequent to March 31,
1996, the information is as of May 31, 1996. The table excludes ATLANTIC's
Homestead Village properties, which will be contributed to Homestead on the
Merger Closing Date. No individual property, or group of properties operated
as a single business unit, amounts to 10% or more of ATLANTIC's pro forma
total assets nor does the gross revenue from any such properties amount to 10%
or more of ATLANTIC's pro forma gross revenues for the fiscal year ended
December 31, 1995.
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PROPERTIES OWNED AT MARCH 31, 1996:
PROPERTIES STABILIZED AT MARCH 31,
1996(3):
Atlanta, Georgia:
Camden at
Ashford(4)......... 1994 97.3% 365 $24,792 $24,886
Camden at
Briarcliff(5)...... 1994 97.3 220 14,210 14,261
Camden at
Dunwoody(4)........ 1994 95.8 238 16,798 16,842
Camden Creek I(4)... 1994 96.3 404 24,436 24,596
Camden Crest(4)..... 1994 97.4 377 23,760 23,833
Cameron Brook(6)(7). 1994 97.1 440 22,412 22,447
Clairmont
Crest(6)(8)........ 1994 95.8 213 10,925 11,009
The Greens(6)(9).... 1994 95.1 304 13,730 13,751
Lenox Villa(4)...... 1994 95.5 176 11,821 11,956
Morgan's Landing(4). 1993 95.8 165 8,353 8,631
Oaks at Sandy
Springs(4)......... 1993 93.2 250 9,457 9,646
Old Salem(4)........ 1994 95.9 172 7,875 8,136
Trolley Square...... 1994 97.4 270 13,843 13,954
Vinings Landing(4).. 1994 96.5 200 9,794 10,036
Birmingham, Alabama:
Morning Sun
Villas(4).......... 1994 94.0 184 9,180 9,275
Charlotte, North
Carolina:
Cameron Oaks(4)..... 1994 94.3 264 15,321 15,392
Columbia, South
Carolina:
Greenbrier(4)(10)... 1994 93.3 358 14,681 14,681
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing
I(6)(11)........... 1994 94.9 408 18,464 18,686
Spencer Run(5)...... 1994 94.3 384 19,450 19,483
Sun Pointe
Cove(6)(12)........ 1994 93.2 221 9,355 9,365
Ft. Myers, Florida:
Forestwood(6)(13)... 1994 95.2 397 13,744 13,769
Jacksonville, Florida:
Bay Club(4)......... 1994 98.6 220 12,186 12,217
Memphis, Tennessee:
Cameron at Kirby
Parkway(4)......... 1994 92.9 324 10,037 10,064
Stonegate(4)........ 1994 91.8 208 6,938 6,987
Miami, Florida:
Park Hill(4)........ 1994 95.1 264 11,255 11,353
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nashville, Tennessee:
Arbor Creek(4)...... 1994 93.6% 360 $ 18,102 $ 18,197
Orlando, Florida:
Camden Springs(4)... 1994 95.3 340 17,282 17,350
Cameron Villas
I(14).............. 1994 96.4 192 7,964 8,008
Wellington(5)....... 1994 94.8 192 7,974 8,005
Raleigh, North
Carolina:
Cameron Square(4)... 1994 94.0 268 15,920 15,972
Richmond, Virginia:
Camden at
Wellesley(4)....... 1994 92.9 340 19,363 19,418
Potomac Hunt(5)..... 1994 98.2 220 10,091 10,156
Sarasota, Florida:
Camden at Palmer
Ranch(4)........... 1994 96.8 432 23,993 24,095
Tampa, Florida:
Camden Downs(4)..... 1994 95.6 250 12,499 12,551
Cameron Lakes(4).... 1995 95.2 207 8,581 8,598
Foxbridge(6)(15).... 1994 94.4 358 10,888 10,959
Summer Chase(5)..... 1994 97.9 96 3,723 3,748
Washington, D.C.:
Arbors at
Landmark(4)........ 1994 96.3 400 23,702 23,909
Camden at Kendall
Ridge(4)........... 1994 94.6 184 11,605 11,700
Camden at
Saybrooke(4)....... 1994 94.8 252 18,825 18,927
---- ------ -------- --------
Subtotals/Average. 95.3% 11,117 $563,329 $566,849
---- ------ -------- --------
PROPERTIES PRE-STABILIZED AT MARCH
31, 1996(3):
Atlanta, Georgia:
Azalea Park......... 1995 86.8% 447 $ 25,276 $ 25,435
Cameron Forest(16).. 1995 90.1 152 6,002 6,241
Cameron Place(16)... 1995 94.3 212 7,571 7,977
Cameron
Station(6)(17)..... 1995 92.5 348 15,684 16,152
Lake Ridge(4)....... 1993 87.3 268 16,542 17,122
WintersCreek
(6)(18)............ 1995 97.0 200 7,689 7,792
Woodlands(4)........ 1995 95.2 644 25,426 25,741
Birmingham, Alabama:
Cameron on the
Cahaba(19)......... 1995 95.3 400 18,649 18,887
Colony Woods I(4)... 1994 90.7 216 10,555 10,579
Colony Woods
II*(16)............ 1995 (20) 198 10,489 10,506
Charlotte, North
Carolina:
Waterford
Hills*(16)......... 1995 (20) 270 12,609 14,062
Ft. Lauderdale/W. Palm
Beach, Florida:
Cypress Lakes(4).... 1995 95.5 176 8,362 8,455
Trails at Meadow
Lakes(4)........... 1995 94.2 189 8,733 8,851
Nashville, Tennessee:
The Enclave at
Brentwood(4)....... 1995 95.8 380 15,966 16,270
Orlando, Florida:
Cameron Villas
II(5).............. 1995 95.2 42 1,743 1,766
Kingston Village(4). 1995 99.2 120 5,917 5,986
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Raleigh, North
Carolina:
Waterford
Point*(16)......... 1996 (20) 336 $ 15,800 $ 17,542
Tampa, Florida:
Country Place
Village(21)........ 1995 97.3% 188 8,247 8,309
Washington, D.C.:
Sheffield
Forest(16)......... 1995 94.1 256 15,182 15,618
---- ----- -------- --------
Subtotals/Average. 93.4% 5,042 $236,442 $243,291
---- ----- -------- --------
DEVELOPMENTS UNDER CONSTRUCTION AT MARCH 31,
1996:
Atlanta, Georgia:
Camden Creek II*.... 1996 N/A 260 $ 12,247 $ 18,289
Charlotte, North
Carolina:
Waterford Square I*. 1996 N/A 408 18,836 21,051
Jacksonville, Florida:
Cameron Deerwood*... 1997 N/A 336 3,759 16,909
Cameron Lakes*...... 1996 N/A 302 14,957 16,065
Cameron Timberlin
Parc I*............ 1997 N/A 320 5,585 16,572
Raleigh, North
Carolina:
Cameron Brook*...... 1997 N/A 228 2,397 11,985
Waterford Forest*... 1997 N/A 384 11,482 19,839
Richmond, Virginia:
Cameron Crossing I*. 1997 N/A 280 2,186 16,566
Washington, D.C.:
Milestone*.......... 1997 N/A 444 18,286 29,492
Woodway at Trinity
Center*............ 1997 N/A 504 19,936 37,835
---- ----- -------- --------
Subtotals......... N/A 3,466 $109,671 $204,603
---- ----- -------- --------
DEVELOPMENTS IN PLANNING--OWNED AT MARCH 31,
1996(3):
Birmingham, Alabama:
Cameron at the
Summit I*.......... 1997 N/A 372 $ 3,108 $ 20,034
Charlotte, North
Carolina:
Waterford Square
II*................ 1998 N/A 286 2,418 17,181
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing
II*................ 1997 N/A 152 2,067 9,454
Jacksonville, Florida:
Cameron Timberlin
Parc II*........... 1998 N/A 200 1,294 10,500
Nashville, Tennessee:
Hickory Hollow*..... 1998 N/A 442 2,837 23,848
Richmond, Virginia:
Cameron at Wyndham*. 1997 N/A 312 2,623 18,339
---- ----- -------- --------
Subtotals......... N/A 1,764 $ 14,347 $ 99,356
---- ----- -------- --------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LAND HELD FOR FUTURE MULTIFAMILY
DEVELOPMENT AT MARCH 31, 1996:
Birmingham, Alabama:
Cameron at the
Summit II(22)...... N/A N/A -- $ 1,902 --
---- ------ -------- ----------
Total Properties
Owned at March
31, 1996......... 94.8% 21,389 $925,691 $1,114,099
---- ------ -------- ----------
DEVELOPMENTS IN PLANNING--UNDER
CONTROL AT MARCH 31, 1996(3):
Atlanta, Georgia:
Stockbridge*........ N/A N/A 400 (23) $ 21,592
Richmond, Virginia:
Cameron Crossing
II*................ N/A N/A 144 (23)(24) 8,703
---- ------ -------- ----------
Total Properties
Under Control at
March 31, 1996... N/A 544 N/A $ 30,295
---- ------ -------- ----------
Total Properties
Owned or Under
Control at March
31, 1996......... 94.8% 21,933 $925,691 $1,144,394
==== ====== ======== ==========
PROPERTIES ACQUIRED FROM MARCH 31,
1996 TO MAY 31, 1996:
PROPERTIES PRE-STABILIZED AT MAY 31,
1996(3):
Atlanta, Georgia:
Cameron Pointe(16).. 1996 96.3% 214 $ 14,362 $ 14,682
Charlotte, North
Carolina:
Cameron at Hickory
Grove.............. 1996 94.6 202 8,034 8,293
Ft. Lauderdale/W. Palm
Beach, Florida:
Park Place at Turtle
Run(16)............ 1996 90.0 350 14,591 15,627
Pointe at Bayberry
Lake............... 1996 90.9 308 16,453 17,075
Greenville, South
Carolina:
Paces Court(16)..... 1996 86.8 234 11,028 11,374
---- ------ -------- ----------
Subtotals/Average. 91.4% 1,308 $ 64,468 $ 67,051
---- ------ -------- ----------
PROPERTIES DISPOSED OF FROM MARCH 31, 1996
TO MAY 31, 1996:
Columbia, South
Carolina:
Greenbrier(10)...... N/A N/A (358) $(14,681) $ (14,681)
---- ------ -------- ----------
Subtotals......... N/A (358) $(14,681) $ (14,681)
---- ------ -------- ----------
DEVELOPMENTS IN PLANNING--PUT UNDER
CONTROL FROM MARCH 31, 1996 TO MAY 31, 1996(3):
Atlanta, Georgia:
Cameron Park*....... N/A N/A 288 N/A $ 14,573
Northpoint Mall*.... N/A N/A 264 N/A 20,270
Nashville, Tennessee:
Breckenridge*....... N/A N/A 264 N/A 14,136
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Richmond, Virginia:
Cameron at Virginia
Center*............ N/A N/A 280 N/A $ 16,543
---- ------ -------- ----------
Subtotals......... N/A N/A 1,096 N/A $ 65,522
---- ------ -------- ----------
Total Properties
Acquired,
Disposed of or
Put Under Control
from March 31,
1996 to May 31,
1996............. 91.4% 2,046 $ 49,787 $ 117,892
==== ====== ======== ==========
Total Properties
Owned or Under
Control at May
31, 1996......... 94.5% 23,979 $975,478 $1,262,286
==== ====== ======== ==========
</TABLE>
- --------
*Property developed by ATLANTIC.
(1) With respect to developments under construction and developments in
planning and owned, represents expected completion date.
(2) For operating properties, represents cost, including planned renovations.
For properties under construction and in planning, represents budgeted
development cost, which includes the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the construction period.
(3) The term "stabilized" means that renovation, repositioning, new
management and new marketing programs (or development and marketing in
the case of newly-developed properties) have been completed and in effect
for a sufficient period of time (but in no event longer than 12 months,
except for major rehabilitations) to achieve 93% occupancy at market
rents. Prior to being "stabilized", a property is considered "pre-
stabilized". The term "in planning" means developments owned or under
control (land which is under control through contingent contract or
letter of intent) with construction anticipated to commence within 12
months.
(4) Property is pledged as collateral for ATLANTIC's $350 million line of
credit. For discussion of the line of credit, see "Business--Building
ATLANTIC's Operating System--Capital Markets/Finance/Legal".
(5) Property is pledged as additional security under ATLANTIC's thirty-year
credit enhancement agreement with FNMA. For discussion of the FNMA credit
enhancement agreement, see "Business--Building ATLANTIC's Operating
System--Capital Markets/Finance/Legal".
(6) Tax-exempt bond issue associated with this property is included in
ATLANTIC's credit enhancement agreement with FNMA.
(7) The Cameron Brook Apartments are subject to a deed of trust securing a
mortgage note related to $19.5 million of tax-exempt bonds.
(8) The Clairmont Crest Apartments are subject to a deed of trust securing a
mortgage note related to $11.6 million of tax-exempt bonds.
(9) The Greens Apartments are subject to a deed of trust securing a mortgage
note related to $10.4 million of tax-exempt bonds.
(10) The Greenbrier Apartments were disposed of on April 9, 1996. A gain of
approximately $670,000 was recognized at disposition.
(11) The Parrot's Landing Phase I Apartments are subject to a deed of trust
securing a mortgage note related to $15.8 million of tax-exempt bonds.
(12) The Sun Pointe Cove Apartments are subject to a deed of trust securing a
mortgage note related to $8.5 million of tax-exempt bonds.
(13) The Forestwood Apartments are subject to a deed of trust securing a
mortgage note related to $11.5 million of tax-exempt bonds.
55
<PAGE>
(14) The Cameron Villas I Apartments are subject to a deed of trust securing
long-term mortgage debt of $6.4 million.
(15) The Foxbridge Apartments are subject to a deed of trust securing a
mortgage note related to $10.4 million of tax-exempt bonds.
(16) ATLANTIC intends to pledge this property as collateral for its $350
million line of credit.
(17) The Cameron Station Apartments are subject to a deed of trust securing a
mortgage note related to $14.5 million of tax-exempt bonds.
(18) The WintersCreek Apartments are subject to a deed of trust securing a
mortgage note related to $5.0 million of tax-exempt bonds.
(19) Phase I consists of 150 units and is pledged as collateral for ATLANTIC's
$350 million line of credit. Phase II consists of 250 units and is
subject to a deed of trust securing long-term mortgage debt of $8.1
million.
(20) Property is in lease-up, therefore percentage leased is not given because
it is not representative of a fully-operating property.
(21) Phase I consists of 88 units and is subject to a deed of trust securing
long-term mortgage debt of $2.0 million. Phase II consists of 100 units
and is pledged as collateral for ATLANTIC's $350 million line of credit.
(22) Consists of 25.2 acres of undeveloped land.
(23) As of March 31, 1996, ATLANTIC's investment in these developments was
$0.1 million. This amount is reflected in the "Other Asset" caption of
ATLANTIC's balance sheet as of March 31, 1996.
(24) Land was acquired by ATLANTIC in June 1996.
56
<PAGE>
GEOGRAPHIC DISTRIBUTION
ATLANTIC's multifamily properties are located in 16 metropolitan areas in 7
states. The table below demonstrates the geographic distribution of ATLANTIC's
equity real estate investments at May 31, 1996, excluding ATLANTIC's Homestead
Village properties, which will be contributed to Homestead on the Merger
Closing Date.
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE
NUMBER OF OF ASSETS
PROPERTIES BASED ON COST(1)
---------- ----------------
<S> <C> <C>
Atlanta, Georgia............................... 26 33%
Birmingham, Alabama............................ 5 5
Charlotte, North Carolina...................... 5 6
Ft. Lauderdale/West Palm Beach, Florida........ 8 8
Ft. Myers, Florida............................. 1 1
Greenville, South Carolina..................... 1 1
Jacksonville, Florida.......................... 5 6
Memphis, Tennessee............................. 2 1
Miami, Florida................................. 1 1
Nashville, Tennessee........................... 4 6
Orlando, Florida............................... 5 3
Raleigh, North Carolina........................ 4 5
Richmond, Virginia............................. 6 7
Sarasota, Florida.............................. 1 2
Tampa, Florida................................. 5 4
Washington, D.C................................ 6 11
--- ---
Total...................................... 85 100%
=== ===
</TABLE>
- --------
(1) For operating properties, represents cost, including planned renovations.
For properties under construction and in planning, represents budgeted
development cost, which includes the cost of land, fees, permits, payments
to contractors, architectural and engineering fees and interest and
property taxes to be capitalized during the construction period.
ENVIRONMENTAL ASSESSMENTS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of such removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials, which may result in increased costs in connection with renovations
at ATLANTIC's properties.
ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability, or other claim in connection with any of the properties
currently owned or being acquired, and ATLANTIC is not aware of any
environmental condition with respect to any of the properties, which is likely
to be material. ATLANTIC has subjected each of its properties to a Phase I
environmental
57
<PAGE>
assessment (which does not involve invasive procedures such as soil sampling
or ground water analysis) by independent consultants. While some of these
assessments have led to further investigation and sampling, none of the
environmental assessments has revealed, nor is ATLANTIC aware of, any
environmental liability (including asbestos related liability) that the REIT
Manager believes would have a material adverse effect on ATLANTIC's business,
financial condition or results of operations. No assurance can be given,
however, that these assessments and investigations reveal all potential
environmental liabilities, that no prior owner or operator created any
material environmental condition not known to ATLANTIC or the independent
consultants or that future uses and conditions (including, without limitation,
resident actions or changes in applicable environmental laws and regulations)
will not result in the imposition of environmental liabilities. See "Risk
Factors--Regulatory Compliance--Possible Liability Relating to Environmental
Laws".
INSURANCE COVERAGE
REIT Management believes that all of ATLANTIC's properties are adequately
insured; however, an uninsured loss could result in loss of capital investment
and anticipated profits. See "Risk Factors--General Real Estate Investment
Risks".
58
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth the Pro Forma Financial Results as of March
31, 1996 and for the three months ended March 31, 1996 and the year ended
December 31, 1995, and the Historical Financial Results as of and for the
three months ended March 31, 1996 and 1995 and as of and for the years ended
December 31, 1995 and 1994 and the period from October 26, 1993 (the date of
ATLANTIC's inception) through December 31, 1993. 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 financial statements and notes thereto included in this Prospectus.
The Pro Forma Financial Results are not necessarily indicative of what the
actual financial position and results of operations of ATLANTIC would have
been as of and for the periods indicated, nor do they purport to represent the
financial position and results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS PERIOD ENDED
ENDED YEAR ENDED ENDED MARCH 31, DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $ 32,941 $125,118 $ 30,809 $ 22,952 $ 103,634 $ 55,071 $ 156
General and
administrative
expenses.............. 168 583 187 105 646 266 1
REIT management fee.... 2,457 9,481 2,123 1,515 6,923 3,671 12
Net earnings........... 8,141 30,560 6,650 4,175 19,639 9,926 38
Net earnings per Share. 0.12 0.11 0.45 0.41 0.07
Distributions declared
and paid.............. 11,667 35,119 11,667 7,426 35,119 14,648 --
Distributions declared
and paid per Share.... $ 0.21 $ 0.80 $ 0.21 $ 0.20 $ 0.80 $ 0.60 $ --
Weighted average Shares
outstanding........... 55,555 37,133 43,889 24,454 572
OTHER DATA:
Funds from
operations(2)......... $ 13,219 $ 49,220 $ 11,454 $ 7,780 $ 35,564 $ 18,696 $ 66
Net cash provided
(used) by operating
activities............ 19,776 58,891 18,011 12,954 45,235 26,205 (492)
Net cash used by
investing activities.. (47,201) (321,082) (47,201) (39,177) (240,652) (392,718) (31,005)
Net cash provided by
financing activities.. 28,743 273,032 29,249 24,579 195,649 372,638 31,634
<CAPTION>
HISTORICAL
--------------------------------------------------
PRO FORMA MARCH 31, DECEMBER 31,
MARCH 31, ------------------ ------------------------------
1996 1996 1995 1995 1994 1993
------------ -------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Real estate owned, at
cost.................. $975,463 $936,129 $678,564 $ 888,928 $ 631,260 $ 31,005
Total assets........... 963,909 929,318 678,683 885,824 637,846 31,850
Line of credit(3)...... 91,568 226,000 181,000 190,000 153,000 --
Mortgages payable...... 129,291 123,291 115,317 118,524 107,347 --
Total liabilities...... 247,201 376,967 310,334 328,886 271,216 178
Total shareholders'
equity................ $716,708 $552,351 $368,349 $ 556,938 $ 366,630 $ 31,672
Number of Shares
outstanding........... 55,570 37,588 55,526 37,133 3,163
</TABLE>
- -------
(1) For the period from October 26, 1993 (the date of ATLANTIC's inception) to
December 31, 1993.
(2) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments and general operating expenses. For an explanation of funds from
operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. On
January 1, 1996, ATLANTIC adopted NAREIT's new definition of funds from
operations. Under this new definition, loan cost amortization is not added
back to net earnings in determining funds from operations. For
comparability, funds from operations for the periods prior to January 1,
1996 give effect to this new definition.
(3) At June 27, 1996, ATLANTIC had $194 million of debt outstanding under its
$350 million line of credit.
59
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information" and all of the financial statements appearing elsewhere
in this Prospectus. Historical results and percentage relationships set forth
in "Selected Financial Information", the Financial Statements of ATLANTIC, and
the Pro Forma Balance Sheet and Statements of Earnings for ATLANTIC are not
indicative of future operations of ATLANTIC. ATLANTIC's historical financial
information and historical financial statements do not give effect to the
Homestead transaction. Consequently, the discussion below includes the
Homestead Village properties owned by ATLANTIC.
OVERVIEW
Since its inception on October 26, 1993, ATLANTIC has amassed a portfolio of
25,266 multifamily units located in the southeastern United States. ATLANTIC
acquired existing properties aggregating 15,355 units, has completed
developments aggregating 804 units and has developments under construction and
in planning aggregating 9,107 units. At March 31, 1996, ATLANTIC's investment
in real estate aggregated $936 million. This investment in real estate has
been financed through both debt and equity. Since inception ATLANTIC has
raised approximately $577 million in net equity, primarily through the private
placement of Shares. Additionally, ATLANTIC assumed approximately $123 million
in long-term debt in connection with certain of its property acquisitions.
ATLANTIC's $350 million line of credit provided the remaining investment
capital.
ATLANTIC's operating results depend primarily upon income from multifamily
properties, which is substantially influenced by (i) the demand for and supply
of multifamily units in ATLANTIC's primary target market and submarkets, (ii)
operating expense levels, (iii) the effectiveness of property level
operations, and (iv) the pace and price at which ATLANTIC can acquire and
develop additional multifamily properties. Capital and credit market
conditions which affect ATLANTIC's cost of capital also influence operating
results.
ATLANTIC's target market cities and submarkets have benefitted substantially
in recent periods from demographic trends (including population and job
growth) which increase the demand for multifamily units. Consequently, rental
rates for multifamily units have increased more than the inflation rate for
the last two years and are expected to continue to experience such increases
throughout 1996. Expense levels also influence operating results, and rental
expenses (other than real estate taxes) as a percentage of rental revenues for
multifamily properties have generally increased at approximately the same rate
as rents for the past year and are expected to increase at a comparable rate
throughout 1996.
The REIT Manager believes that development of multifamily properties from
the ground up, which are built for long-term ownership and are designed to
meet broad renter preferences and demographic trends, will provide a greater
source of long-term cash flow growth in the future. Therefore, while land
prices are favorable, ATLANTIC has acquired and will continue to acquire, on
an unleveraged basis, prudent amounts of land zoned for multifamily
development. The REIT Manager believes ATLANTIC's ability to compete is
significantly enhanced relative to other companies because of the REIT
Manager's depth of development and acquisition personnel and presence in local
markets combined with ATLANTIC's access to investment capital.
ATLANTIC's strategy is to build its asset base through the development and
acquisition of multifamily properties that will provide long-term growth in
cash flow. ATLANTIC's real estate investments have been made with a view to
effective long-term operation and ownership. Based upon ATLANTIC's market
research and in an effort to optimize its portfolio composition, ATLANTIC may
from time to time seek to dispose of assets that in management's view do not
meet ATLANTIC's long-term investment criteria and redeploy the proceeds
therefrom, preferably through like-kind exchanges, into assets that are more
consistent with ATLANTIC's investment objectives.
60
<PAGE>
RESULTS OF OPERATIONS
INTERIM PERIOD RESULTS
Net earnings for the three-month period ended March 31, 1996 were $6.7
million ($0.12 per Share) as compared to $4.2 million ($0.11 per Share) for
the same period in 1995. In the first quarter of 1996, ATLANTIC had 59
operating properties (19 classified as pre-stabilized) as compared to 43
operating properties (40 classified as pre-stabilized) in the first quarter of
1995. The additional operating properties resulted in increases in rental
revenues ($7.8 million), rental expenses, excluding real estate taxes ($3.1
million), real estate taxes ($0.7 million), depreciation ($1.2 million) and
REIT Management fee ($0.6 million) in the three-month period ended March 31,
1996 as compared to the same period in 1995. The increase in rental expenses
is attributable to the larger number of pre-stabilized properties in 1995 over
1996. After stabilization, consistent with ATLANTIC's conservative accounting
policies, ATLANTIC expenses all make-ready costs, including carpet and
appliance replacements.
Interest expense in the three-month period ended March 31, 1996 was $4.3
million as compared to $4.7 million for the three-month period ended March 31,
1995. The decrease in interest expense of $0.4 million is primarily a result
of lower short-term interest rates in 1996 which offset the effect of
ATLANTIC's higher outstanding debt balances. ATLANTIC's weighted average
short-term interest rate for the first quarter of 1996 was 7.61% as compared
to 8.10% in the first quarter of 1995.
Rental revenues were negatively impacted by the severe winter in the mid-
Atlantic region, resulting in reduced leasing activity. For ATLANTIC's 38
stabilized properties at March 31, 1996 that were fully operational throughout
both the first quarter of 1995 and the first quarter of 1996, rental revenues
grew 3.1%. All of these properties were pre-stabilized in 1995 and stabilized
in 1996. Due to the more conservative accounting treatment for stabilized
properties, expense comparisons between periods are not meaningful. These
properties represent 68.1% of ATLANTIC's operating properties at March 31,
1996, based on cost.
ATLANTIC adopted Statement of Financial Accounting Standards No. 121,
Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets
To Be Disposed Of, on January 1, 1996. As a result of adopting this new
accounting standard, ATLANTIC did not recognize any provisions for possible
losses.
1995 COMPARED TO 1994
Net earnings in 1995 were $19.6 million ($0.45 per Share), an increase of
$9.7 million from net earnings in 1994 of $9.9 million ($0.41 per Share).
PROPERTY OPERATIONS. Rental revenues for 1995 increased $48.6 million over
revenues for 1994. The increase in rental revenues from 1994 to 1995 is
attributable to (i) inclusion of a full year of operations for the 40
properties acquired in 1994; (ii) the acquisition of 15 existing properties in
1995; and (iii) the leasing of units in five of ATLANTIC's developments, two
of which were completed at December 31, 1995.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional existing properties in its target market,
ATLANTIC anticipates increases in rental revenues in subsequent periods.
Additionally, revenues in subsequent periods will reflect a full year of
operations for the 1995 acquisitions.
In 1995, rental expenses and real estate taxes increased over the 1994
levels by $14.4 million and $4.0 million, respectively. These increases are
attributable to the larger number of properties in operation in 1995. On a
combined basis, rental expenses and real estate taxes as a percentage of
rental revenues decreased to 40.0% in 1995 from 41.9% in 1994.
61
<PAGE>
Including the newly acquired and developed assets, income from property
operations (which is defined as rental income plus other real estate income,
less rental expenses, real estate taxes and depreciation) increased $23.0
million for 1995 over 1994. Depreciation expense increased $7.2 million for
1995 over 1994. These increases are almost entirely related to the increased
number of assets in operation.
Cash provided by operating activities was $45.2 million in 1995, an increase
of $19.0 million from the 1994 level. This increase is primarily the result of
the increased number of properties in operation in 1995 as compared to 1994.
PROPERTIES FULLY OPERATING THROUGHOUT BOTH PERIODS. In building its
portfolio, ATLANTIC made significant investments in multifamily properties in
each year since its inception. Accordingly, the size of its portfolio changed
significantly from 1993 to 1994 and from 1994 to 1995. ATLANTIC's portfolio
included only three properties aggregating 683 units that were fully operating
throughout both 1995 and 1994. Property level net operating income from these
three properties increased by 10.1% in 1995 over 1994. These three properties
represent 4.3% of ATLANTIC's operating properties at December 31, 1995, based
on cost.
INTEREST EXPENSE. Interest expense for 1995 was $9.8 million higher than for
1994. ATLANTIC had no debt outstanding until the second quarter of 1994, which
resulted in higher average outstanding debt balances and higher interest
expense in 1995. Total interest capitalized amounted to $4.4 million and $0.8
million for 1995 and 1994, respectively. This increase is a function of the
higher interest expense incurred in 1995 and the increased development
activity in 1995 as compared to 1994.
GENERAL AND ADMINISTRATIVE EXPENSES INCLUDING REIT MANAGEMENT FEE. The REIT
Management fee paid by ATLANTIC increased by $3.3 million from 1994 to 1995.
Because the REIT Management fee fluctuates with the level of ATLANTIC's cash
flow calculated before the REIT Management fee, this increase is expected and
is proportionate to the increases in other revenue and expense items
experienced by ATLANTIC in 1995. As ATLANTIC arranges fully amortizing, fixed
rate, long-term debt, which it intends to arrange after achieving a
substantial equity base, the REIT Management fee will effectively decline in
proportion to ATLANTIC's cash flow because regularly scheduled principal
payments or their assumed equivalent are deducted from the cash flow amount on
which the REIT Management fee is based. Currently, principal and principal
reserve account payments on long-term mortgage debt are deducted in arriving
at cash flow for purposes of calculating the REIT Management fee, thus
reducing REIT Management fee expense.
1994 COMPARED TO 1993
In 1994, net earnings increased by $9.9 million over 1993; $9.9 million
($0.41 per Share) in 1994 as compared to $38,000 ($0.07 per Share) in 1993.
Rental revenues were $55.1 million in 1994 as compared to $0.2 million in
1993. This increase of $54.9 million is primarily the result of the
acquisition of 40 multifamily properties during 1994. Rental revenues for 1993
are not reflective of a full year of operations since ATLANTIC was formed in
October of that year. Additionally during 1993, ATLANTIC earned revenues from
only three income producing properties acquired in December 1993. These
factors also result in increases in rental expenses, real estate taxes, and
depreciation in 1994 as compared to 1993.
The increased number of operating properties in operation generated more
cash in 1994 as compared to 1993. Cash provided by operating activities was
$26.2 million in 1994. In 1993, operations used $0.5 million of cash. As
discussed above, the increase in cash flow affects the calculation of the REIT
Management fee. The REIT Management fee increased by $3.7 million for 1994 as
compared to 1993.
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In 1994, ATLANTIC obtained its line of credit facility. Also in 1994,
ATLANTIC assumed mortgage obligations in connection with the acquisition of
certain properties. These debt obligations generated interest expense of $9.2
million in 1994. ATLANTIC had no outstanding debt and incurred no interest
expense in 1993.
ENVIRONMENTAL MATTERS
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each property prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The REIT Manager considers ATLANTIC's liquidity and ability to generate cash
from operations and financings to be adequate and expects it to continue to be
adequate to meet ATLANTIC's development, acquisition, operating, debt service
and shareholder distribution requirements.
INVESTING AND FINANCING ACTIVITIES
OVERVIEW. ATLANTIC's investment activities, which consisted primarily of
acquiring and developing multifamily properties, used approximately $47.2
million, $240.7 million, $392.7 million and $31.0 million of cash for the
three-month period ended March 31, 1996, the years ended December 31, 1995 and
1994 and the period ended December 31, 1993, respectively.
ATLANTIC's financing activities provided net cash flow of $29.2 million,
$195.6 million, $372.6 million and $31.6 million for the three-month period
ended March 31, 1996, the years ended December 31, 1995 and 1994 and the
period ended December 31, 1993, respectively. Combined proceeds from equity
offerings of $0.4 million in the three-month period ended March 31, 1996,
$205.8 million, net of Share repurchases, in 1995, $239.7 million in 1994, and
$31.6 million in 1993 were the primary source of financing funds. Proceeds
from line of credit borrowings, net of repayments, were $36.0 million in the
three-month period ended March 31, 1996, $37.0 million in 1995 and $153.0
million in 1994.
ATLANTIC expects to finance construction, development and acquisitions
primarily with cash on hand, borrowings under its line of credit and cash from
future securities offerings. After building a substantial equity base,
ATLANTIC intends to arrange fully amortizing, fixed rate, 15 year to 25 year
debt to finance additional acquisitions and developments. ATLANTIC believes
that its current conservative ratio of long-term debt to total long-term
undepreciated book capitalization, the sum of long-term debt and shareholders'
equity after adding back accumulated depreciation (17.5% at March 31, 1996 on
an historical basis and 14.8% at March 31, 1996 on a pro forma basis as
adjusted to give effect to the Offering and other sales of Shares subsequent
to March 31, 1996 and application of the proceeds therefrom and to the
Homestead transaction, which are discussed below) provides considerable
flexibility to prudently increase its capital base by utilizing long-term debt
as a financing tool in the future.
1993 INVESTING AND FINANCING ACTIVITIES. ATLANTIC's initial portfolio
investment consisted of the acquisition of three operating properties (683
units) located in Atlanta, Georgia. Additionally, ATLANTIC purchased a land
parcel in Charlotte, North Carolina for the development of a 270-unit
property.
ATLANTIC's investment in real estate at December 31, 1993 aggregated $31
million, all of which was financed by the sale of Shares.
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1994 INVESTING AND FINANCING ACTIVITIES. ATLANTIC's investment strategy in
1994 focused on two components: the acquisition of a substantial base of
existing operating properties to provide operating cash flow and the creation
of an internal development process. During 1994, ATLANTIC acquired 40
operating properties, 31 of which were obtained in two large portfolio
acquisitions. These 40 properties, located in 14 metropolitan areas, added
11,307 units to the portfolio for a total of 11,990 operating units. At
December 31, 1994, ATLANTIC had a total of 15,060 units in its portfolio,
3,070 of which were in development (1,212 units in construction and 1,858
units in planning). The nine projects under development had an estimated
completion cost of $190.7 million.
ATLANTIC's investment in real estate at December 31, 1994 aggregated $631.3
million. The additional investment of approximately $600 million in 1994 was
financed through a combination of debt and equity. As partial payment for the
largest of the portfolio acquisitions, ATLANTIC issued $100 million in Shares
to the seller of the portfolio. Sales of Shares through a private placement
raised an additional $240 million. Existing debt of $107.5 million associated
with certain of the properties acquired was assumed by ATLANTIC. Additionally,
ATLANTIC had net borrowings on its line of credit during 1994 of $153 million.
1995 INVESTING AND FINANCING ACTIVITIES. In 1995, ATLANTIC acquired existing
properties aggregating 3,961 units and disposed of two properties aggregating
596 units. The cost of the 15 operating properties acquired in 1995 was $177.6
million. Also in 1995, ATLANTIC began development on 5,051 units. In the
fourth quarter ATLANTIC completed construction on its first two internally
developed multifamily communities, a 270-unit property in Charlotte, North
Carolina and a 198-unit property in Birmingham, Alabama. At December 31, 1995,
ATLANTIC's operating property portfolio aggregated 15,823 units. ATLANTIC's
development portfolio at the end of 1995 included 3,095 units under
construction and 4,558 units in planning with an estimated cost upon
completion of $401.3 million. Three properties under construction began
leasing completed units in the fourth quarter of 1995. At December 31, 1995,
Homestead Village properties, ATLANTIC's moderate priced, purpose-built,
extended-stay lodging properties, comprised 2,515 units of the development
portfolio with 137 units under construction and the remaining units in
planning.
During 1995, ATLANTIC's net additional investment in real estate was $257.7
million bringing its total real estate investment at December 31, 1995 to
$888.9 million. Sales of Shares generated the largest source of capital in
1995. ATLANTIC sold $205.8 million of Shares, net of Share repurchases,
through two private placements. In connection with the acquisition of certain
properties in 1995, ATLANTIC assumed $24.7 million in existing debt.
Additional borrowings on its line of credit during 1995 aggregated $37
million. At December 31, 1995, ATLANTIC's outstanding balance on its line of
credit was $190 million.
FIRST QUARTER 1996 INVESTING AND FINANCING ACTIVITIES. During the first
quarter of 1996, ATLANTIC's additional investment in real estate aggregated
$47.2 million, primarily as a result of development activity. This investment
included the acquisitions of land parcels for the development of 1,790 units.
These additional units brought ATLANTIC's total portfolio to 25,266 units at
March 31, 1996 (16,159 operating units and 9,107 units of developments under
construction and in planning). The additional investment during the first
quarter of 1996 was financed primarily through borrowings on the line of
credit and additional mortgage debt. Also during this period, ATLANTIC
completed construction on a 336-unit multifamily community in Raleigh, North
Carolina, bringing its internally developed operating units to 804. ATLANTIC
began construction on 844 units during the first quarter of 1996.
At March 31, 1996, ATLANTIC had $209.7 million of budgeted development costs
for projects under construction, including $5.1 million associated with a
Homestead Village property. Of the total budgeted development cost, $97.3
million was unfunded at March 31, 1996. In addition, ATLANTIC
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had developments in planning at March 31, 1996 aggregating 5,504 units in
various target market cities with an aggregate budgeted development cost of
$264.9 million, including $136.3 million associated with Homestead Village
properties. The foregoing developments are subject to a number of conditions,
and ATLANTIC cannot predict with certainty that any of them will be
consummated.
On April 9, 1996, ATLANTIC disposed of a 358-unit, middle income property as
part of a tax-deferred exchange. This property accounted for $255,000 of net
operating income during the three-month period ended March 31, 1996. A gain of
approximately $670,000, which will be recognized in the second quarter of
1996, was realized on this disposition. The proceeds from this disposition
were held in escrow until April 22, 1996 when these funds were used to acquire
a 350-unit, moderate income property. Including this property, ATLANTIC
acquired a total of three operating properties aggregating 786 units at a cost
of $33.4 million in April 1996.
Subsequent to March 31, 1996, ATLANTIC sold 4,210,870 Shares at $11.50 per
Share. Total proceeds from these sales were $48,425,000.
HOMESTEAD TRANSACTION
ATLANTIC has traditionally focused on multifamily assets, which since the
first quarter of 1995 has included certain purpose-built, extended-stay
lodging properties known as Homestead Village. In March 1996 the Board began
considering ways to maximize shareholder value with respect to the Homestead
Village properties. In May 1996, ATLANTIC entered into the Merger Agreement,
as more fully described under "Homestead Transaction", whereby ATLANTIC will
contribute its Homestead Village properties to Homestead in exchange for
Homestead common stock. The Homestead transaction is expected to (i) result in
the Homestead Village properties being more effectively and profitably
utilized and developed due to the elimination of certain restrictions
applicable to REITs and (ii) enhance the ability of Homestead to access
external capital markets necessary to carry out its plans.
In exchange for ATLANTIC's contribution of the Homestead Village properties
and for ATLANTIC entering into the Funding Commitment Agreement, as more fully
described under "Certain Relationships and Transactions--Funding Commitment
Agreements", ATLANTIC will receive shares of Homestead common stock,
convertible mortgages and warrants to purchase shares of Homestead common
stock. Following the consummation of the transaction, ATLANTIC will distribute
the Homestead common stock and warrants to its shareholders of record on the
Distribution Record Date. Each mortgage loan issued by Homestead pursuant to
the Funding Commitment Agreement bears interest at 9% per annum and will be
convertible into Homestead common stock on the basis of one share of Homestead
common stock for every $11.50 of principal outstanding on the mortgage loan.
ATLANTIC's contribution to Homestead will consist of cash, one operating
Homestead Village property and twenty-five Homestead Village land parcels,
which are either owned or under ATLANTIC's control. ATLANTIC's contribution,
including budgeted completion cost for the 26 properties, is approximately
$158.7 million. On the Merger Closing Date, ATLANTIC will contribute assets
with an expected book value of approximately $29 million and cash of
approximately $18.6 million (subject to adjustment as provided in the Merger
Agreement). The remaining cost to complete the properties of $111.1 million
will constitute the funding commitment amount. ATLANTIC intends to fund this
commitment through cash on hand, borrowings on its line of credit and sales of
Shares. See "Homestead Transaction".
LINE OF CREDIT
ATLANTIC obtained a $225 million secured line of credit agented by Morgan
Guaranty Trust Company of New York in June 1994. In August 1995, the line of
credit was increased to $300 million, and in June 1996, the line of credit was
increased to $350 million. The line of credit is scheduled to
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mature in June 1998 and may be extended for an additional year with the
approval of Morgan Guaranty Trust Company of New York and the other
participating lenders. The line of credit provides for interest at prime or,
at ATLANTIC's option, LIBOR plus 1.50% or the certificate of deposit rate plus
1.625%. ATLANTIC obtained a fixed rate of interest of 7.46% through February
5, 1997 on $100 million of its borrowings on the line of credit through an
interest rate protection agreement with Goldman Sachs Capital Markets, L.P. A
commitment fee of .1875% per annum on the average unfunded line of credit
balance is payable quarterly.
All debt incurrences are subject to certain covenants. Primarily these
covenants address tangible net worth, interest payment coverage and
distributions. ATLANTIC must maintain a debt to tangible net worth ratio of
not greater than 2 to 1 and an adjusted net worth (as defined) of at least
$325 million. ATLANTIC's interest payment coverage (as defined) is required to
be not less than 2 to 1. Restricted payments or distributions (as defined) may
not exceed 95% of ATLANTIC's funds from operations (as defined) for the
preceding four quarters. The lenders have agreed to exclude the Distribution
from the restricted payments covenant and have granted ATLANTIC a waiver of
the restricted payments covenant. This waiver allows for restricted payments
not to exceed 97% of funds from operations through the third quarter of 1997.
ATLANTIC is currently in compliance with all covenants.
As of June 27, 1996, $194 million of borrowings were outstanding (and $
million of borrowings are expected to be outstanding at the time of closing of
the Offering) and multifamily properties with an undepreciated cost of
approximately $476.2 million were pledged as collateral.
MORTGAGE DEBT
At March 31, 1996, ATLANTIC had approximately $123 million of mortgages
payable consisting of approximately $16 million of fixed rate conventional
mortgage debt and approximately $107 million of mortgages which secure nine
tax-exempt bond issues. As further discussed below, this long-term mortgage
debt, which is substantially fully amortizing, has a weighted average interest
rate of 6.73% and an average maturity of 25.8 years, thus providing ATLANTIC
with favorable and conservative financial leverage on the investment in the
properties associated with such debt.
Eight of ATLANTIC's nine tax-exempt bond issues have variable interest
rates. The tax-exempt bond issues are included in a credit enhancement
agreement with FNMA. Under the agreement with FNMA, ATLANTIC makes monthly
principal payments, based upon a thirty-year amortization, into a principal
reserve account. To mitigate the variable interest rate exposure associated
with these bond issues, ATLANTIC has entered into interest rate protection
agreements. Under these interest rate protection agreements, ATLANTIC pays and
receives interest on the aggregate principal amount of the underlying bonds
outstanding, net of the amount held in the principal reserve account. These
agreements effectively mitigate ATLANTIC's variable interest rate exposure by
ensuring that ATLANTIC pays interest on a fixed rate as provided in such
agreements.
ATLANTIC has three interest rate protection agreements: (i) an agreement
expiring in June 2002 on approximately $23 million of bonds that fixes the
interest rate at 6.31% (including the cost of the interest rate protection
agreement); (ii) an agreement expiring in June 2005 on approximately $65
million of bonds that fixes the interest rate at 6.59% (including the cost of
the interest rate protection agreement); and (iii) an agreement expiring in
March 2006 on $5 million of bonds that fixes the interest rate at 4.82%,
(including the cost of the interest rate protection agreement). To the extent
the deposits in the principal reserve account with FNMA have not been used to
redeem any of the outstanding bonds, ATLANTIC pays interest at the variable
rates as provided by the mortgage agreements on that portion of bonds
outstanding which is equivalent to the balance in the principal reserve fund.
DISTRIBUTIONS AND FUNDS FROM OPERATIONS
ATLANTIC's current distribution policy is to pay quarterly distributions to
shareholders based upon what REIT Management considers to be a reasonable
percentage of cash flow. Because depreciation
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is a non-cash expense, cash flow typically will be greater than earnings from
operations and net earnings. Therefore, quarterly distributions will be higher
than quarterly earnings.
Distributions paid on Shares in 1995 and 1994 aggregated $35.1 million
($0.80 per Share) and $14.6 million ($0.60 per Share), respectively. No
distributions were paid in 1993. The distributions paid were in excess of net
earnings in both 1995 and 1994 resulting in decreases in shareholders' equity
of $15.5 million in 1995 and $4.7 million in 1994.
ATLANTIC announces the following year's proposed distribution level after
the Board's annual budget review and approval in December of each year. At its
December 19, 1995 meeting, the Board announced a projected increase in the
annual distribution level from $0.80 to $0.84 per Share. The payment of
distributions is subject to the discretion of the Board and is dependent upon
the financial condition and operating results of ATLANTIC. A $0.21 per Share
distribution for the first quarter of 1996 was paid on March 28, 1996. The
distribution paid aggregated $11.7 million. In light of the Homestead
transaction (including the Distribution of the Homestead common stock and
warrants), the Board is evaluating the proposed 1996 distribution level.
Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) plus depreciation. ATLANTIC
believes that funds from operations is helpful in understanding a property
portfolio's ability to support interest payments and general operating
expenses. On January 1, 1996, ATLANTIC adopted NAREIT's new definition of
funds from operations. Under this new definition, loan cost amortization is
not added back to net earnings in determining funds from operations. For
comparability, funds from operations for the periods prior to January 1, 1996
give effect to this new definition.
Funds from operations were $11.5 million and $7.8 million for the three-
month periods ended March 31, 1996 and 1995, respectively. Funds from
operations were $35.6 million, $18.7 million and $0.1 million for the years
ended December 31, 1995 and 1994 and the period ended December 31, 1993,
respectively. The aggregate increases corresponded with the increased number
of properties in operation in each year.
Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance nor as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. Cash
flow from financing activities is expected to be substantially equivalent to
cash used in investing activities, as ATLANTIC utilizes revolving credit
borrowings, to be refunded with sales of equity and long-term, fully
amortizing debt securities, to fund its investment activities. ATLANTIC's
policy is to expense, rather than capitalize, repairs and maintenance, in
determining net income and funds from operations. Only major renovations,
replacements or improvements with a substantial expected economic life (such
as roofs, parking lots and additions) are capitalized.
REIT MANAGEMENT AGREEMENT
Effective October 28, 1993, ATLANTIC entered into the REIT Management
Agreement, as amended and restated, pursuant to which the REIT Manager assumed
the day-to-day management of ATLANTIC (the "REIT Management Agreement").
The REIT Management Agreement requires ATLANTIC to pay an annual fee of
approximately 16% of cash flow as defined in the REIT Management Agreement,
payable monthly. Cash flow is calculated by reference to ATLANTIC's cash flow
from operations, plus (i) fees paid to the REIT Manager, (ii) extraordinary
expenses incurred at the request of the Independent Directors of ATLANTIC (of
which there were none in the periods reported) and (iii) 33% of any interest
paid by ATLANTIC on convertible subordinated debentures (of which there were
none in the periods reported); and after deducting (i) regularly scheduled
principal payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and
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interest payments like a 20-year level-payment, fully amortizing mortgage (of
which there were none in the periods reported) and (iii) distributions actually
paid with respect to any non-convertible preferred stock of ATLANTIC (of which
there were none in the periods reported). Cash flow does not include dividend
and interest income from Atlantic Development Services, interest income from
the convertible Homestead mortgage notes, realized gains or losses from
dispositions of investments or income from cash equivalent investments. The
REIT Manager also receives a fee of 0.20% per year on the average daily balance
of cash equivalent investments. The REIT Management fee aggregated $2,123,000
for the three-month period ended March 31, 1996 and $6,923,000, $3,671,000 and
$12,000 for the years ended December 31, 1995 and 1994 and the period ended
December 31, 1993, respectively.
Total real estate operating, interest, general and administrative costs will
increase due to ATLANTIC's larger asset size, as well as unforeseen changes
which may occur. REIT Management fees paid by ATLANTIC will increase if cash
flow of ATLANTIC, as defined in the REIT Management Agreement, increases,
including such increases that may relate to increases in ATLANTIC's assets.
ATLANTIC does not expect its other operating costs and expenses to increase
except as a result of inflation, market conditions or other factors over which
the REIT Manager has no control. Operating costs for particular items, however,
may be increased if they are expected to result in greater decreases in other
expenses or increases in revenues from ATLANTIC assets.
ATLANTIC is obligated to reimburse the REIT Manager for all expenses incurred
by the REIT Manager on behalf of ATLANTIC relating to ATLANTIC's operations,
primarily including third party legal, accounting, property management and
similar fees paid on behalf of ATLANTIC, and travel expenses incurred in
seeking financing, property acquisitions, property sales and similar activities
on behalf of ATLANTIC and in attending ATLANTIC Board, committee and
shareholder meetings. Under the REIT Management Agreement, the REIT Manager or
any of its affiliates are not precluded from rendering services to other
investors, including REITs, even if such investors compete with ATLANTIC. Since
the REIT Manager is owned by ATLANTIC's largest shareholder, the REIT Manager
has no intention of rendering services to investors who compete with ATLANTIC.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to a
determination by the Independent Directors that the REIT Manager's performance
has been satisfactory and that the compensation payable to the REIT Manager is
fair. Each of ATLANTIC or the REIT Manager may terminate the REIT Management
Agreement on 60 days' notice. Because of the year-to-year nature of the
agreement, its maximum effect on ATLANTIC's results of operations cannot be
predicted, other than that the REIT Management fees will generally increase or
decrease in proportion to cash flow increases or decreases.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The Board may amend or revise ATLANTIC's policies from time to time without a
vote of the shareholders of ATLANTIC. The Board also reserves the right to make
exceptions for transactions when it believes that the transaction is in the
best long-term interests of ATLANTIC and its shareholders.
INVESTMENT POLICIES
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's investment
decision is based upon the expected contribution of the property to long-term
cash flow growth on an unleveraged basis. The expected cash flow contribution
is based on an estimate of all cash revenues from leases and other revenue
sources, minus expenses incurred in
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operating the property (generally, real estate taxes, insurance, maintenance,
personnel costs and utility charges, but excluding depreciation, debt service
and amortization of loan costs) and a reserve for capital expenditures.
It is ATLANTIC's policy to generally limit its investments such that (i) no
more than 10% of its assets are invested in land held for development other
than land under development or where development is in planning, (ii) ATLANTIC
will not be treated as an investment company under the Investment Company Act
of 1940, and (iii) ATLANTIC will not invest in mortgage loans, other than
mortgage loans to third party owner-developers in connection with the
development of multifamily properties that are contractually required to be
sold to ATLANTIC upon completion or mortgage loans to Homestead or to entities
in which ATLANTIC owns a substantial majority of the economic interest and
other than mortgage loans (convertible, participating or other) where the Board
believes that such loans are in the best long-term interests of ATLANTIC and
its shareholders.
ATLANTIC's strategy includes the development of industry-leading, moderate
income multifamily product designed for the largest renter groups. Long term,
REIT Management believes that development will contribute as much, or more, to
ATLANTIC's earnings growth than acquisitions.
While the current policy of ATLANTIC is to make equity investments in
multifamily properties exclusively, ATLANTIC may invest in other real estate
interests consistent with its qualification as a REIT. A change in this policy
could occur, for example, if ATLANTIC concludes that it may benefit from the
cash flow or any appreciation in the value of the property arising through
mortgage investment or as a means of ultimately achieving equity ownership of a
property.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, ATLANTIC may also invest in securities of
other entities engaged in real estate activities or securities of other
issuers. See "Federal Income Tax Considerations--Taxation of ATLANTIC".
ATLANTIC does not currently intend to invest in the securities of other issuers
except in connection with acquisitions of indirect interests in properties
(normally, general or limited partnership interests in special purpose
partnerships controlled by ATLANTIC and owning multifamily properties and
except for preferred stock of entities in which ATLANTIC has a substantial
majority of the economic interest).
FINANCING POLICIES
ATLANTIC has a secured line of credit for the purpose of facilitating
investment in developments and acquisitions as well as for working capital.
ATLANTIC may also determine to issue securities senior to the Shares, including
preferred stock and debt securities (either of which may be convertible into
Shares or be accompanied by warrants to purchase Shares). ATLANTIC's financing
policies are to replace revolving credit borrowings with the proceeds of equity
offerings or long-term, fixed rate, fully amortizing debt. ATLANTIC does not
intend to incur long-term, floating rate debt other than in connection with
property acquisitions in which the debt assumed is impracticable to prepay or
is tax-exempt debt. Because its assets are largely long-term, ATLANTIC's debt
is expected to be long-term, fixed rate, fully amortizing debt.
The proceeds of any borrowings by ATLANTIC may be used to pay distributions,
to provide working capital, to pay existing indebtedness or to finance
acquisitions, expansions or development of new properties.
CONFLICT OF INTEREST POLICIES
ATLANTIC does not intend to engage in principal transactions with officers
and Directors or to engage Independent Directors to provide services to
ATLANTIC. In addition, transactions with the REIT Manager and its affiliates
are significantly restricted and must be reviewed and approved by a
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majority of Independent Directors, as described below. ATLANTIC's policy is
not to borrow from or make loans to affiliates, other than mortgage loans to
entities in which ATLANTIC owns a substantial majority of the economic
interest, mortgage loans to Homestead or mortgage loans (convertible,
participating or other) where the Board believes that such loans are in the
best long-term interests of ATLANTIC and its shareholders.
With a view to resolving potential conflicts of interest and protecting the
interests of ATLANTIC's shareholders against such possible conflicts, the
Articles of Incorporation require that a majority of the Board be Independent
Directors immediately following the effective date of the registration
statement relating to the Offering. "Independent Director" means a Director
who (i) is not affiliated, directly or indirectly, with the REIT Manager,
whether by ownership of, ownership interest in, employment by, any material
business or professional relationship with, or service as an officer or
director of, the REIT Manager or a business entity which is an affiliate of
the REIT Manager, (ii) is not serving as a trustee or director for more than
three real estate investment trusts organized by a sponsor of ATLANTIC and
(iii) performs no other services for ATLANTIC, except as Director. ATLANTIC's
Independent Directors are required to monitor the performance of the REIT
Manager.
POLICIES APPLICABLE TO THE REIT MANAGER AND OFFICERS AND DIRECTORS OF ATLANTIC
The REIT Manager has agreed in writing not to engage in any principal
transaction with ATLANTIC, including but not limited to purchases, sales or
leases of property or borrowing or lending of funds, except for transactions
approved by a majority of the Independent Directors not otherwise interested
in such transaction as being fair and reasonable to ATLANTIC and on terms and
conditions not less favorable to ATLANTIC than those available from
unaffiliated third parties. The Homestead transaction would be prohibited by
the terms of the REIT Management Agreement; the REIT Manager and ATLANTIC have
waived this prohibition. In addition to the requirements described above,
ATLANTIC will not engage in such transactions unless the Independent Directors
believe that any such transaction is in the long-term best interests of
ATLANTIC and its shareholders. The sole activity of the REIT Manager is
advising ATLANTIC.
The REIT Management Agreement permits affiliates of the REIT Manager to
provide property management and other services to ATLANTIC for compensation.
The fees charged for such services must be comparable to fees that would be
charged by unaffiliated, qualified third parties. Any property management fees
are reviewed annually by the Board and must be approved by a majority of the
Independent Directors.
With certain exceptions, officers and employees of the REIT Manager spend
all of their time on ATLANTIC's affairs. In the future, certain officers or
employees may be transferred to or from other affiliates of the REIT Manager,
consistent with REIT Management's plan for management depth and orderly
succession.
ATLANTIC does not intend to issue options or warrants to the REIT Manager or
its employees.
Under the law of Maryland (where ATLANTIC is organized), each Director will
be obligated to offer to ATLANTIC any opportunity (with certain limited
exceptions) which comes to him or her and which ATLANTIC could reasonably be
expected to have an interest in developing. In addition, under Maryland law,
any contract or transaction between ATLANTIC and any Director or any entity in
which the Director has a material financial interest will be 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 ATLANTIC.
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POLICIES WITH RESPECT TO OTHER ACTIVITIES
ATLANTIC may, but does not presently intend to, make investments other than
as previously described. All investments will be primarily related to
multifamily properties and the management and development thereof. ATLANTIC
has authority to issue senior securities, to offer its Shares or other
securities and to repurchase or otherwise reacquire its Shares or any other
securities and may engage in such activities in the future. ATLANTIC's policy
is not to make loans to its officers or directors or to the REIT Manager.
ATLANTIC may in the future make loans to partnerships and joint ventures in
which it participates in order to meet working capital needs. ATLANTIC has not
engaged in trading, underwriting or agency distribution or sale of securities
of other issuers and does not intend to do so. ATLANTIC does not intend to
engage in the purchase or sale of investments (other than acquisition or
disposition of properties in accordance with the REIT rules and ATLANTIC's
investment policies) and may on a selected basis in the future offer
securities in exchange for properties. ATLANTIC intends to make annual and
quarterly reports to shareholders. The annual reports will contain audited
financial statements.
At all times, ATLANTIC intends to make investments in such a manner as to be
consistent with the requirements of the Code for ATLANTIC to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board determines that it is no longer in the best
interests of ATLANTIC to qualify as a REIT.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In addition to the transactions with affiliates described elsewhere in this
Prospectus, ATLANTIC has entered into the following transactions:
REIT MANAGEMENT AGREEMENT
Pursuant to the REIT Management Agreement, the REIT Manager assumed the day-
to-day management of ATLANTIC. The REIT Manager is owned by SCG, which
currently beneficially owns approximately 64.1% of the outstanding Shares
( %, after giving effect to the Offering). The REIT Manager's sole business
and principal occupation since its formation in October 1993 is advising
ATLANTIC. The services provided or coordinated by the REIT Manager include
strategic and day-to-day management, research, investment analysis,
acquisition and due diligence, multifamily property development, asset
management, capital markets, asset disposition, legal and accounting services.
All such services are included in the REIT Management fee, including capital
markets and development services, which most REITs capitalize (or, in the case
of capital markets, deduct from proceeds). The REIT Management fee is paid
monthly and was $6.9 million for the year ended December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--REIT Management Agreement".
SCG INVESTOR AGREEMENT
ATLANTIC and SCG are parties to an Investor Agreement, dated as of October
28, 1993 (the "Investor Agreement"), which required SCG to purchase $21.5
million in Shares, subject to certain conditions. The Investor Agreement,
among other things, requires ATLANTIC to obtain SCG's approval of (i) the
annual operating budget and substantial deviations therefrom, (ii) contracts
for investment management, property management or leasing services or that
contemplate annual payments in excess of $100,000 and (iii) acquisitions or
dispositions in a single transaction or a group of related transactions where
the purchase price exceeds $5 million. The Investor Agreement also provides
that, so long as SCG owns at least 10% of the outstanding Shares, ATLANTIC may
not increase the Board to more than seven members. SCG is entitled to
designate one or more persons as Directors, and
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ATLANTIC is obligated to use its best efforts to cause the election of such
persons, as follows: (i) so long as SCG owns at least 10%, but less than 20%,
of the outstanding Shares, it is entitled to nominate two persons; and (ii) so
long as SCG owns at least 20% of the outstanding Shares, it is entitled to
nominate three persons.
SHAREHOLDERS' AGREEMENT
To facilitate ATLANTIC's acquisition of certain properties from Laing, SCG
granted Laing certain rights to require SCG to purchase Laing's Shares at pre-
agreed prices. ATLANTIC assumed SCG's first put obligation for 5,000,000
Shares and on March 31, 1995 purchased such Shares from Laing at $11.00 per
Share. In exchange for ATLANTIC's assumption of the first put obligation, SCG
purchased $94.8 million of Shares at $11.00 per Share from ATLANTIC in a
private offering. In November 1995, ATLANTIC assumed SCG's second put
obligation for 2,500,000 Shares at $11.568 per Share. In exchange for
ATLANTIC's assumption of the second put obligation, SCG purchased 2,500,000
Shares at a price of $11.568 per Share and purchased an additional $21.1
million of Shares at $11.50 per Share in a private offering. Laing has
exercised its rights with respect to SCG's third put obligation for 2,500,000
Shares (representing all Shares owned by Laing) at $12.265 per Share. SCG's
purchase of Shares under the third put obligation is expected to occur on July
1, 1996.
PROPERTY MANAGEMENT COMPANY
Commencing May 12, 1994, SCG Realty Services, an affiliate of the REIT
Manager, began providing property management services for certain of
ATLANTIC's properties. The agreement terminates September 30, 1996, subject to
earlier termination by ATLANTIC on 30 days' notice, is renewable annually upon
approval of ATLANTIC's Independent Directors, and contemplates a fee to SCG
Realty Services of 3.5% per annum of property revenues for properties located
in Atlanta and Washington D.C. markets and 3.75% per annum of property
revenues for all other properties, paid monthly, which was $3.5 million for
the year ended December 31, 1995. The REIT Manager anticipates that SCG Realty
Services will manage additional ATLANTIC properties in the future. Any
management contracts executed with SCG Realty Services are expected to be at
market rates.
PROTECTION OF BUSINESS AGREEMENT
ATLANTIC will enter into a protection of business agreement dated as of the
Merger Closing Date (the "Protection of Business Agreement") with Homestead
which will prohibit ATLANTIC and its affiliates from engaging, directly or
indirectly, in the extended-stay lodging business except through Homestead and
its subsidiaries. The Protection of Business Agreement also prohibits
Homestead from, directly or indirectly, engaging in the ownership, operation,
development, management or leasing of multifamily properties. The Protection
of Business Agreement does not prohibit ATLANTIC from: (i) owning securities
of Homestead; (ii) owning up to 5% of the outstanding securities of another
person engaged in owning, operating, developing, managing or leasing extended-
stay lodging properties, so long as it does not actively participate in the
business of such person; (iii) owning the outstanding securities of another
person, a majority owned subsidiary, division, group, franchise or segment of
which is engaged in owning, operating, developing, managing or leasing
extended-stay lodging properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties; and (iv) owning
securities of another person primarily engaged in a business otherthan owning,
operating, developing, managing or leasing extended-stay lodging
properties,including a person primarily engaged in business as an owner,
operator or developer of hotelproperties, whether or not such person owns,
operates, develops, manages or leases extended-stay lodging properties. The
Protection of Business Agreement does not prohibit Homestead from: (i) owning
securities of ATLANTIC, PTR or SCG; (ii) owning up to 5% of the outstanding
securities of another person engaged in owning, operating, developing,
managing or leasing garden style multifamily properties; and (iii) owning the
outstanding securities of another person, a majority owned
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subsidiary, division, group, franchise or segment of which is engaged in
owning, operating, developing, managing or leasing garden style multifamily
properties, so long as not more than 5% of such person's consolidated revenues
are derived from such properties. The Protection of Business Agreement will
terminate in the event of an acquisition, directly or indirectly (other than
by purchase from ATLANTIC, PTR or SCG or any of their respective affiliates),
by any person (or group of associated persons acting in concert), other than
ATLANTIC, PTR or SCG or their respective affiliates, of 25% or more of the
outstanding voting stock of Homestead, without the prior written consent of
Homestead's board of directors. Subject to earlier termination pursuant to the
preceding sentence, the Protection of Business Agreement will terminate on the
tenth anniversary of the Merger Closing Date.
FUNDING COMMITMENT AGREEMENTS
Pursuant to funding commitment agreements to be dated as of the Merger
Closing Date (the "Funding Commitment Agreements"), each of ATLANTIC and PTR
will agree to make mortgage loans to Homestead. ATLANTIC and PTR will provide
Homestead aggregate funding for developments in amounts of up to $111 million
and $133 million, respectively, which amounts are anticipated to be sufficient
to complete the development of the respective Homestead Village facilities
contributed by them. ATLANTIC and PTR will receive convertible mortgage notes
in respect of such fundings in stated amounts of up to $98 million and $144
million, respectively. The effect of these provisions of the Funding
Commitment Agreement is that ATLANTIC will fund $1,133,535 for each $1,000,000
of convertible mortgage loans. The difference between the funded amounts and
the stated amounts of the convertible mortgage loans arises because the rate
of return on the existing Homestead Village facilities contributed by PTR is
projected to exceed the rate of return on the Homestead Village facilities
contributed by ATLANTIC and PTR to Homestead which are under construction or
in pre-development planning. In calculating the relative ownership interests
of ATLANTIC and PTR, SCG took into account the fact that as of July 1, 1996,
PTR will have 28 Homestead Village facilities in operation and generating
income, while ATLANTIC will have one. In addition, SCG expects that the
average property development costs for the existing PTR Homestead Village
properties will, on balance, be less than those for the ATLANTIC and PTR
Homestead Village properties projected to be built in the future because a
large portion of the existing PTR Homestead Village properties were in
planning or under development during 1992 and 1993 when land prices and
construction costs were less than they are now and are anticipated to be over
the next 18 months. The obligations of ATLANTIC and PTR are limited to a
specific dollar amount for each property identified in the respective Funding
Commitment Agreements. Upon any determination by Homestead to commence
development of a property identified in the Funding Commitment Agreement,
Homestead is required to notify ATLANTIC or PTR, as the case may be, and
ATLANTIC or PTR, as the case may be, is required to fund up to the full amount
of its obligation with respect to such property. Homestead is required to use
its reasonable efforts to complete the development of such property consistent
with the development plans for such property. Each mortgage note issued by
Homestead pursuant to a Funding Commitment Agreement will be convertible into
shares of Homestead common stock on the basis of one share of Homestead common
stock for every $11.50 of principal outstanding on the mortgage loan. The
obligation of Homestead to call for funding of, and the obligations of
ATLANTIC and PTR to provide funding for, the mortgage loans expire on March
31, 1998, except with respect to properties for which Homestead has given
notice that it intends to develop. Interest on the mortgage notes accrues at
the rate of 9% on the unpaid principal balance, payable every six months. The
mortgage notes are scheduled to mature on October 31, 2006, and, are not
callable until five years after the Merger Closing Date. Homestead has pledged
the assets being contributed by ATLANTIC as collateral for the mortgage loans
being made by ATLANTIC, and it has pledged the assets being contributed by PTR
as collateral for the mortgage loans being made by PTR.
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HOMESTEAD INVESTOR AGREEMENT
ATLANTIC will enter into an investor and registration rights agreement with
Homestead pursuant to which ATLANTIC is entitled to designate one person for
nomination to the Homestead board of directors, and Homestead will use its
best efforts to cause the election of such nominee, until March 31, 1998 and
for so long thereafter as ATLANTIC has the right to convert in excess of $20
million in principal amount of loans made pursuant to its Funding Commitment
Agreement. Such nominee may, but need not, include the same person(s)
nominated by SCG pursuant to SCG's investor agreement with Homestead. In
addition, Homestead has granted to ATLANTIC registration rights with respect
to the distribution of all of the shares of Homestead common stock issuable
upon conversion of the convertible mortgage notes. Prior to the one-year
anniversary of the date the Homestead common stock is registered under the
Exchange Act, ATLANTIC may request one registration of those shares of
Homestead common stock which are issued upon conversion of any or all of the
convertible mortgage notes during such one year period and which it intends to
distribute to its stockholders. After such one-year anniversary, ATLANTIC may
request three additional registrations pursuant to Rule 415 promulgated under
the Securities Act of all shares of Homestead common stock issued or issuable
upon conversion of the convertible mortgage notes. Such registration, except
for the fees and disbursements of counsel to ATLANTIC, shall be at the expense
of Homestead.
OTHER TRANSACTIONS WITH AFFILIATES
In ATLANTIC's March through June 1995 private offering, SCG purchased $94.8
million of Shares at $11.00 per Share. In ATLANTIC's December 1995 through May
1996 private offering, SCG purchased an aggregate of $50 million of Shares,
$21.1 million of which were purchased at $11.50 per Share (which was the price
per Share paid by other investors in the offering) and $28.9 million of which
were purchased at $11.568 per Share. See "--Shareholders' Agreement". Except
as described above, all subscriptions were made on the same terms and at the
same times as made available to other investors.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 1, 1996, the beneficial ownership
of Shares for (i) each person known to ATLANTIC to be the beneficial owner of
more than 5% of ATLANTIC's Shares, (ii) each Director of ATLANTIC and (iii)
the Directors and executive officers of ATLANTIC as a group. Unless otherwise
indicated in the footnotes, all of such interests are owned directly, and the
indicated person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED ALL SHARES
------------------- ------------------ ----------
<S> <C> <C>
Security Capital Group Incorporated.............. 42,257,407(1) 64.1%
125 Lincoln Avenue
Santa Fe, NM 87501
William D. Sanders (Corporate Ownership)....... 42,257,407(2) 64.1
7777 Market Center Avenue
El Paso, TX 79912
William D. Sanders (Personal Ownership)........ 12,310 *
7777 Market Center Avenue
El Paso, TX 79912
Ameritech Pension Trust.......................... 4,446,640 6.7
Ameritech Corporation
225 West Randolph Street
HQ-13A
Chicago, IL 60606
General Motors Investment Management Corporation. 4,347,826(3) 6.6
767 Fifth Avenue
New York, NY 10153
C. Ronald Blankenship............................ 1,000 *
125 Lincoln Avenue
Santa Fe, NM 87501
Manuel A. Garcia, III............................ 20,000 *
P.O. Box 2066
Davgar Restaurants, Inc.
Winter Park, FL 32790
Ned S. Holmes.................................... 120,000(4) *
Parkway Investments/Texas, Inc.
55 Waugh Drive
Houston, TX 77007
Constance B. Moore............................... 21,739 *
Six Piedmont Center
Atlanta, GA 30305
James C. Potts................................... 26,100 *
Six Piedmont Center
Atlanta, GA 30305
All Directors and executive officers as a group
(10 persons).................................... 189,839 *
</TABLE>
- --------
* Less than 1%
(1) These Shares are owned of record by SC Realty Incorporated, a wholly owned
subsidiary of SCG, and are pledged to secure SCG's $300 million revolving
line of credit facility with a syndicate of banks. As of July 1, 1996, SCG
expects that there will be $163 million of borrowings outstanding under
the line of credit. The line of credit is also secured by securities owned
by SCG of PTR, SCI and Security Capital U.S. Realty, an entity based in
Luxembourg which invests in real estate operating companies in the United
States. SCG estimates that the aggregate market value of the pledged
securities exceeded $1.9 billion as of June 26, 1996. SCG was in
compliance with all covenants under the line of credit at March 31, 1996.
(2) Mr. Sanders may be deemed to beneficially own these Shares, which are
owned by SCG, because Mr. Sanders shares voting and dispositive power with
respect to all Shares owned by SCG. SCG and Mr. Sanders intend to play a
major role in the direction of ATLANTIC for the purpose of maximizing the
value of ATLANTIC.
(3) 3,913,043 of these Shares are owned by the General Motors Hourly-Rate
Employees Pension Trust and 434,783 of these Shares are owned by the
General Motors Salaried Employees Pension Trust.
(4) Mr. Holmes directly owns 5,000 of these Shares. Mr. Holmes may be deemed
to beneficially own 115,000 of these Shares which are owned by Mr. Holmes'
wife and children and by Holmes Family Venture Ltd., a family entity with
respect to which Mr. Holmes shares voting and dispositive power.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of ATLANTIC does not
purport to be complete and is subject to and qualified in its entirety by
reference to ATLANTIC's Articles of Incorporation and Bylaws, copies of which
have been filed as exhibits to the registration statement of which this
Prospectus forms a part.
GENERAL
The authorized capital stock of ATLANTIC consists of 250,000,000 Shares. The
Board may classify or reclassify any unissued Shares from time to time by
setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such Shares. No holder
of any class of capital stock of ATLANTIC will have any preemptive right to
subscribe to any securities of ATLANTIC except as may be granted by the Board
in authorizing the issuance of a class of preferred stock. Under Maryland law,
shareholders are generally not liable for ATLANTIC's debts or obligations. For
a description of certain provisions that could have the effect of delaying,
deferring or preventing a change in control, see "Risk Factors--Limitations on
Acquisition of Shares and Change in Control", "Certain Relationships and
Transactions--SCG Investor Agreement" and "Certain Provisions of Maryland Law
and of ATLANTIC's Articles of Incorporation and Bylaws".
The transfer agent and registrar for the Shares is The First National Bank
of Boston, 150 Royall Street, Canton, Massachusetts 02021.
COMMON STOCK
The outstanding Shares are fully paid and non-assessable. Each Share
entitles the holder to one vote on all matters requiring a vote of
shareholders, including the election of Directors. Shareholders do not have
the right to cumulate their votes in the election of Directors, which means
that the holders of a majority of the outstanding Shares can elect all of the
Directors then standing for election. Shareholders are entitled to such
distributions as may be authorized from time to time by the Directors out of
assets legally available therefor. ATLANTIC's current distribution policy is
to pay quarterly distributions to shareholders based on a reasonable
percentage of funds from operations. Prior to the Offering, ATLANTIC has paid
consecutive distributions of $0.21 per Share for the first two quarters of
1996, $0.20 per Share for 1995 quarters and $0.15 per Share for 1994 quarters.
ATLANTIC paid no distributions in 1993.
In the event of any liquidation, dissolution or winding-up of the affairs of
ATLANTIC, holders of Shares will be entitled, subject to the preferential
rights of holders of preferred stock, if any, to share ratably in the assets
of ATLANTIC remaining after provision for payment of liabilities to creditors.
All Shares have equal distribution, liquidation and other rights, and shall
have no preference, preemptive, appraisal, conversion or exchange rights.
PREFERRED STOCK
The Board is empowered by the Articles of Incorporation, without the
approval of shareholders, to cause shares of preferred stock to be issued in
one or more series and to determine, among other things, the number of
preferred shares of each series and the rights, preferences, powers and
limitations of each series which may be senior to the rights of Shares. The
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of ATLANTIC and may adversely affect the voting
and other rights of shareholders. Upon completion of the Offering, no shares
of preferred stock will be outstanding and ATLANTIC has no present plans to
issue any preferred stock following completion of the Offering other than as
contemplated by the Rights Agreement (as defined below).
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PURCHASE RIGHTS
On March 12, 1996, the Board declared a dividend of one Purchase Right for
each Share outstanding at the close of business on March 12, 1996 (the "Rights
Record Date") to the holders of Shares of record as of the Rights Record Date.
The dividend was paid on the Rights Record Date. The holders of any additional
Shares issued after the Rights Record Date and before the redemption or
expiration of the Purchase Rights will also be entitled to one Purchase Right
for each such additional Share. Each Purchase Right entitles the registered
holder under certain circumstances to purchase from ATLANTIC one one-hundredth
of a Participating Preferred Share of ATLANTIC at a price of $40 per one one-
hundredth of a Participating Preferred Share (the "Purchase Price"), subject
to adjustment. The description and terms of the Purchase Rights are set forth
in the Rights Agreement dated as of March 12, 1996 between ATLANTIC and The
First National Bank of Boston, as rights agent (the "Rights Agreement").
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earlier to occur of: (1) 10 days following a
public announcement that a person or group of affiliated or associated persons
(excluding SCG) has acquired beneficial ownership of 20% or more of the
outstanding Shares (thereby becoming an "Acquiring Person") or (2) 15 business
days (or such later date as may be determined by action of the Board prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of persons (excluding SCG) of
25% or more of the outstanding Shares (the first to occur of such dates being
called the "Rights Distribution Date"). With respect to any of the Share
certificates outstanding as of the Rights Record Date, until the Rights
Distribution Date the Purchase Rights will be evidenced by such Share
certificate. Until the Rights Distribution Date (or earlier redemption or
expiration of the Purchase Rights), new Share certificates issued after the
Rights Record Date upon transfer or new issuance of Shares will contain a
notation incorporating the Rights Agreement by reference. Notwithstanding the
foregoing, if the Board in good faith determines that a person who would
otherwise be an Acquiring Person under the Rights Agreement has become such
inadvertently, and such person divests as promptly as practicable a sufficient
number of Shares so that such person would no longer be an Acquiring Person,
then such person shall not be deemed to be an Acquiring Person for purposes of
the Rights Agreement.
The Purchase Rights will expire on March 12, 2006 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed or exchanged by ATLANTIC, in each case as described below.
The Purchase Price payable, and the number of Participating Preferred Shares
or other securities or property issuable, upon exercise of the Purchase Rights
are subject to adjustment under certain circumstances from time to time to
prevent dilution. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase
Rights will not be redeemable. Each Participating Preferred Share will be
entitled to a minimum preferential quarterly distribution payment of $1 per
share but will be entitled to an aggregate distribution of 100 times the
distribution declared per Share. Each Participating Preferred Share will have
100 votes, voting together with the Shares. In the event of liquidation, the
holders of the Participating Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1 per share but will be entitled to an
aggregate payment of 100 times the payment made per Share. In the event of any
merger, consolidation or other transaction in which Shares are exchanged, each
Participating Preferred Share will be entitled to receive 100 times the amount
received per Share. In the event of issuance of Participating Preferred Shares
upon exercise of the Purchase Rights, in order to facilitate trading, a
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depositary receipt may be issued for each one one-hundredth of a Participating
Preferred Share. The Purchase Rights will be protected by customary
antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of Shares having a market value
(determined in accordance with the Rights Agreement) of twice the Purchase
Price. In lieu of the issuance of Shares upon exercise of Purchase Rights, the
Board may under certain circumstances, and if there is an insufficient number
of Shares authorized but unissued or held as treasury Shares to permit the
exercise in full of the Purchase Rights, the Board is required to, take such
action as may be necessary to cause ATLANTIC to issue or pay upon the exercise
of Purchase Rights, cash (including by way of a reduction of purchase price),
property, other securities or any combination of the foregoing having an
aggregate value equal to that of the Shares which otherwise would have been
issuable upon exercise of Purchase Rights.
In the event that, after any person or group becomes an Acquiring Person,
ATLANTIC is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Purchase Right will thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price, a number of shares of common stock of the acquiring company
having a market value (determined in accordance with the Rights Agreement) of
twice the Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
Shares, the Board may exchange the Purchase Rights (other than Purchase Rights
owned by that person or group which will have become void), in whole or in
part, at an exchange ratio of one Share (or one one-hundredth of a
Participating Preferred Share) per Purchase Right (subject to adjustment).
As soon as practicable after a Rights Distribution Date, ATLANTIC is
obligated to use its best efforts to file a registration statement under the
Securities Act relating to the securities issuable upon exercise of Purchase
Rights and to cause such registration statement to become effective as soon as
practicable.
At any time prior to the time a person or group of persons becomes an
Acquiring Person, the Board may redeem the Purchase Rights in whole, but not
in part, at a price of $0.01 per Purchase Right (the "Redemption Price")
payable in cash, Shares or any other form of consideration deemed appropriate
by the Board. The redemption of the Purchase Rights may be made effective at
such time, on such basis and with such conditions as the Board in its sole
discretion may establish. Immediately upon the effectiveness of any redemption
of the Purchase Rights, the right to exercise the Purchase Rights will
terminate and the only right of the holders of Purchase Rights will be to
receive the Redemption Price.
The terms of the Purchase Rights may be amended by the Board without the
consent of the holders of the Purchase Rights, except that from and after the
time any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Purchase Rights and in no event shall any such amendment change
the 20% threshold at which a person acquiring beneficial ownership of Shares
becomes an Acquiring Person.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
ATLANTIC on terms not approved by its Board, except pursuant to an offer
conditioned on a substantial number of Purchase Rights being
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acquired. The Purchase Rights should not interfere with any merger or other
business combination approved by the Board since the Purchase Rights may be
redeemed by ATLANTIC at the Redemption Price prior to the time that a person
or group has acquired beneficial ownership of 20% or more of the Shares. The
form of Rights Agreement specifying the terms of the Purchase Rights has been
incorporated by reference into the registration statement of which this
Prospectus forms a part and is incorporated herein by reference. The foregoing
description of the Purchase Rights does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Rights
Agreement, including the definitions therein of certain terms.
RESTRICTION ON SIZE OF HOLDINGS OF SHARES
ATLANTIC's Articles of Incorporation contains certain restrictions on the
number of Shares that individual shareholders may own. For ATLANTIC to qualify
as a REIT under the Code, no more than 50% in value of its Shares (after
taking into account options to acquire Shares) may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities and constructive ownership among specified family members)
during the last half of a taxable year (other than the first taxable year) or
during a proportionate part of a short taxable year. The Shares must also be
beneficially owned (other than during the first taxable year) by 100 or more
persons during at least 335 days of a taxable year or during a proportionate
part of a shorter taxable year. Because ATLANTIC is a REIT, the Articles of
Incorporation contain restrictions on the acquisition of Shares intended to
ensure compliance with these requirements.
Subject to certain exceptions specified in the Articles of Incorporation, no
holder may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than 9.8% (the "Ownership Limit") of the number or value of the
issued and outstanding Shares. The Board, upon receipt of a ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel or other
evidence satisfactory to the Board and upon such other conditions as the Board
may direct, may also exempt a proposed transferee from the Ownership Limit. As
a condition of such exemption, the proposed transferee must give written
notice to ATLANTIC of the proposed transfer no later than the fifteenth day
prior to any transfer which, if consummated, would result in the intended
transferee owning Shares in excess of the Ownership Limit. The Board may
require such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary or advisable in order to determine or ensure ATLANTIC's
status as a REIT. Any transfer of Shares that would (i) create a direct or
indirect ownership of Shares in excess of the Ownership Limit, (ii) result in
the Shares being beneficially owned by fewer than 100 persons (determined
without reference to any rules of attribution) as provided in Section 856(a)
of the Code, or (iii) result in ATLANTIC being "closely held" within the
meaning of Section 856(h) of the Code, shall be null and void ab initio, and
the intended transferee will acquire no rights to the Shares. The foregoing
restrictions on transferability and ownership will not apply if the Board
determines, which determination must be approved by the shareholders, that it
is no longer in the best interests of ATLANTIC to attempt to qualify, or to
continue to qualify, as a REIT. The Articles of Incorporation exclude SCG (and
its transferees) from the foregoing ownership restriction.
Any Shares the purported transfer of which would result in a person owning
Shares in excess of the Ownership Limit or cause ATLANTIC to become "closely
held" under Section 856(h) of the Code that is not otherwise permitted as
provided above will constitute excess shares ("Excess Shares"), which will be
transferred pursuant to the Articles of Incorporation to a party not
affiliated with ATLANTIC designated by ATLANTIC as the trustee of a trust for
the exclusive benefit of an organization or organizations described in
Sections 170(b)(1)(A) and 170(c) of the Code and identified by the Board as
the beneficiary or beneficiaries of the trust (the "Charitable Beneficiary"),
until such time as the Excess Shares are transferred to a person whose
ownership will not violate the restrictions on ownership. While these Excess
Shares are held in trust, distributions on such Excess Shares will
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be paid to the trust for the benefit of the Charitable Beneficiary and may
only be voted by the trustee for the benefit of the Charitable Beneficiary.
Subject to the Ownership Limit, the Excess Shares shall be transferred by the
trustee at the direction of ATLANTIC to any person (if the Excess Shares would
not be Excess Shares in the hands of such person). The purported transferee
will receive the lesser of (i) the price paid by the purported transferee for
the Excess Shares (or, if no consideration was paid, fair market value on the
day of the event causing the Excess Shares to be held in trust) and (ii) the
price received from the sale or other disposition of the Excess Shares held in
trust. Any proceeds in excess of the amount payable to the purported
transferee will be paid to the Charitable Beneficiary. In addition, such
Excess Shares held in trust are subject to purchase by ATLANTIC for a 90 day
period at a purchase price equal to the lesser of (i) the price paid for the
Excess Shares by the purported transferee (or, if no consideration was paid,
fair market value at the time of the event causing the shares to be held in
trust) and (ii) the fair market value of the Excess Shares on the date
ATLANTIC elects to purchase. Fair market value, for these purposes, means the
last reported sales price reported on the NYSE on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the last
reported sales price on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over or through which the
relevant class of shares of stock may be traded, or if not then traded over or
through any exchange or quotation system, then the market price on the
relevant date as determined in good faith by the Board.
From and after the purported transfer to the purported transferee of the
Excess Shares, the purported transferee shall cease to be entitled to
distributions, voting rights and other benefits with respect to the Excess
Shares except the right to payment on the transfer of the Excess Shares as
described above. Any distribution paid to a purported transferee on Excess
Shares prior to the discovery by ATLANTIC that such Excess Shares have been
transferred in violation of the provisions of the Articles of Incorporation
shall be repaid, upon demand, to ATLANTIC, which shall pay any such amounts to
the trust for the benefit of the Charitable Beneficiary. If the foregoing
transfer restrictions are determined to be void, invalid or unenforceable by
any court of competent jurisdiction, then the purported transferee of any
Excess Shares may be deemed, at the option of ATLANTIC, to have acted as an
agent on behalf of ATLANTIC in acquiring such Excess Shares and to hold such
Excess Shares on behalf of ATLANTIC.
All certificates representing Shares will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5%, as
provided in the rules and regulations promulgated under the Code) of the
number or value of the outstanding Shares must give a written notice
containing certain information to ATLANTIC by January 31 of each year. In
addition, each shareholder shall upon demand be required to disclose to
ATLANTIC in writing such information with respect to the direct, indirect and
constructive ownership of Shares as the Board deems reasonably necessary to
comply with the provisions of the Code applicable to a REIT, to determine
ATLANTIC's status as a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of the Shares
might receive a premium for their Shares over the then prevailing market price
or which such holders might believe to be otherwise in their best interest.
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DIRECTOR LIABILITY
ATLANTIC's Articles of Incorporation provide that Directors shall not be
individually liable for any obligation or liability incurred by or on behalf
of ATLANTIC or by Directors for the benefit and on behalf of ATLANTIC. Under
the Articles of Incorporation and Maryland law respecting REITs, Directors are
not liable to ATLANTIC or the shareholders for any act or omission except for
acts or omissions which constitute bad faith, willful misfeasance, gross
negligence or reckless disregard of duties to ATLANTIC and its shareholders.
See "REIT Management--Indemnification".
CERTAIN PROVISIONS OF MARYLAND LAW AND OF ATLANTIC'S ARTICLES
OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
ATLANTIC's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
Maryland law and ATLANTIC's Articles of Incorporation and Bylaws, copies of
which have been filed as exhibits to the registration statement of which this
Prospectus forms a part.
CLASSIFICATION OF THE BOARD
ATLANTIC's Bylaws provide that the number of Directors may be established by
the Board but may not be fewer than three nor more than fifteen. Any vacancy
will be filled, at any regular meeting or at any special meeting called for
that purpose, by a majority of the remaining Directors, except that a vacancy
resulting from an increase in the number of Directors will be filled by a
majority of the entire Board. Pursuant to the Articles of Incorporation, the
Directors are divided into three classes. One class will hold office initially
for a term expiring at the annual meeting of shareholders to be held in 1997,
another class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1998 and another class will hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1999. As the term of each class expires, Directors in that class will be
elected for a term of three years and until their successors are duly elected
and qualify. ATLANTIC believes that classification of the Board will help to
assure the continuity and stability of ATLANTIC's business strategies and
policies as determined by the Board.
The classified Director provision could have the effect of making the
removal of incumbent Directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of ATLANTIC, even though such an attempt might be beneficial to
ATLANTIC and its shareholders. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Board. Thus, the classified board provision could increase the likelihood
that incumbent Directors will retain their positions.
BUSINESS COMBINATIONS
Under Maryland law, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
other than shares held by the Interested Stockholder with whom (or
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with whose affiliate) the business combination is to be effected, unless,
among other things, the corporation's stockholders receive a minimum price (as
defined under Maryland law) for their shares and the consideration is received
in cash or in the same form as previously paid by the Interested Stockholder
for its shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes
an Interested Stockholder. The Board has exempted from these provisions of
Maryland law any business combination with SCG and its affiliates and
successors. As a result, SCG and its affiliates and successors may be able to
enter into business combinations with ATLANTIC that may not be in the best
interests of ATLANTIC's shareholders without compliance by ATLANTIC with the
super-majority vote requirements and other provisions of the statute.
CONTROL SHARE ACQUISITIONS
Maryland law provides that "Control Shares" of a Maryland corporation
acquired in a "Control Share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority, or (iii) a majority of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "Control Share acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the Control Shares, as of the date of the
last Control Share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
ATLANTIC's Bylaws contain a provision exempting SCG and its affiliates and
successors from the provisions of the Control Share acquisition statute.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
ATLANTIC's Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board and the
proposal of business to be considered by shareholders may be made only (i)
pursuant to ATLANTIC's notice of the meeting, (ii) by the Board or
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(iii) by a shareholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws, and (b) with
respect to special meetings of shareholders, only the business specified in
ATLANTIC's notice of the meeting may be brought before the meeting and
nominations of persons for election to the Board may be made only on terms
similar to those for annual meetings.
SHARES AVAILABLE FOR FUTURE SALE
As of June 27, 1996, ATLANTIC had 65,903,161 Shares issued and outstanding
which were held of record by 289 shareholders. Upon completion of the
Offering, ATLANTIC will have Shares issued and outstanding or reserved for
issuance upon exercise of outstanding options. All of the Shares to be
issued or sold by ATLANTIC in the Offering, other than any Shares purchased by
affiliates, will be tradeable without restriction under the Securities Act.
The Shares currently issued and outstanding or reserved for issuance upon
exercise of options will be eligible for sale in the future, subject to the
volume resale, manner of sale and notice limitations of Rule 144 of the
Securities Act.
In general, under Rule 144, a person (or persons whose Shares are aggregated
in accordance with the Rule) who has beneficially owned his or her Shares for
at least two years, including any such persons who may be deemed "affiliates"
of ATLANTIC (as defined in the Securities Act), would be entitled to sell
within any three-month period a number of Shares that does not exceed the
greater of 1% of the then outstanding number of Shares or the average weekly
trading volume of the Shares during the four calendar weeks preceding each
such sale. After Shares are held for three years, a person who is not deemed
an "affiliate" of ATLANTIC is entitled to sell such Shares under Rule 144
without regard to the volume limitations described above. Sales of Shares by
affiliates will continue to be subject to the volume limitations. As defined
in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly, through the use of one or more intermediaries, controls, is
controlled by, or is under common control with, such issuer.
ATLANTIC has granted SCG, which beneficially owns 42,257,407 Shares, the
right to demand, at any time after the Shares are registered under the
Exchange Act, registration of all or any part of the Shares owned by SCG
pursuant to Rule 415 of the Securities Act. In addition, ATLANTIC has agreed
to file a registration statement (within one year of the consummation of the
Offering) pursuant to Rule 415 of the Securities Act for up to $50 million of
Shares on behalf of certain investors who purchased Shares in ATLANTIC's most
recent private offering. The persons entitled to register their securities are
responsible for all costs and expenses (other than ATLANTIC's legal, audit and
certain accounting fees) incident to any registration of the type discussed in
this paragraph.
ATLANTIC has reserved an additional 200,000 Shares for future issuance upon
exercise of Options under the Outside Directors Plan. See "REIT Management--
Outside Directors Plan".
No prediction can be made as to the effect, if any, that future sales of
Shares or the availability of Shares for future sale will have on the market
price prevailing from time to time. Sales of substantial amounts of Shares
(including Shares issued upon the exercise of options), or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Shares.
For a description of certain restrictions on transfers of Shares by ATLANTIC
(and certain of its Directors and officers) and by SCG, see "Underwriting".
FEDERAL INCOME TAX CONSIDERATIONS
ATLANTIC intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such
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requirements will be met. The following is a description of the federal income
tax consequences to ATLANTIC and its shareholders of the treatment of ATLANTIC
as a REIT. Since these provisions are highly technical and complex, each
prospective purchaser of ATLANTIC's Shares is urged to consult his or her own
tax advisor with respect to the federal, state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the Shares.
Based upon certain representations of ATLANTIC with respect to the facts as
set forth and explained in the discussion below, in the opinion of Mayer,
Brown & Platt, counsel to ATLANTIC, ATLANTIC has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ended December 31, 1994, and its proposed method of operation described
in this Prospectus and as represented by management will enable it to satisfy
the requirements for such qualification.
This opinion is conditioned upon certain representations made by ATLANTIC as
to certain factual matters relating to ATLANTIC's organization and intended or
expected manner of operation. In addition, this opinion is based on the law
existing and in effect on the date hereof. ATLANTIC's qualification and
taxation as a REIT will depend upon ATLANTIC's ability to meet on a continuing
basis, through actual operating results, asset composition, distribution
levels and diversity of stock ownership, the various qualification tests
imposed under the Code discussed below. Mayer, Brown & Platt will not review
compliance with these tests on a continuing basis. No assurance can be given
that ATLANTIC will satisfy such tests on a continuing basis.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as ATLANTIC, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporations.
If ATLANTIC fails to qualify as a REIT in any year, however, it will be
subject to federal income taxation as if it were a domestic corporation, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, ATLANTIC could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
ATLANTIC elected REIT status effective for the taxable year ended December
31, 1994 and the Board currently intends that ATLANTIC will operate in a
manner that permits it to qualify as a REIT in each taxable year thereafter.
There can be no assurance, however, that this expectation will be fulfilled,
since qualification as a REIT depends on ATLANTIC continuing to satisfy
numerous asset, income and distribution tests described below, which in turn
will be dependent in part on ATLANTIC's operating results.
The following summary is based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local, or foreign tax considerations, nor does it discuss all of the
aspects of federal income taxation that may be relevant to a prospective
shareholder in light of his or her particular circumstances or to certain
types of shareholders (including insurance companies, tax-exempt entities,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) subject to special
treatment under the federal income tax laws.
TAXATION OF ATLANTIC
GENERAL
In any year in which ATLANTIC qualifies as a REIT, in general it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to
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shareholders. ATLANTIC may, however, be subject to tax at normal corporate
rates upon any taxable income or capital gain not distributed.
Notwithstanding its qualification as a REIT, ATLANTIC may also be subject to
taxation in certain other circumstances. If ATLANTIC should fail to satisfy
either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which ATLANTIC fails to satisfy either the 75% test or the 95% test,
multiplied by a fraction intended to reflect ATLANTIC's profitability.
ATLANTIC will also be subject to a tax of 100% on net income from any
"prohibited transaction", as described below, and if ATLANTIC has (i) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or
(ii) other non-qualifying income from foreclosure property, it will be subject
to tax on such income from foreclosure property at the highest corporate rate.
In addition, if ATLANTIC should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior years, ATLANTIC would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. ATLANTIC may also be subject to the corporate
"alternative minimum tax", as well as tax in certain situations and on certain
transactions not presently contemplated. ATLANTIC will use the calendar year
both for federal income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, ATLANTIC must meet, among others, the
following requirements:
SHARE OWNERSHIP TEST
ATLANTIC's Shares must be held by a minimum of 100 persons for at least 335
days in each taxable year (or a proportional number of days in any short
taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the capital stock of ATLANTIC may
be owned, directly or indirectly and by applying certain constructive
ownership rules, by five or fewer individuals (the "50% test"), which for this
purpose includes certain tax-exempt entities. Any stock held by a qualified
domestic pension or other retirement trust will be treated as held directly by
its beneficiaries in proportion to their actuarial interest in such trust
rather than by such trust. Pursuant to the constructive ownership rules, SCG's
ownership of Shares is attributed to its shareholders for purposes of the 50%
test.
In order to ensure compliance with the 50% test, ATLANTIC has placed certain
restrictions on the transfer of the Shares to prevent additional concentration
of ownership. Moreover, to evidence compliance with these requirements under
United States Treasury Department ("Treasury") regulations, ATLANTIC must
maintain records which disclose the actual ownership of its outstanding
Shares. In fulfilling its obligations to maintain records, ATLANTIC must and
will demand written statements each year from the record holders of designated
percentages of its Shares disclosing the actual owners of such Shares (as
prescribed by Treasury regulations). A list of those persons failing or
refusing to comply with such demand must be maintained as a part of ATLANTIC's
records. A shareholder failing or refusing to comply with ATLANTIC's written
demand must submit with his or her tax returns a similar statement disclosing
the actual ownership of Shares and certain other information. In addition,
ATLANTIC's Articles of Incorporation provide restrictions regarding the
transfer of its Shares that are intended to assist ATLANTIC in continuing to
satisfy the Share ownership requirements. See "Description of Capital Stock--
Restriction on Size of Holdings of Shares". ATLANTIC intends to enforce the
9.8% limitation on ownership of Shares to assure that its qualification as a
REIT will not be compromised.
ASSET TESTS
At the close of each quarter of ATLANTIC's taxable year, ATLANTIC must
satisfy certain tests relating to the nature of its assets (determined in
accordance with GAAP). First, at least 75% of the
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value of ATLANTIC's total assets must be represented by interests in real
property, interests in mortgages on real property, shares in other REITs,
cash, cash items, and government securities (including certain government
guaranteed securities) and qualified temporary investments. Second, although
the remaining 25% of ATLANTIC's assets generally may be invested without
restriction, securities in this class may not exceed either (i) in the case of
securities of any one non-government issuer, 5% of the value of ATLANTIC's
total assets or (ii) 10% of the outstanding voting securities of any one such
issuer. Where ATLANTIC invests in a partnership, it will be deemed to own a
proportionate share of the partnership's assets.
GROSS INCOME TESTS
There are three separate percentage tests relating to the sources of
ATLANTIC's gross income which must be satisfied for each taxable year. For
purposes of these tests, where ATLANTIC invests in a partnership, ATLANTIC
will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of ATLANTIC as it has in the hands of the partnership.
The three tests are as follows:
1. THE 75% TEST. At least 75% of ATLANTIC's gross income for the taxable
year must be "qualifying income". Qualifying income generally includes: (i)
rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real
property and real estate mortgages, other than gain from property held
primarily for sale to customers in the ordinary course of ATLANTIC's trade
or business ("dealer property"); (iv) dividends or other distributions on
shares in other REITs, as well as gain from the sale of such shares; (v)
abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage collateralized by such property ("foreclosure
property"); and (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property.
Rents received from a resident will not, however, qualify as rents from
real property in satisfying the 75% test (or the 95% gross income test
described below) if ATLANTIC, or an owner of 10% or more of ATLANTIC,
directly or constructively owns 10% or more of such resident. In addition,
if rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will
not qualify as rents from real property. Moreover, an amount received or
accrued will not qualify as rents from real property (or as interest
income) for purposes of the 75% and 95% gross income tests if it is based
in whole or in part on the income or profits of any person, although an
amount received or accrued generally will not be excluded from "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, ATLANTIC generally must not operate or manage the
property or furnish or render services to residents, other than through an
"independent contractor" from whom ATLANTIC derives no income, except that
the "independent contractor" requirement does not apply to the extent that
the services provided by ATLANTIC are "usually or customarily rendered" in
connection with the rental of multifamily units for occupancy only, or are
not otherwise considered "rendered to the occupant for his convenience".
2. THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of ATLANTIC's gross income for the
taxable year must be derived from the above-described qualifying income, or
from dividends, interest, or gains from the sale or disposition of stock or
other securities that are not dealer property. Dividends (other than on
REIT shares) and interest on any obligations not collateralized by an
interest in real property are included for purposes of the 95% test, but
not for purposes of the 75% test.
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For purposes of determining whether ATLANTIC complies with the 75% and
95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property
(excluding foreclosure property) unless such property is held by ATLANTIC
for at least four years and certain other requirements (relating to the
number of properties sold in a year, their tax bases, and the cost of
improvements made thereto) are satisfied. See "--Taxation of ATLANTIC--
General".
Even if ATLANTIC fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if: (i) ATLANTIC's
failure to comply was due to reasonable cause and not to willful neglect;
(ii) ATLANTIC reports the nature and amount of each item of its income
included in the tests on a schedule attached to its tax return; and (iii)
any incorrect information on this schedule is not due to fraud with intent
to evade tax. If these relief provisions apply, however, ATLANTIC will
nonetheless be subject to a special tax upon the greater of the amount by
which it fails either the 75% or 95% gross income test for that year.
3. THE 30% TEST. ATLANTIC must derive less than 30% of its gross income
for each taxable year from the sale or other disposition of: (i) real
property held for less than four years (other than foreclosure property and
involuntary conversions); (ii) stock or securities held for less than one
year; and (iii) property in a prohibited transaction. ATLANTIC does not
anticipate that it will have any substantial difficulty in complying with
this test.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, ATLANTIC is required to make distributions
(other than capital gain dividends) to its shareholders each year in an amount
at least equal to (i) the sum of (a) 95% of ATLANTIC's REIT taxable income
(computed without regard to the dividends paid deduction and the REIT's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before ATLANTIC timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that ATLANTIC does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be.
ATLANTIC intends to make timely distributions sufficient to satisfy the
annual distribution requirements. It is possible that ATLANTIC may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to timing differences between the actual receipt of income
and actual payment of expenses on the one hand, and the inclusion of such
income and deduction of such expenses in computing ATLANTIC's REIT taxable
income on the other hand. To avoid any problem with the 95% distribution
requirement, ATLANTIC will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, intends to borrow funds in
order to satisfy the distribution requirement. However, there can be no
assurance that such borrowing would be available at such time.
If ATLANTIC fails to meet the 95% distribution requirement as a result of an
adjustment to ATLANTIC's tax return by the IRS, ATLANTIC may retroactively
cure the failure by paying a "deficiency dividend" (plus applicable penalties
and interest) within a specified period.
FAILURE TO QUALIFY
If ATLANTIC fails to qualify for taxation as a REIT in any taxable year and
the relief provisions do not apply, ATLANTIC will be subject to applicable
federal and state tax (including any applicable
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alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to shareholders in any year in which ATLANTIC fails to qualify
will not be deductible by ATLANTIC, nor generally will they be required to be
made under the Code. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and, subject to certain limitations in the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, ATLANTIC also will be
disqualified from re-electing taxation as a REIT for the four taxable years
following the year during which qualification was lost.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as ATLANTIC qualifies as a REIT, distributions made to ATLANTIC's
taxable domestic shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed ATLANTIC's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held its Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that ATLANTIC makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
shareholder, reducing the tax basis of a shareholder's Shares by the amount of
such distribution (but not below zero), with distributions in excess of the
shareholder's tax basis taxable as capital gains (if the Shares are held as a
capital asset). See "Distributions". In addition, any dividend declared by
ATLANTIC in October, November or December of any year and payable to a
shareholder of record on a specific date in any such month shall be treated as
both paid by ATLANTIC and received by the shareholder on December 31 of such
year, provided that the dividend is actually paid by ATLANTIC during January
of the following calendar year. Shareholders may not include in their
individual income tax returns any net operating losses or capital losses of
ATLANTIC. Federal income tax rules may also require that certain minimum tax
adjustments and preferences be apportioned to ATLANTIC shareholders.
In general, any loss upon a sale or exchange of Shares by a shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from ATLANTIC required to be treated by such shareholder as
long-term capital gains.
BACKUP WITHHOLDING
ATLANTIC will report to its domestic shareholders and to the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld,
if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at applicable rates with
respect to dividends paid unless such shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that
does not provide ATLANTIC with its correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability.
In addition, ATLANTIC may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to ATLANTIC. See "--Taxation of Foreign Shareholders" below.
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TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). Subject to the
discussion below regarding a "pension-held REIT", based upon the ruling, the
analysis therein and the statutory framework of the Code, distributions by
ATLANTIC to a shareholder that is a tax-exempt entity should also not
constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its Shares with "acquisition indebtedness" within the meaning
of the Code, and that the Shares are not otherwise used in an unrelated trade
or business of the tax-exempt entity, and that ATLANTIC, consistent with its
present intent, does not hold a residual interest in a real estate mortgage
investment conduit.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of stock of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or
one or more qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
TAXATION OF FOREIGN SHAREHOLDERS
ATLANTIC will qualify as a "domestically-controlled REIT" so long as less
than 50% in value of its Shares is held by foreign persons (i.e., non-resident
aliens, and foreign corporations, partnerships, trusts and estates). It is
currently anticipated that ATLANTIC will qualify as a domestically-controlled
REIT. Under these circumstances, gain from the sale of the Shares by a foreign
person should not be subject to U.S. taxation, unless such gain is effectively
connected with such person's U.S. business or, in the case of an individual
foreign person, such person is present within the U.S. for more than 182 days
in such taxable year.
Distributions of cash generated by ATLANTIC's real estate operations (but
not by its sale or exchange of such properties) that are paid to foreign
persons generally will be subject to U.S. withholding tax at a rate of 30%,
unless (i) an applicable tax treaty reduces that tax and the foreign
shareholder files with ATLANTIC the required form evidencing such lower rate
or (ii) the foreign shareholder files an IRS Form 4224 with ATLANTIC claiming
that the distribution is "effectively connected" income. Treasury Regulations
proposed in 1996, which have not yet been adopted, and are therefore not
currently effective, would, if and when they become effective, revise in
certain respects the rules applicable to foreign shareholders with respect to
payments made after December 31, 1997.
Distributions of proceeds attributable to the sale or exchange by ATLANTIC
of U.S. real property interests are subject to income and withholding taxes
pursuant to the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), and may be subject to branch profits tax in the hands of a
shareholder which is a foreign corporation if it is not entitled to treaty
relief or exemption. ATLANTIC is required by applicable Treasury Regulations
to withhold 35% of any distribution to a foreign person that could be
designated by ATLANTIC as a capital gain dividend; this amount is creditable
against the foreign shareholder's FIRPTA tax liability.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors in ATLANTIC should consult their own tax advisors regarding the
income and withholding tax considerations with respect to their investment in
ATLANTIC.
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TAX CONSEQUENCES OF THE HOMESTEAD TRANSACTION
The following is a summary of the material United States Federal income tax
consequences of the Homestead transaction to ATLANTIC and ATLANTIC
shareholders. The summary is based upon the Code, administrative
pronouncements, judicial decisions and Treasury regulations, subsequent
changes to any of which may affect the tax consequences described herein. The
summary only applies to persons who hold Shares as capital assets and does not
address tax considerations which may affect the treatment of certain special
status taxpayers such as financial institutions, broker-dealers, life
insurance companies, tax-exempt organizations, investment companies and
foreign taxpayers. Shareholders are urged to consult their tax advisors as to
the particular United States Federal income tax consequences to them of the
Homestead transaction and as to the foreign, state, local and other tax
consequences of the Homestead transaction.
TAX CONSEQUENCES TO ATLANTIC
THE MERGERS. PTR, ATLANTIC, SCG and Homestead have requested a ruling from
the IRS that, among other matters, the Mergers constitute a transaction
subject to Section 351 of the Code and related provisions. In the event that
ATLANTIC does not receive a favorable ruling from the IRS prior to the
consummation of the Homestead transaction, it is expected that Mayer, Brown &
Platt will give an opinion that, among other matters, the Mergers constitute a
transaction subject to Section 351 or the reorganization provisions of the
Code and related provisions. The obligation of PTR, ATLANTIC, Homestead and
SCG to consummate the Mergers is conditioned on receipt of either a favorable
ruling from the IRS or an opinion of Mayer, Brown & Platt that the Mergers so
qualify. Assuming the Mergers constitute a transaction subject to Section 351
or the reorganization provisions of the Code and related provisions, (i)
ATLANTIC will not recognize gain, income or loss upon the receipt of the
Homestead common stock in the Mergers in exchange for the assets transferred
except to the extent that ATLANTIC is treated as having received boot in the
Mergers, (ii) the tax basis of the Homestead common stock received by ATLANTIC
will be the same as ATLANTIC's and its subsidiaries' tax basis in the
Homestead Village properties transferred by ATLANTIC to Homestead in the
Mergers, and (iii) the holding period of the Homestead common stock received
by ATLANTIC will be the same as ATLANTIC's and its subsidiaries' holding
period in the Homestead Village properties, allocated among the shares of the
Homestead common stock received according to the fair market values of such
properties. To the extent that ATLANTIC is treated as having received boot in
the Mergers, (i) ATLANTIC will recognize taxable gain, but only to the extent
that the fair market value of the assets transferred by ATLANTIC in the
Mergers exceeds ATLANTIC's and its subsidiaries' tax basis therein, and (ii)
the tax basis of the Homestead common stock received by ATLANTIC will be
increased by the amount of any such taxable gain recognized. Any such taxable
gain recognized by ATLANTIC as a result of the receipt of boot will reduce the
amount of gain recognized by ATLANTIC on the Distribution.
THE DISTRIBUTION. ATLANTIC will recognize gain upon the Distribution of the
Homestead common stock and warrants to its shareholders in an amount equal to
the excess of the fair market value of the Homestead common stock and warrants
on the Distribution Record Date over ATLANTIC's tax basis therein, and the
earnings and profits of ATLANTIC will be increased by the amount of any such
gain recognized. ATLANTIC's gain on the Distribution will be reduced to the
extent that ATLANTIC recognized gain on the Mergers from the receipt of boot
and its tax basis in the Homestead common stock was increased thereby. In
computing its taxable income for the year in which the Distribution occurs,
ATLANTIC will be allowed a dividends paid deduction with respect to the
Distribution in an amount equal to the sum of the fair market value on the
Distribution Record Date of the Homestead common stock and warrants
distributed and any cash distributed in lieu of fractional shares of Homestead
common stock and fractional Homestead warrants, but in no event in excess of
the earnings and profits of ATLANTIC.
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The fair market value of the Homestead common stock and warrants on the
Distribution Record Date will be determined by the best available evidence as
to their value on that date. Assuming there are no aberrations in the trading
of the Homestead common stock and warrants, and absent special factors bearing
on the value of a particular holder's Homestead common stock and warrants, the
best available evidence of the fair market value of the Homestead common stock
and warrants on the Distribution Record Date should be their value as
reflected by their trading prices on the Distribution Record Date or within a
reasonable period before or after such date. To the extent the trading price
of the Homestead common stock and warrants does not reflect their fair market
value because, for example, there are too few trades, the trading is of a
sporadic nature or such securities are not traded, then other relevant date
bearing on the value of the Homestead common stock and warrants will be
considered in determining the fair market value of the Homestead common stock
and warrants.
As a result of the Homestead transaction, ATLANTIC will recognize gain to
the full extent of the excess of the value of the Homestead Village properties
transferred to Homestead in the Mergers over ATLANTIC's or its subsidiaries'
basis therein (the "built-in gain"). ATLANTIC will recognize the built-in gain
either as a result of the receipt of boot in the Mergers or upon the
Distribution (or on the Mergers and Distribution together), but in no event
will ATLANTIC recognize the built-in gain on both the Mergers and the
Distribution.
MORTGAGES. After consummation of the Homestead transaction, ATLANTIC will
hold mortgage notes of Homestead convertible into shares of Homestead common
stock. The terms of the Funding Commitment Agreement provide that ATLANTIC
will fund $1,133,535 for each $1,000,000 of convertible mortgage loans.
Accordingly, ATLANTIC will be treated as having acquired the convertible
mortgage loans at a premium which ATLANTIC will be entitled to amortize as an
offset to interest income (with a corresponding reduction in ATLANTIC's tax
basis) under a constant yield method over the terms of the convertible
mortgage notes if (as ATLANTIC intends) an election under Section 171 of the
Code is made. Interest paid by Homestead to ATLANTIC on the mortgage notes
will constitute qualified income for purposes of determining whether ATLANTIC
meets the gross income requirements for REIT qualification.
The terms of the mortgages provide for adjustment of the price for
conversion of the mortgages into the Homestead common stock if Homestead makes
certain distributions of stock, cash or other property to its shareholders.
While Homestead does not presently contemplate making such a distribution, if
Homestead makes a distribution of cash or property resulting in an adjustment
to the conversion price, ATLANTIC, as a holder of such convertible mortgages,
may be viewed as receiving a "deemed distribution" under Section 305 of the
Code, even if ATLANTIC does not hold any Homestead common stock at such time.
The deemed distribution would be considered a return of capital, would reduce
ATLANTIC's tax basis in the convertible mortgages (but not below zero) by the
value of the deemed distribution, and, to the extent that the value of the
deemed distribution exceeds ATLANTIC's tax basis in the convertible mortgages,
the deemed distribution would result in gain to ATLANTIC. ATLANTIC's tax basis
in the convertible mortgages would then immediately be increased by the value
of the property deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of
fractional shares of Homestead common stock, ATLANTIC will not recognize gain
or loss upon the exercise of the conversion right. ATLANTIC's tax basis in the
Homestead common stock received upon the conversion will be equal to
ATLANTIC's tax basis in the mortgages converted. Upon conversion of the
mortgages, ATLANTIC will receive cash in lieu of any fractional shares of
Homestead common stock and will recognize gain to the extent that the cash
received exceeds ATLANTIC's tax basis in the portion of the mortgages
converted for cash in lieu of fractional shares. In the event that ATLANTIC
exercises its conversion right, it is expected that ATLANTIC, consistent with
its status as a REIT, will shortly thereafter distribute to its shareholders
or sell in the open market the Homestead common stock received. ATLANTIC will
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recognize gain upon such distribution or sale of the Homestead common stock
received upon conversion in an amount equal to the excess of the fair market
value of the Homestead common stock over ATLANTIC's tax basis therein, and the
earnings and profits of ATLANTIC will be increased by the amount of any such
gain recognized. In computing its taxable income for the year in which any
Homestead common stock is distributed, ATLANTIC will be allowed a dividends
paid deduction in an amount equal to the fair market value at the time of
distribution of the Homestead common stock distributed, but in no event in
excess of the earnings and profits of ATLANTIC.
COMMITMENT FEE INCOME. The receipt by ATLANTIC of the Homestead warrants in
consideration for entering into the Funding Commitment Agreement will be
treated as a commitment fee to ATLANTIC for entering into the Funding
Commitment Agreement which will constitute taxable income to ATLANTIC. Such
income will constitute qualified income for purposes of determining whether
ATLANTIC meets the gross income requirements for REIT qualification. The
earnings and profits of ATLANTIC will be increased by the amount of the
commitment fee income, consequently increasing the amount of the Distribution
which will be treated as a fully taxable dividend to ATLANTIC shareholders.
TAX CONSEQUENCES TO HOMESTEAD
Assuming the Mergers constitute a transaction subject to Section 351 or the
reorganization provisions of the Code and related provisions, (i) Homestead
will not recognize gain, income or loss as a result of the Homestead
transaction, (ii) the tax bases of the Homestead Village properties received
by Homestead from ATLANTIC and its subsidiaries will be the same as the tax
bases of ATLANTIC and its subsidiaries in such properties increased by the
amount of any gain recognized by ATLANTIC as a result of the receipt by
ATLANTIC of boot in the Mergers, and (iii) the holding period of the Homestead
Village properties received by Homestead from ATLANTIC and its subsidiaries
will be the same as the holding period of ATLANTIC and its subsidiaries in
such properties.
TAX CONSEQUENCES TO ATLANTIC SHAREHOLDERS
THE DISTRIBUTION. The amount received by ATLANTIC shareholders in the
Distribution will be equal to the fair market value of the Homestead common
stock and warrants received plus the amount of any cash received in lieu of
fractional shares of Homestead common stock and fractional Homestead warrants.
The Distribution will constitute a taxable dividend to ATLANTIC shareholders,
taxable as ordinary income, to the extent of the earnings and profits of
ATLANTIC allocable to such Homestead common stock and warrants and cash. The
amount of the Distribution which exceeds the allocated earnings and profits of
ATLANTIC will be treated as a nontaxable reduction (although not below zero)
of a shareholder's adjusted tax basis in its Shares. To the extent that the
Distribution exceeds such shareholder's adjusted tax basis in its Shares, the
Distribution will be treated as gain to such shareholder. Any such gain will
constitute capital gain to such shareholder if the shareholder holds its
Shares as a capital asset. Such gain will constitute short-term capital gain
for any holder acquiring its Shares in the Offering. As discussed above, gain
recognized by ATLANTIC upon the distribution of the Homestead common stock and
warrants will increase ATLANTIC's earnings and profits, thus increasing the
portion of the distributions of ATLANTIC for the taxable year of the
Distribution which will be treated as taxable dividends as opposed to return
of capital.
To the extent that ATLANTIC has a net capital gain for the taxable year, it
may designate all or a portion of any dividend distributed as a capital gain
dividend. In this event, shareholders will be provided written notice of such
designation within 30 days after the close of ATLANTIC's taxable year.
Shareholders will be taxed at the long-term capital gains rate on any such
capital gain dividends regardless of the shareholder's holding period of its
Shares. The amount of capital gain dividends which may be designated by
ATLANTIC will be reduced by any capital loss carryovers of ATLANTIC. Gain
recognized by ATLANTIC as a result of the Distribution will constitute capital
gain to the extent
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attributable to Homestead Village properties held by ATLANTIC and its
subsidiaries in excess of one year prior to the Mergers and ATLANTIC
anticipates that it will designate dividends attributable to any net capital
gain resulting from the Distribution as capital gain dividends. However,
ATLANTIC does not anticipate that it will derive significant net capital gain
from the Distribution.
ATLANTIC is required to report the amount distributed to shareholders
pursuant to the Distribution (and the allocation of such amount among ordinary
dividends, capital gain dividends and return of capital) to the IRS and each
shareholder on Form 1099-DIV.
HOMESTEAD COMMON STOCK. A shareholder's tax basis in the Homestead common
stock received in the Distribution will be the fair market value of the
Homestead common stock on the Distribution Record Date to be determined as
discussed above. A shareholder's holding period for the Homestead common stock
received in the Distribution will begin on the Distribution Record Date.
Upon the sale or exchange of Homestead common stock, a Homestead shareholder
will realize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the shareholder's tax basis in
the Homestead common stock. Such gain or loss will be a capital gain or loss
to such shareholder if the shareholder holds its Homestead common stock as a
capital asset, and will be a long-term capital gain or loss if the Homestead
shareholder's holding period with respect to the Homestead common stock sold
is more than one year at the time of sale or exchange.
HOMESTEAD WARRANTS. A shareholder's tax basis in the Homestead warrants
received in the Distribution will be the fair market value of the Homestead
warrants on the Distribution Record Date to be determined as discussed above.
A shareholder's holding period for the Homestead warrants received in the
Distribution will begin on the Distribution Record Date.
The terms of the Homestead warrants distributed to ATLANTIC shareholders
pursuant to the Merger Agreement provide for adjustment of the price for
exercise if Homestead makes certain distributions of stock, cash or other
property to its shareholders. While Homestead does not presently contemplate
making such a distribution, if Homestead makes a distribution of cash or
property resulting in an adjustment to the exercise price, the holders of the
Homestead warrants may be viewed as receiving a "deemed distribution" under
Section 305 of the Code even if such holder does not hold any Homestead common
stock at such time. The deemed distribution would be considered a return of
capital, the Homestead warrant holder's tax basis in the Homestead warrants
would be reduced (but not below zero) by the value of the deemed distribution
and, to the extent that the value of the deemed distribution exceeds the
Homestead warrant holder's tax basis in its Homestead warrants, the deemed
distribution would result in gain to such holder. The Homestead warrant
holder's tax basis in its Homestead warrants would then immediately be
increased by the amount of the property deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of
fractional shares of Homestead common stock, Homestead warrant holders will
not recognize gain or loss upon the exercise of the Homestead warrants. The
Homestead warrant holder's tax basis in the Homestead common stock received
upon the exercise of the Homestead warrants will be equal to the sum of (i)
the Homestead warrant holder's tax basis in the warrants exercised and (ii)
the exercise price paid. Upon the exercise of the Homestead warrants,
Homestead warrant holders will receive cash in lieu of any fractional shares
of Homestead common stock and will recognize gain to the extent that the cash
received exceeds the Homestead warrant holder's tax basis in the portion of
the Homestead warrants exercised for cash in lieu of fractional shares.
Upon a sale or other disposition of a Homestead warrant, a Homestead warrant
holder will recognize gain or loss measured by the difference between the
amount realized on the sale or other disposition and the warrant Holder's tax
basis in the Homestead warrant. Such gain or loss will be
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capital gain or loss if the stock into which the Homestead warrants are
exercisable would be a capital asset in the Homestead warrant holder's hands,
and will be a short-term capital gain or loss because the Homestead warrants
expire within one year and therefore the Homestead warrant holder's holding
period will be one year or less.
If a Homestead warrant holder's Homestead warrants expire without being
exercised, the Homestead warrant holder will recognize a loss at the time such
Homestead warrants expire equal to its tax basis in the expired Homestead
warrants. In general, such loss will be a capital loss if the stock into which
the warrants were exercisable would be a capital asset in the Homestead
warrant holder's hands.
OTHER TAX CONSIDERATIONS
TAX ON BUILT-IN GAIN
Pursuant to I.R.S. Notice 88-19, 1988-1 C.B. 486, a "C" corporation that
elects to be taxed as a REIT has to recognize any gain that would have been
realized if the "C" corporation had sold all of its assets for their
respective fair market values at the end of its last taxable year before the
taxable year in which it qualifies to be taxed as a REIT and immediately
liquidated unless the REIT elects to be taxed under rules similar to the rules
of Section 1374 of the Code.
Since ATLANTIC has made this election, if during the 10-year period
beginning on the first day of the first taxable year for which ATLANTIC
qualifies as a REIT (the "Recognition Period"), ATLANTIC recognizes gain on
the disposition of any asset held by ATLANTIC as of the beginning of such
Recognition Period, then, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b)
ATLANTIC's adjusted basis in such asset as of the beginning of such
Recognition Period (the "Built-in Gain"), such gain will be subject to tax at
the highest regular corporate rate. Because ATLANTIC acquired many of its
properties in fully taxable transactions and presently expects to hold each
property beyond the Recognition Period, it is not anticipated that ATLANTIC
will pay a substantial corporate level tax on its Built-in Gain.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in ATLANTIC may be modified by legislative,
judicial or administrative action at any time and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the Treasury, resulting in revisions of
regulations and revised interpretations of established concepts as well as
statutory changes. Revisions in federal tax laws and interpretations thereof
could adversely affect the tax consequences of investment in ATLANTIC.
STATE AND LOCAL TAXES
ATLANTIC and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of ATLANTIC and its shareholders
may not conform to the federal income tax consequences discussed above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the
Shares of ATLANTIC.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, ATLANTIC
has agreed to sell to each of the Underwriters named below, and each of the
Underwriters, for whom Goldman, Sachs & Co. are acting as representatives, has
severally agreed to purchase from ATLANTIC, the respective number of Shares
set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Goldman, Sachs & Co.........................................
---
Total...................................................
===
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Shares offered
hereby, if any are taken.
The Underwriters propose to offer the Shares in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession of $ per Share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per Share to certain brokers and
dealers. After the Shares are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
representatives.
ATLANTIC has granted the Underwriters an option exercisable for days
after the date of this Prospectus to purchase up to an aggregate of
additional Shares solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Shares to be purchased by each of them, as shown in
the foregoing table, bears to the Shares offered.
The representatives of the Underwriters have informed ATLANTIC that they do
not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of Shares
offered by them.
Prior to the Offering, there has been no public market for the Shares. The
initial public offering price will be negotiated among ATLANTIC and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Shares, in addition to prevailing market
conditions, will be the dividend yields and price earnings ratios of publicly
traded real estate investment trusts that ATLANTIC and the representatives
believe to be comparable to ATLANTIC, estimates of the business potential and
earnings prospects of ATLANTIC, an assessment of ATLANTIC's management, the
current state of ATLANTIC's industry and the economy as a whole.
95
<PAGE>
SCG, ATLANTIC and certain of its Directors and officers have agreed that,
during the period beginning from the date of this Prospectus and continuing to
and including the date 90 days after the date of this Prospectus, they will
not offer, sell, contract to sell or otherwise dispose of any securities of
ATLANTIC (other than pursuant to employee or director stock option plans
existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus and except pursuant to
rights offerings to existing shareholders (which may include sales of
unsubscribed and additional Shares to third parties) and except for the
issuance of limited partnership interests (which partnership interests may be
exchangeable for Shares after such 90-day period)) which are substantially
similar to the Shares or which are convertible or exchangeable into securities
which are substantially similar to the Shares without the prior written
consent of Goldman, Sachs & Co., except for the Shares offered in connection
with the Offering.
Application will be made to list the Shares on the New York Stock Exchange
under the symbol " ". In order to meet one of the requirements for listing
the Shares on the New York Stock Exchange, the Underwriters have undertaken to
sell lots of 100 or more Shares to a minimum of 2,000 beneficial holders.
ATLANTIC and Homestead have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Goldman Sachs Capital Markets, L.P., an affiliate of Goldman, Sachs & Co.,
and ATLANTIC are parties to an interest rate swap agreement, which effectively
fixes the interest rate on $100 million of ATLANTIC's borrowings under
ATLANTIC's line of credit at 7.46% through February 5, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Line of Credit". In addition, in connection
with the Mergers, Goldman, Sachs & Co. is providing a fairness opinion to PTR.
EXPERTS
The financial statements and related schedule of ATLANTIC included in this
Prospectus and elsewhere in the registration statement of which this
Prospectus forms a part have been audited by Ernst & Young LLP, independent
certified public accountants to the extent indicated in their reports thereon
also appearing elsewhere herein and in the registration statement. Such
financial statements have been included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
VALIDITY OF SHARES
The validity of the issuance of the Shares offered pursuant to this
Prospectus will be passed upon for ATLANTIC by Mayer, Brown & Platt, Chicago,
Illinois and for the Underwriters by Sullivan & Cromwell, New York, New York.
Mayer, Brown & Platt has in the past represented and is currently representing
ATLANTIC, SCG and certain of their affiliates, including representation of SCG
and Homestead in connection with the Homestead transaction. As to all matters
of Maryland law, Mayer, Brown & Platt and Sullivan & Cromwell will rely upon
the opinion of .
ADDITIONAL INFORMATION
ATLANTIC has filed with the Commission a registration statement (of which
this Prospectus forms a part) on Form S-11 under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the registration statement, certain
96
<PAGE>
portions of which have been omitted as permitted by the rules and regulations
of the Commission. Statements contained in this Prospectus as to the content
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
hereto. For further information regarding ATLANTIC and the Shares offered
hereby, reference is hereby made to the registration statement and such
exhibits and schedules.
The registration statement, the exhibits and schedules forming a part
thereof filed by ATLANTIC with the Commission can be inspected and copies
obtained from the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-
2511. Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, such material can also be obtained from the
Commission's Web site at http://www.sec.gov.
ATLANTIC intends to furnish its shareholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
97
<PAGE>
GLOSSARY
"Acquiring Person" means a person or group of affiliated or associated
persons (excluding certain affiliates of ATLANTIC and certain current
shareholders) that has acquired beneficial ownership of 20% or more of the
outstanding Shares.
"ADA" means the Americans with Disabilities Act of 1990.
"Administrator" means the Secretary of ATLANTIC as administrator of the
Outside Directors Plan.
"Articles of Incorporation" means the Second Amended and Restated Articles
of Incorporation of ATLANTIC, as amended.
"ATLANTIC" means, as the context may require, Security Capital Atlantic
Incorporated, a Maryland corporation formed in April 1994 and/or its
predecessor and its subsidiaries.
"ATLANTIC Development Services" means ATLANTIC Development Services
Incorporated, a Maryland corporation.
"Board" means ATLANTIC's Board of Directors.
"Capital Markets Group" means Security Capital Markets Group Incorporated,
an affiliate of the REIT Manager and a registered broker-dealer.
"Charitable Beneficiary" means an organization or organizations described in
Sections 170(b)(1)(A) and 170(c) of the Code and identified by the Board as
the beneficiary or beneficiaries of the Excess Shares trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Control Share acquisition" means, under Maryland law, the acquisition of
Control Shares, subject to certain exceptions.
"Control Shares" means, under Maryland law, voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority of all voting power.
"Distribution" means the distribution by ATLANTIC of the Homestead common
stock and warrants received by ATLANTIC pursuant to the Merger Agreement to
the holders of Shares on the Distribution Record Date.
"Distribution Record Date" means the record date established by ATLANTIC for
determining the holders of Shares who are entitled to receive the
Distribution.
"Excess Shares" means Shares that would result in a person owning Shares in
excess of the Ownership Limit or cause ATLANTIC to become "closely held" under
Section 856(h) of the Code, unless acquired in a permitted transfer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FHA" means the Fair Housing Amendments Act of 1988.
98
<PAGE>
"Final Expiration Date" means March 12, 2006.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FNMA" means the Federal National Mortgage Association.
"Funds from operations" means net income (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation, and after adjustments for unconsolidated partnerships and
joint ventures. Adjustments for unconsolidated partnerships and joint ventures
are calculated to reflect funds from operations on the same basis.
"GAAP" means generally accepted accounting principles.
"Historical Financial Results" means selected financial information on an
historical basis for ATLANTIC as of and for each of the years ended December
31, 1995 and December 31, 1994 and the period ended December 31, 1993.
"Homestead" means Homestead Village Properties Incorporated, a Maryland
corporation.
"In planning" means developments owned or under control by ATLANTIC (land
which is under control through contingent contract or letter of intent) with
construction anticipated to commence within 12 months.
"Independent Director" means a Director of ATLANTIC who (i) is not
affiliated, directly or indirectly, with the REIT Manager, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or service as an officer or director of, the
REIT Manager or a business entity which is an affiliate of the REIT Manager,
(ii) is not serving as a trustee or director for more than three real estate
investment trusts organized by a sponsor of ATLANTIC and (iii) performs no
other services for ATLANTIC, except as Director.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland corporation's shares or an affiliate of a
Maryland corporation who, at any time within the two-year period prior to the
date in question, was the beneficial owner of 10% or more of the voting power
of the then-outstanding voting stock of the corporation.
"Investor Agreement" means the Investor Agreement dated October 28, 1993
between SCG and ATLANTIC.
"IRS" means the Internal Revenue Service.
"Laing" means Laing Properties, Inc.
"Merger Agreement" means the Merger and Distribution Agreement, dated as of
May 21, 1996, among PTR, ATLANTIC, SCG and Homestead.
"Merger Closing Date" means the date of closing of the Mergers.
"Mergers" means the series of merger transactions pursuant to which each of
ATLANTIC, PTR and SCG will contribute all of their respective assets related
to Homestead Village properties to Homestead.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means the New York Stock Exchange, Inc.
99
<PAGE>
"Offering" means the offering of Shares to the public by ATLANTIC pursuant
to this Prospectus.
"Options" means options to acquire Shares granted pursuant to the Outside
Directors Plan.
"Outside Directors" means the Directors of ATLANTIC who are not employees or
officers of ATLANTIC or SCG or any of its affiliates.
"Outside Directors Plan" means the Security Capital Atlantic Incorporated
Share Option Plan for Outside Directors.
"Ownership Limit" means 9.8% of the number or value of the issued and
outstanding Shares.
"Participating Preferred Shares" means the shares of Series A Junior
Participating Preferred Stock, $0.01 par value per share.
"Pro Forma Financial Results" means selected financial information on a pro
forma basis for ATLANTIC for the year ended December 31, 1995.
"PTR" means Security Capital Pacific Trust, a publicly traded REIT managed
by an affiliate of SCG.
"Purchase Price" means $40 per one one-hundredth of a Participating
Preferred Share.
"Purchase Right" means a preferred share purchase right entitling the
holder, under certain circumstances, to purchase Participating Preferred
Shares or Shares pursuant to the Rights Agreement.
"Recognition Period" means the 10-year period beginning on the first day of
the first taxable year for which ATLANTIC qualifies as a REIT.
"Redemption Price" means $0.01 per Purchase Right.
"REIT" means a real estate investment trust as defined under the Code.
"REIT Management Agreement" means the REIT management agreement pursuant to
which the REIT Manager assumed the day-to-day management of ATLANTIC.
"REIT Manager" or "REIT Management" means Security Capital (Atlantic)
Incorporated, a wholly owned subsidiary of SCG.
"Representatives" means Goldman, Sachs & Co., as representatives of the
Underwriters.
"Rights Agreement" means the Rights Agreement governing the terms upon which
the Purchase Rights will become exercisable.
"Rights Distribution Date" means the earlier to occur of (i) 10 days
following a public announcement that a person has become an Acquiring Person
or (ii) 15 business days (or such later date as may be determined by action of
the Board prior to such time as any person or group of affiliated persons
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of persons
(excluding certain affiliates of ATLANTIC and certain current shareholders) of
25% or more of the outstanding Shares.
"Rights Record Date" means March 12, 1996.
100
<PAGE>
"SCG Realty Services" means SCG Realty Services Atlantic Incorporated, an
affiliate of the REIT Manager.
"SCG" means Security Capital Group Incorporated, ATLANTIC's principal
shareholder and the owner of the REIT Manager.
"SCI" means Security Capital Industrial Trust, a publicly traded REIT
managed by an affiliate of SCG.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Capital Investment Research" means Security Capital Investment
Research Incorporated, an affiliate of the REIT Manager.
"Shareholders' Agreement" means the Shareholders' Agreement dated May 12,
1994 among ATLANTIC, SCG and Laing.
"Shares" means the shares of common stock, par value $.01 per share, of
ATLANTIC.
"Stabilized" means that renovation, repositioning, new management and new
marketing programs (or development and marketing in the case of newly-
developed properties) have been completed and in effect for a sufficient
period of time (but in no event longer than 12 months, except for major
rehabilitations) to achieve 93% occupancy at market rents. Prior to being
"stabilized", a property is considered "pre-stabilized".
"Treasury" means the United States Treasury Department.
"UBTI" means unrelated business taxable income as defined under the Code.
"Underwriting Agreement" means the Underwriting Agreement between ATLANTIC
and the Underwriters.
"Underwriters" means the Underwriters named in the Prospectus.
101
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL:
Condensed Balance Sheets as of March 31, 1996 and December 31, 1995..... F-2
Condensed Statements of Earnings for the three-month periods ended March
31, 1996 and 1995...................................................... F-3
Condensed Statements of Cash Flows for the three-month periods ended
March 31, 1996 and 1995................................................ F-4
Notes to Condensed Financial Statements................................. F-5
Report of Independent Certified Public Accountants...................... F-11
Balance Sheets as of December 31, 1995 and 1994......................... F-12
Statements of Earnings for the years ended December 31, 1995, 1994, and
1993................................................................... F-13
Statements of Shareholders' Equity for the years ended December 31,
1993, 1994, and 1995................................................... F-14
Statements of Cash Flows for the years ended December 31, 1995, 1994,
and 1993............................................................... F-15
Notes to Financial Statements........................................... F-16
Schedule III--Real Estate and Accumulated Depreciation.................. F-25
Note to Schedule III.................................................... F-29
PRO FORMA (UNAUDITED):
Summary of Pro Forma adjustments........................................ F-30
Pro Forma Balance Sheet as of March 31, 1996............................ F-31
Pro Forma Statement of Earnings for the three-month period ended March
31, 1996............................................................... F-32
Pro Forma Statement of Earnings for the year ended December 31, 1995.... F-33
Notes to Pro Forma Financial Statements................................. F-34
COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES
PURSUANT TO RULE 3-14:
Report of Independent Certified Public Accountants...................... F-38
Group A Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1994......... F-39
Notes to Group A Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-40
Report of Independent Certified Public Accountants...................... F-42
Group B Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the period from January 1, 1995 through
September 30, 1995..................................................... F-43
Notes to Group B Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-44
Report of Independent Certified Public Accountants...................... F-46
Group C Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the Year ended December 31, 1995......... F-47
Notes to Group C Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-48
</TABLE>
F-1
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate........................................... $936,129 $888,928
Less accumulated depreciation......................... 28,364 23,561
-------- --------
Net investments in real estate.................... 907,765 865,367
Cash and cash equivalents............................. 6,553 6,494
Other assets.......................................... 15,000 13,963
-------- --------
Total assets...................................... $929,318 $885,824
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit...................................... $226,000 $190,000
Mortgages payable................................... 123,291 118,524
Accounts payable.................................... 16,267 11,030
Accrued expenses and other liabilities.............. 11,409 9,332
-------- --------
Total liabilities................................. 376,967 328,886
-------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 55,569,635
issued and
outstanding at March 31, 1996 and 55,525,635 issued
and outstanding at December 31, 1995).............. 556 555
Additional paid-in capital.......................... 576,976 576,547
Distributions in excess of net earnings............. (25,181) (20,164)
-------- --------
Total shareholders' equity........................ 552,351 556,938
-------- --------
Total liabilities and shareholders' equity........ $929,318 $885,824
======== ========
</TABLE>
See accompanying notes to the condensed financial statements.
F-2
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-
MONTH PERIODS
ENDED MARCH 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
Rental income................................................. $30,809 $22,952
Interest income............................................... 72 45
------- -------
30,881 22,997
------- -------
Expenses:
Rental expenses, excluding real estate taxes.................. 9,632 6,488
Real estate taxes............................................. 3,104 2,430
Depreciation.................................................. 4,804 3,605
Interest...................................................... 4,342 4,677
General and administrative, including REIT management fee..... 2,310 1,620
Other......................................................... 39 2
------- -------
24,231 18,822
------- -------
Net earnings.................................................... $ 6,650 $ 4,175
======= =======
Weighted average shares outstanding........................... 55,555 37,133
======= =======
Net earnings per share........................................ $ 0.12 $ 0.11
======= =======
</TABLE>
See accompanying notes to the condensed financial statements.
F-3
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings............................................ $ 6,650 $ 4,175
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization......................... 5,236 3,948
Increase in accounts payable.......................... 5,237 1,157
Increase in accrued expenses and other liabilities.... 2,076 1,991
(Decrease) increase in other assets................... (1,188) 1,683
--------- ---------
Net cash flow provided by operating activities...... 18,011 12,954
--------- ---------
INVESTING ACTIVITIES:
Net cash flow used in real estate investing activities.. (47,201) (39,177)
--------- ---------
FINANCING ACTIVITIES:
Repurchase of shares.................................... -- (55,000)
Proceeds from sale of shares............................ 430 59,970
Proceeds from line of credit............................ 42,000 32,000
Proceeds from mortgage debt............................. 5,000 --
Payments on line of credit.............................. (6,000) (4,000)
Distributions paid...................................... (11,667) (7,426)
Debt issuance costs incurred............................ (281) (808)
Regularly scheduled principal payments on mortgages
payable................................................ (233) (157)
--------- ---------
Net cash flow provided by financing activities...... 29,249 24,579
--------- ---------
Net increase (decrease) in cash and cash equivalents...... 59 (1,644)
Cash and cash equivalents, beginning of period............ 6,494 6,262
--------- ---------
Cash and cash equivalents, end of period.................. $ 6,553 $ 4,618
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assumption of mortgages payable upon purchase of
multifamily properties................................. $ -- $ 8,127
</TABLE>
See accompanying notes to the condensed financial statements.
F-4
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1--GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of March 31, 1996 and for the three-month periods ended March
31, 1996 and 1995 are unaudited and certain information and footnote
disclosures normally included in financial statements have been omitted. While
management of ATLANTIC believes that the disclosures presented are adequate,
these interim financial statements should be read in conjunction with the
financial statements and notes included in ATLANTIC's financial statements for
the years ended December 31, 1995 and 1994 and the period October 26, 1993
(inception) through December 31, 1993.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments for a fair presentation of ATLANTIC's
financial statements for the interim periods presented. The results of
operations for the three-month periods ended March 31, 1996 and 1995 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of these financial statements required the use of certain
estimates by management in determining ATLANTIC's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
NOTE 2--REAL ESTATE
Investments in Real Estate
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating properties:
Acquired..................... $760,874 15,355 $757,986 15,355
Developed.................... 38,897 804 23,097 468
-------- ------ -------- ------
799,771 16,159 781,083 15,823
Developments under construc-
tion.......................... 112,429 3,603 95,293 3,095
Developments in planning:
Owned........................ 22,027 2,542(1) 11,258 1,504(1)
Under control (2)............ -- 2,962(1) -- 3,054(1)
-------- ------ -------- ------
22,027 5,504 11,258 4,558
Land held for future develop-
ment.......................... 1,902 -- 1,294 --
-------- ------ -------- ------
Total...................... $936,129 25,266 $888,928 23,476
======== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based upon management's estimates.
(2) ATLANTIC's investment as of March 31, 1996 and December 31, 1995 for
developments under control was $1.7 million and $2.0 million,
respectively, and is reflected in the "Other assets" caption of ATLANTIC's
balance sheets.
At March 31, 1996, ATLANTIC had unfunded commitments for developments under
construction of $97.3 million, for a total completed construction cost of
$209.7 million. Costs for developments in planning shown above are primarily
for land acquisitions.
F-5
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The change in investments in real estate, at cost, for the three-month
period ended March 31, 1996 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1996...................................... $888,928
Renovation expenditures......................................... 2,229
Capital improvements............................................ 586
Development expenditures, including land acquisitions........... 44,386
--------
Balance at March 31, 1996....................................... $936,129
========
</TABLE>
Third Party Owner--Developments
To enhance its flexibility in developing and acquiring multifamily
properties, ATLANTIC has and will enter into presale agreements with third
party owner-developers to acquire properties developed by such owner-
developers where the developments meet ATLANTIC's investment criteria.
ATLANTIC has and will fund such developments through development loans to such
owner-developers. In addition, to provide greater flexibility for the use of
land acquired for development and to dispose of excess parcels, ATLANTIC plans
to make mortgage loans to Atlantic Development Services Incorporated
("Atlantic Development Services") to purchase land for development. ATLANTIC
owns all of the preferred stock of Atlantic Development Services, which
entitles ATLANTIC to substantially all of the net operating cash flow (95%) of
Atlantic Development Services. All of the common stock of Atlantic Development
Services is owned by an unaffiliated trust. The common stock is entitled to
receive the remaining 5% of net operating cash flow. As of March 31, 1996 the
outstanding balance of development and mortgage loans made by ATLANTIC to
third party owner-developers and Atlantic Development Services aggregated
$13,157,000 and none, respectively. The activities of Atlantic Development
Services and development loans are consolidated with ATLANTIC's activities and
all intercompany transactions have been eliminated in consolidation.
Gains and Losses from Sales or Impairments of Real Estate
ATLANTIC's real estate investments have been made with a view to effective
long-term operation and ownership. Based upon ATLANTIC's market research and
in an effort to optimize its portfolio composition, ATLANTIC may from time to
time seek to dispose of assets that in management's view do not meet
ATLANTIC's long-term investment criteria and redeploy the proceeds therefrom,
preferably through like-kind exchanges, into assets that are more consistent
with ATLANTIC's investment objectives.
On April 9, 1996, ATLANTIC sold a 358-unit middle-income property as part of
a tax-deferred exchange. This property accounted for $255,000 of net operating
income during the three-month period ended March 31, 1996. A gain of
approximately $670,000 on this disposition will be recognized in the second
quarter. The proceeds from this sale were held in escrow until April 22, 1996
when these funds were used to acquire a 350-unit moderate-income operating
property. Including this property, ATLANTIC acquired a total of three
operating properties aggregating 786 units at a cost of $33.4 million in April
1996.
ATLANTIC adopted 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, effective January 1, 1996. SFAS No. 121 requires that long-
lived assets, including real estate assets, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. SFAS No. 121 also requires that long-lived
assets to be disposed of be reported at the lower of carrying amount or fair
value less cost to sell. No provisions for possible losses were required as a
result of adopting this new accounting standard and real estate is carried at
cost.
F-6
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--LINE OF CREDIT AND MORTGAGES PAYABLE
At March 31, 1996, ATLANTIC had $226 million outstanding on its $300 million
revolving line of credit with Morgan Guaranty Trust Company of New York, as
agent for a group of lenders ("MGT"). The line of credit was increased to $350
million on June 27, 1996. Borrowings bear interest at prime, or at ATLANTIC's
option, LIBOR plus 1.50% (reduced from 1.75% on March 13, 1996) or the
certificate of deposit rate (as defined) plus 1.625% (reduced from 1.875% on
March 13, 1996). Additionally, there is a commitment fee of .1875% per annum
on the average unfunded line of credit balance. The line is collateralized by
multifamily properties having an aggregate undepreciated cost of $489,491,000
at March 31, 1996.
The MGT line of credit matures June 1998 and may be extended for one year
with the approval of MGT and other participating lenders. All debt incurrences
are subject to certain covenants, as set forth in the loan agreement. ATLANTIC
is in compliance with all such convenants.
Mortgages Payable
Mortgages payable consisted of the following at March 31, 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PROPERTY INTEREST RATE MATURITY DATE PERIODIC PAYMENT TERMS PRINCIPAL BALANCE
-------- ------------- ------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cahaba Forest II...... 7.125% 03/01/29 fully amortizing $ 8,067
Country Place Village
I.................... 7.750% 11/01/00 (1) 2,030
Longwood Villas....... 8.750% 04/01/24 fully amortizing 6,388
--------
16,485
--------
Tax exempt fixed rate or
variable rate subject
to interest rate
protection
agreements(2):
Cameron Brook......... (3) 06/01/25 interest only 19,500
Cameron Station....... 6.0% 06/01/07 interest only 14,500
Clairmont Crest....... (3) 06/01/25 interest only 11,600
Forestwood............ (3) 06/01/25 interest only 11,485
Foxbridge............. (3) 06/01/25 interest only 10,400
The Greens............ (3) 06/01/25 interest only 10,400
Parrot's Landing...... (3) 06/01/25 interest only 15,835
Sun Pointe Cove....... (3) 06/01/25 interest only 8,500
WintersCreek.......... (3) 06/01/25 interest only 5,000
Less amounts held in
principal reserve
fund(4)................ (414)
--------
106,806
--------
$123,291
========
Total annual weighted
average interest rate.. 6.73%
========
</TABLE>
F-7
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) Interest and principal payments due monthly; balloon payment of $1,845,000
due at maturity.
(2) These properties, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly-owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(3) Interest rate is fixed through interest rate protection agreements
executed in conjunction with the credit enhancement agreement with the
Federal National Mortgage Association discussed below.
(4) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to the tax exempt bond issues. This
credit enhancement agreement requires ATLANTIC to make monthly payments on
each mortgage, based upon a thirty-year amortization, into a principal
reserve account.
ATLANTIC has effectively mitigated its variable interest rate exposure by
entering into interest rate protection agreements covering eight variable rate
bond issues included in ATLANTIC's credit enhancement agreement with the
Federal National Mortgage Association ("Fannie Mae"). Under these interest
rate protection agreements, ATLANTIC pays and receives interest on the
aggregate principal amount of the underlying bonds outstanding, net of the
amount held in the principal reserve account. These agreements are summarized
as follows:
<TABLE>
<CAPTION>
AMOUNT OF BONDS TERM FIXED RATE ISSUER
--------------- -------- ---------- ------
<S> <C> <C> <C>
$23.1 million........... 7 years 6.31% General Re Financial Products Corporation
$64.6 million........... 10 years 6.59% Morgan Guaranty Trust Company of New York
$5.0 million............ 10 years 4.82% Morgan Guaranty Trust Company of New York
</TABLE>
To the extent the deposits in the principal reserve account have not been
used to redeem any of the outstanding bonds, ATLANTIC pays interest at the
variable rates as provided by the mortgage agreements on that portion of bonds
outstanding which is equivalent to the balance in the principal reserve fund.
Real estate with an aggregate undepreciated cost at March 31, 1996 of
$23,429,000 and $180,080,000 serves as collateral for the conventional
mortgages payable and the tax exempt mortgages, respectively. Based on
prevailing market borrowing rates, the fair value of the mortgages payable was
not materially different from the book value at March 31, 1996.
The change in mortgages payable for the three-month period ended March 31,
1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balances at January 1, 1996..................................... $118,524
Mortgage proceeds............................................... 5,000
Regularly scheduled principal payments.......................... (233)
--------
Balances at March 31, 1996...................................... $123,291
========
</TABLE>
In connection with an operating property acquisition on April 10, 1996,
ATLANTIC assumed a $6 million conventional mortgage loan which bears interest
at a fixed rate of 8%. The mortgage loan provides for monthly principal and
interest payments of $44,026 through maturity on July 10, 2003, at which time
a balloon payment of $5,556,000 will be due.
At March 31, 1996 ATLANTIC was in compliance with all debt covenants.
F-8
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid in cash on all outstanding debt for the three months ended
March 31, 1996 was $6,381,000 including $2,036,000 of interest capitalized
during construction. Interest paid in cash on all outstanding debt for the
three months ended March 31, 1995 was $5,386,000, including $610,000 of
interest capitalized during construction.
Amortization of loan costs included in interest expense for the three months
ended March 31, 1996 and 1995 was $432,000 and $343,000, respectively.
NOTE 4--DISTRIBUTIONS AND FUNDS FROM OPERATIONS
ATLANTIC's current policy is to pay distributions to shareholders based upon
funds from operations and aggregating annually at least 95% of its taxable
income. Funds from operations 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.
In January 1996, ATLANTIC adopted the National Association of Real Estate
Investment Trusts' (NAREIT) new definition of funds from operations. Under
this new definition, loan cost amortization is not added back to net earnings
in determining funds from operations. For comparability, funds from operations
for the three months ended March 31, 1995 gives effect to this change in
definition as if it had been applied since January 1, 1995.
Funds from operations for three-month periods ended March 31, 1996 and 1995
were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net earnings............................................. $ 6,650 $ 4,175
Add depreciation......................................... 4,804 3,605
------- -------
Funds from operations.................................... $11,454 $ 7,780
======= =======
Weighted average shares outstanding...................... 55,555 37,133
======= =======
</TABLE>
On December 19, 1995, the Board of Directors of ATLANTIC set an annualized
distribution level of $.84 per share in 1996. On March 28, 1996, ATLANTIC made
a quarterly distribution of $0.21 per share.
NOTE 5--SHAREHOLDERS' EQUITY
Capital Offerings
ATLANTIC began a private offering in the fourth quarter of 1995. In
connection with this offering ATLANTIC sold 11,391,030 shares; 8,891,030
shares at $11.50 per share and 2,500,000 shares at $11.568 per share, for an
aggregate total of $130.7 million through December 31, 1995. In consideration
for Security Capital Group Incorporated's ("SCG") purchase of $50 million of
shares in this offering, and to permit greater participation by other
investors in this offering, ATLANTIC assumed SCG's Put Obligation and
purchased $28.9 million of ATLANTIC shares owned by the holder of the Put
Obligation; 2,500,000 shares at $11.568 per share.
During the three-month period ended March 31, 1996, ATLANTIC sold an
additional 44,000 shares in this private placement. Subsequent to March 31,
1996, ATLANTIC raised an additional $48.4 million through the sale of
4,210,870 shares.
F-9
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Purchase Rights
On March 12, 1996, the Board of Directors declared and paid a dividend of
one Purchase Right for each common share outstanding at the close of business
on March 12, 1996 to the holders of ATLANTIC's common shares on that date.
Holders of additional common shares after March 12, 1996 and prior to the
expiration of the rights on March 12, 2006 will be entitled to one Purchase
Right for each such additional common share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC one-hundredth of non-redeemable Series A Junior
Participating Preferred Stock of ATLANTIC at a price of $40. At this time,
ATLANTIC has no Series A Junior Participating Preferred Stock outstanding.
NOTE 6--REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective June 30, 1995, ATLANTIC entered into an amended and restated REIT
Management agreement with Security Capital (Atlantic) Incorporated (the "REIT
Manager"), to provide Management services to ATLANTIC. The REIT Manager is a
subsidiary of SCG, which owns 71.5% of ATLANTIC's common shares. The REIT
Management fee was $2,123,000 and $1,515,000 for the three months ended March
31, 1996 and 1995, respectively.
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") began
managing properties for ATLANTIC on May 12, 1994 and currently manages
approximately 80% of ATLANTIC's multifamily properties. For the three months
ended March 31, 1996 and 1995, ATLANTIC paid SCG Realty Services aggregate
fees of $920,000 and $717,000, respectively. SCG owns 100% of SCG Realty
Services voting shares. Rates for services performed by SCG Realty Services
are subject to approval by ATLANTIC's independent Directors and are at rates
prevailing in the markets in which ATLANTIC operates.
F-10
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 1995 and 1994, and the related statements of
earnings, shareholders' equity, and cash flows for the years ended December
31, 1995 and 1994 and the period October 26, 1993 (inception) through December
31, 1993. Our audits also included the schedule of real estate and accumulated
depreciation as of December 31, 1995. These financial statements and schedule
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, 1995 and 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994 and the
period October 26, 1993 (inception) through December 31, 1993, in conformity
with generally accepted accounting principles. Also, in our opinion, the
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
West Palm Beach, Florida
January 26, 1996 except for
Note 3, as to which the date
is February 5, 1996
F-11
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Real estate................................................ $888,928 $631,260
Less accumulated depreciation.............................. 23,561 8,798
-------- --------
Net investments in real estate......................... 865,367 622,462
Cash and cash equivalents.................................. 6,494 6,262
Other assets............................................... 13,963 9,122
-------- --------
Total assets........................................... $885,824 $637,846
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit........................................... $190,000 $153,000
Mortgages payable........................................ 118,524 107,347
Accounts payable......................................... 11,030 4,590
Accrued expenses and other liabilities................... 9,332 6,279
-------- --------
Total liabilities...................................... 328,886 271,216
-------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 55,525,635 issued
and outstanding at December 31, 1995 and 37,133,150
issued and outstanding at December 31, 1994)............ 555 371
Additional paid-in capital............................... 576,547 370,943
Distributions in excess of net earnings.................. (20,164) (4,684)
-------- --------
Total shareholders' equity............................. 556,938 366,630
-------- --------
Total liabilities and shareholders' equity............. $885,824 $637,846
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
(FROM
INCEPTION)
1995 1994 1993
-------- ------- ----------
<S> <C> <C> <C>
Revenues:
Rental income.................................... $103,634 $55,071 $ 156
Interest income.................................. 245 149 3
-------- ------- -----
103,879 55,220 159
-------- ------- -----
Expenses:
Rental expenses.................................. 31,880 17,457 75
Real estate taxes................................ 9,570 5,595 --
Depreciation..................................... 15,925 8,770 28
Interest......................................... 19,042 9,240 --
General and administrative, including REIT man-
agement fee..................................... 7,569 3,937 13
Other............................................ 254 295 5
-------- ------- -----
84,240 45,294 121
-------- ------- -----
Net earnings....................................... $ 19,639 $ 9,926 $ 38
======== ======= =====
Weighted average shares outstanding................ 43,889 24,454 572
======== ======= =====
Net earnings per share............................. $ 0.45 $ 0.41 $0.07
======== ======= =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON DISTRIBUTIONS
SHARES ADDITIONAL IN EXCESS
AT PAR PAID-IN OF NET
VALUE CAPITAL EARNINGS TOTAL
------ ---------- ------------- --------
<S> <C> <C> <C> <C>
Balances at inception (October 26,
1993)............................... $ -- $ -- $ -- $ --
Net earnings....................... -- -- 38 38
Shares issued...................... 32 31,602 -- 31,634
----- -------- -------- --------
Balances at December 31, 1993........ 32 31,602 38 31,672
Net earnings....................... -- -- 9,926 9,926
Distributions...................... -- -- (14,648) (14,648)
Shares issued...................... 339 339,341 -- 339,680
----- -------- -------- --------
Balances at December 31, 1994........ 371 370,943 (4,684) 366,630
Net earnings....................... -- -- 19,639 19,639
Distributions...................... -- -- (35,119) (35,119)
Shares repurchased................. (75) (83,845) -- (83,920)
Shares issued...................... 259 289,449 -- 289,708
----- -------- -------- --------
Balances at December 31, 1995........ $ 555 $576,547 $(20,164) $556,938
===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
(FROM
INCEPTION)
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings................................. $ 19,639 $ 9,926 $ 38
Adjustments to reconcile net earnings to net
cash flow provided (used) by operating
activities:
Depreciation and amortization.............. 17,496 9,480 28
Increase in accounts payable............... 6,440 4,550 39
Increase in accrued expenses and other
liabilities............................... 3,053 6,141 139
Increase in other assets................... (1,393) (3,892) (736)
--------- --------- --------
Net cash flow provided (used) by
operating activities.................... 45,235 26,205 (492)
--------- --------- --------
INVESTING ACTIVITIES:
Real estate investments...................... (264,511) (392,718) (31,005)
Disposition of investment properties, net.... 23,859 -- --
--------- --------- --------
Net cash flow used in real estate
investing activities.................... (240,652) (392,718) (31,005)
--------- --------- --------
FINANCING ACTIVITIES:
Repurchase of shares......................... (83,920) -- --
Proceeds from sale of shares................. 289,708 239,680 31,634
Proceeds from line of credit................. 270,000 166,000 --
Payments on line of credit................... (233,000) (13,000) --
Distributions paid........................... (35,119) (14,648) --
Debt issuance costs incurred................. (5,019) (5,204) --
Principal payments at maturity............... (6,378) -- --
Regularly scheduled principal payments on
mortgages payable........................... (623) (190) --
--------- --------- --------
Net cash flow provided by financing
activities.............................. 195,649 372,638 31,634
--------- --------- --------
Net increase in cash and cash equivalents...... 232 6,125 137
Cash and cash equivalents, beginning of period. 6,262 137 --
--------- --------- --------
Cash and cash equivalents, end of period....... $ 6,494 $ 6,262 $ 137
========= ========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of shares as partial consideration
for the purchase of multifamily properties.. $ -- $ 100,000 $ --
Assumption of mortgages payable upon purchase
of multifamily properties................... 24,678 107,537 --
Reduction to mortgages payable upon
disposition of multifamily property......... (6,500) -- --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Security Capital Atlantic Incorporated ("ATLANTIC") is an equity real estate
investment trust organized as a corporation under the laws of the state of
Maryland, which owns, acquires, develops and operates income-producing
multifamily properties in the southeastern United States.
ATLANTIC was formed on October 26, 1993 (inception) and, accordingly, the
1993 statements of earnings and cash flows reflect the results of operations
and cash flows for the period from inception through December 31, 1993.
Principles of Financial Presentation
The accounts of ATLANTIC and its wholly-owned subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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.
Cash and Cash Equivalents
ATLANTIC 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 is carried at cost, which is not in excess of net realizable
value. Costs directly related to the acquisition, renovation or development of
real estate are capitalized. Costs incurred in connection with the pursuit of
unsuccessful land or property acquisitions 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 economic useful lives of depreciable
property on a straight-line basis. Properties are depreciated principally over
the following periods:
<TABLE>
<S> <C>
Buildings and improvements.................................... 20-40 years
Furnishings and other......................................... 2-10 years
</TABLE>
Interest
Periodically, ATLANTIC enters into interest rate protection agreements to
manage its variable interest rate exposure. Interest rate protection
agreements are agreements to exchange interest rate payment streams based on a
notional principal amount. The net rate differentials to be paid or received
are recorded currently as adjustments to interest expense in calculating net
earnings and funds from operations. ATLANTIC is exposed to credit loss in the
event of nonperformance by the other parties to the interest rate protection
agreements. However, ATLANTIC does not anticipate nonperformance by the
counterparties.
F-16
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1995, 1994, and 1993, the total interest paid in cash on all
outstanding debt was $22,178,000, $9,120,000, and zero, respectively.
ATLANTIC capitalizes interest as part of the cost of real estate projects
under development. Interest capitalized during 1995, 1994, and 1993 aggregated
$4,404,000, $793,000, and zero, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of common 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 renewal term. Amortization of deferred
financing costs included in interest expense for the years ended December 31,
1995, 1994, and 1993 totaled $1,568,000, $707,000, and zero, respectively.
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting
for financial reporting and tax purposes. A provision for possible loss is
made when collection of receivables is considered doubtful.
Federal Income Taxes
ATLANTIC has made an election to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. ATLANTIC believes it
qualifies as a real estate investment trust. Accordingly, no provisions have
been made for federal income taxes in the accompanying financial statements.
Per Share Data
Per share data is computed based upon the weighted average number of common
shares, par value $.01 per share, outstanding during the period.
Reclassifications
Certain of the 1994 financial statements and notes to financial statements
amounts have been reclassified to conform to the 1995 presentation.
NOTE 2--REAL ESTATE
Investments in Real Estate
Investments in real estate, at cost, for the years ended December 31, 1995
and 1994, were as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating properties:
Acquired......................... $757,986 15,355 $600,880 11,990
Developed........................ 23,097 468 -- --
-------- ------ -------- ------
781,083 15,823 600,880 11,990
Developments under construction.... 95,293 3,095 20,741 1,212
Developments in planning:
Owned............................ 11,258 1,504(1) 9,639 764(1)
Under control(2)................. -- 3,054(1) -- 1,094(1)
-------- ------ -------- ------
11,258 4,558 9,639 1,858
Land held for future development... 1,294 -- -- --
-------- ------ -------- ------
Total............................ $888,928 23,476 $631,260 15,060
======== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based upon management's estimates and is unaudited.
(2) ATLANTIC's investment as of December 31, 1995 and 1994 for developments
under control was $2.0 million and $1.8 million, respectively, and is
reflected in the "Other assets" caption of ATLANTIC's balance sheets.
F-17
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, ATLANTIC had unfunded commitments for developments
under construction of $86.6 million, for a total completed construction cost
of $181.9 million. Costs for developments in planning shown above are
primarily for land acquisitions.
During January 1996, ATLANTIC acquired two of the land parcels included in
"Developments in planning-Under control" as of December 31, 1995. These two
developments represent an estimated 469 units with an aggregate estimated
development cost of $23.8 million.
The change in investments in real estate, at cost, for the years ended
December 31, 1995, 1994, and 1993 consisted of the following (in thousands):
<TABLE>
<CAPTION>
(FROM
INCEPTION)
1995 1994 1993
-------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $631,260 $ 31,005 $ --
Acquisitions and renovation expenditures... 187,267 571,288 29,591
Development expenditures, including land
acquisitions.............................. 101,335 28,967 1,414
Dispositions............................... (30,934) -- --
-------- -------- -------
Ending balances............................ $888,928 $631,260 $31,005
======== ======== =======
</TABLE>
Gains and Losses from Sales of Real Estate
ATLANTIC develops and acquires multifamily properties with a view to
effective long term operation and ownership. Based upon ATLANTIC's market
research and in an effort to optimize its portfolio allocation, ATLANTIC may
from time to time seek to dispose of assets that in management's view do not
meet ATLANTIC's long term investment criteria and redeploy the proceeds
therefrom, preferably through like kind exchanges, into assets that it
believes provide better long term growth opportunities. ATLANTIC disposed of
two properties in the fourth quarter of 1995. The proceeds from these
dispositions were not materially different from the book value of the assets
on the date of disposition.
Properties are periodically evaluated for impairment and provisions for
possible losses are made if required. Statement of Financial Accounting
Standards No.121, Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of, will be adopted by ATLANTIC, as required,
effective January 1, 1996. In the opinion of ATLANTIC's management, the
adoption of this accounting standard will not have a material impact on the
financial statements as of the date of adoption.
NOTE 3--LINE OF CREDIT AND MORTGAGES PAYABLE
Line of Credit
ATLANTIC has a $300 million revolving line of credit with Morgan Guaranty
Trust Company of New York, as agent for a group of lenders ("MGT"). Borrowings
bear interest at prime, or at ATLANTIC's option, LIBOR plus 1.75% or the
certificate of deposit rate (as defined) plus 1.875%. Additionally, there is a
commitment fee of .1875% per annum on the average unfunded line of credit
balance. The line is collateralized by multifamily properties having an
aggregate undepreciated cost of $487,790,000 at December 31, 1995. Subsequent
to December 31, 1995, the line of credit agreement was amended to reduce the
interest on borrowings to LIBOR plus 1.50% or the certificate of deposit rate
(as defined) plus 1.625%.
The MGT line of credit matures June 1997 and may be extended for one year
with the approval of MGT and other participating lenders. All debt incurrences
are subject to certain covenants, as set forth in the loan agreement. ATLANTIC
is in compliance with all such covenants.
F-18
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of ATLANTIC's line of credit borrowings for the years ended
December 31, 1995 and 1994 (none in 1993) is as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total line of credit.................................. $300,000 $225,000
Borrowings outstanding at December 31................. 190,000 153,000
Weighted average daily borrowings..................... 178,318 127,957
Maximum borrowings outstanding at any month end....... 252,000 153,000
Weighted average daily interest rate.................. 7.92% 7.34%
Weighted average interest rate at December 31......... 7.73% 8.17%
</TABLE>
In August 1995, ATLANTIC entered into an interest rate protection agreement
with Goldman Sachs Capital Markets, L.P. covering $100 million of borrowings
under the line of credit. Under this one-year agreement which became effective
on February 5, 1996, ATLANTIC pays a fixed rate of interest of 7.71%. By
entering into this interest rate protection agreement, ATLANTIC has
effectively mitigated a significant portion of the variable interest rate
exposure associated with the line of credit.
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1995 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
PROPERTY RATE DATE TERMS BALANCE
-------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cahaba Forest II............ 7.125% 03/01/29 fully amortizing $ 8,083
Country Place Village I..... 7.750% 11/01/00 (1) 2,038
Longwood Villas............. 8.750% 04/01/24 fully amortizing 6,402
--------
16,523
--------
Tax exempt fixed rate or
variable rate subject to
interest rate protection
agreements(2)(3):
Cameron Brook............... (4) 06/01/25 interest only 19,500
Cameron Station............. 6.0% 06/01/07 interest only 14,500
Clairmont Crest............. (4) 06/01/25 interest only 11,600
Forestwood.................. (4) 06/01/25 interest only 11,485
Foxbridge................... (4) 06/01/25 interest only 10,400
The Greens.................. (4) 06/01/25 interest only 10,400
Parrot's Landing............ (4) 06/01/25 interest only 15,835
Sun Pointe Cove............. (4) 06/01/25 interest only 8,500
Less amounts held in
principal reserve fund(3).. (219)
--------
102,001
--------
$118,524
========
Total annual weighted aver-
age
interest rate.............. 6.67%
========
</TABLE>
F-19
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) Interest and principal payments due monthly; balloon payment of $1,845,000
due at maturity.
(2) These properties, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly-owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(3) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to eight tax exempt bond issues.
This credit enhancement agreement requires ATLANTIC to make monthly
payments on each mortgage, based upon a thirty-year amortization, into a
principal reserve account.
(4) Interest rate is fixed through interest rate protection agreements
executed in conjunction with the credit enhancement agreement with the
Federal National Mortgage Association discussed below.
ATLANTIC has effectively mitigated its variable interest rate exposure by
entering into interest rate protection agreements covering seven variable rate
bond issues included in ATLANTIC's credit enhancement agreement with the
Federal National Mortgage Association ("Fannie Mae"). Under these interest
rate protection agreements, ATLANTIC pays and receives interest on the
aggregate principal amount of the underlying bonds outstanding, net of the
amount held in the principal reserve account. These agreements effectively
change ATLANTIC's variable interest rate exposure on the $23.1 million of
bonds included in the seven-year protection agreement with General Re
Financial Products Corporation to a fixed interest rate of 6.31% (including
the cost of the interest rate protection agreement) and to a fixed interest
rate of 6.59% (including the cost of the interest rate protection agreement)
on the $64.6 million of bonds included in the ten-year protection agreement
with Morgan Guaranty Trust Company of New York. To the extent the deposits in
the principal reserve account have not been used to redeem any of the
outstanding bonds, ATLANTIC pays interest at the variable rates as provided by
the mortgage agreements on that portion of bonds outstanding which is
equivalent to the balance in the principal reserve fund.
The mortgages that secure the tax exempt bond issues contain certain
covenants which require that a minimum percentage of units (generally 20% to
30%) be rented to individuals whose income does not exceed levels specified by
U.S. Government programs. The Fannie Mae credit enhancement agreement contains
additional covenants. ATLANTIC is in compliance with all such covenants.
Real estate with an aggregate undepreciated cost at December 31, 1995 of
$23,342,000 and $172,079,000 serves as collateral for the conventional
mortgages payable and the tax exempt mortgages, respectively. Based on
prevailing market borrowing rates, the fair value of the mortgages payable was
not materially different from the book value at December 31, 1995.
The change in mortgages payable for the years ended December 31, 1995 and
1994 (none in 1993) is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balances at January 1................................ $107,347 $ --
Mortgages assumed.................................... 24,678 107,537
Principal payments at maturity....................... (6,378) --
Regularly scheduled principal payments............... (623) (190)
Reduction to mortgages payable upon disposition of
multifamily property................................ (6,500) --
-------- --------
Balances at December 31.............................. $118,524 $107,347
======== ========
</TABLE>
F-20
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Approximate principal payments due on mortgages payable during each of the
years in the five-year period ending December 31, 2000 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 962
1997............................................................. 1,046
1998............................................................. 1,137
1999............................................................. 1,235
2000............................................................. 3,184
Thereafter....................................................... 110,960
--------
$118,524
========
</TABLE>
NOTE 4--DISTRIBUTIONS AND FUNDS FROM OPERATIONS
ATLANTIC's current policy is to pay distributions to shareholders based upon
funds from operations and aggregating annually at least 95% of its taxable
income. Funds from operations 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. In January 1996, ATLANTIC adopted the National
Association of Real Estate Investments Trusts' new definition of funds from
operations. Under this new definition, loan cost amortization is not added
back to net earnings in determining funds from operations. Funds from
operations for the years ended December 31, 1995 and 1994 give effect to this
change in definition as if it had been in effect during those periods.
ATLANTIC did not incur loan cost amortization prior to 1994, therefore, funds
from operations for the period from October 26, 1993 (inception) to December
31, 1993 is not affected by the change in definition.
Funds from operations for the years ended December 31, 1995, 1994, and 1993
were as follows (in thousands):
<TABLE>
<CAPTION>
(FROM
INCEPTION)
1995 1994 1993
------- ------- ----------
<S> <C> <C> <C>
Net earnings................................... $19,639 $ 9,926 $38
Add depreciation............................... 15,925 8,770 28
------- ------- ---
Funds from operations.......................... $35,564 $18,696 $66
======= ======= ===
Weighted average shares outstanding............ 43,889 24,454 572
======= ======= ===
</TABLE>
ATLANTIC made total distributions of $.80 per share in 1995 and $.60 per
share in 1994. No distributions were made in 1993. On December 19, 1995, the
Board of Directors of ATLANTIC set an annualized distribution level of $.84
per share in 1996.
For federal income tax purposes, the following summarizes the taxability of
distributions paid for 1994, and the estimated taxability for 1995:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Per share:
Ordinary income........................................... $ .46 $ .46
Return of capital......................................... .34 .14
------ ------
Total................................................... $ .80 $ .60
====== ======
</TABLE>
ATLANTIC's tax return for the year ended December 31, 1995 has not been
filed. The taxability information for 1995 is based upon the best available
data. ATLANTIC's tax returns have not been examined by the Internal Revenue
Service and, therefore, the taxability of dividends is subject to change.
F-21
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SHAREHOLDERS' EQUITY
Ownership Restrictions and Significant Shareholder
ATLANTIC's Articles of Incorporation restrict beneficial ownership (or
ownership generally attributed to a person under the REIT tax rules) of
ATLANTIC's outstanding common shares by a single person, or persons acting as
a group, to 9.8% of ATLANTIC's common shares.
The purpose of this provision is to assist in protecting and preserving
ATLANTIC's REIT status and to protect the interest of shareholders in takeover
transactions by preventing the acquisition of a substantial block of shares
unless the acquiror makes a cash tender offer for all outstanding shares. For
ATLANTIC 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
ATLANTIC's taxable year. The provision permits five persons to individually
acquire up to a maximum of 9.8% each of the common shares, or an aggregate of
49% of the outstanding common shares and, thus, assists the Directors in
protecting and preserving ATLANTIC's REIT status for tax purposes.
Common shares owned by a person or group of persons in excess of these
limits are subject to redemption by ATLANTIC. The provision does not apply
where a majority of the Board of Directors, in its sole and absolute
discretion, waives such limit after determining that the status of ATLANTIC as
a REIT for federal income tax purposes will not be jeopardized or the
disqualification of ATLANTIC as a REIT is advantageous to the shareholders.
The Board of Directors has permitted Security Capital Group Incorporated
("Security Capital Group"), an affiliate of the REIT Manager (see Note 6) to
acquire more than the stated maximum percentage of shares. Security Capital
Group owned 71.6% of the outstanding common shares at December 31, 1995. For
tax purposes, Security Capital Group's ownership is attributed to its
shareholders.
Capital Offerings
ATLANTIC completed a private offering in August 1994 in order to attain the
100 shareholders necessary to obtain REIT qualification. In the offering,
1,000,000 shares were offered at a price of $10.00 per share. All shares were
subscribed for by 125 persons and were purchased as of August 31, 1994.
ATLANTIC exchanged 10,000,000 shares of common stock at a price of $10 per
share as partial consideration for the acquisition of a pool of properties in
May 1994. The acquisition price was negotiated prior to the seller becoming a
related party. To facilitate ATLANTIC's transactions with the seller, Security
Capital Group granted the seller certain rights to require Security Capital
Group to purchase the 10,000,000 ATLANTIC shares owned by the seller at pre-
agreed prices (the "Put Obligation").
In the second quarter of 1995, ATLANTIC completed a private offering of
14,545,455 shares at $11.00 per share for an aggregate offering price of $160
million. In consideration for Security Capital Group purchasing $95 million of
shares in this offering, and to permit greater participation by other
investors in this offering, ATLANTIC assumed Security Capital Group's first
Put Obligation to purchase $55 million of ATLANTIC shares owned by the holder
of the Put Obligation. ATLANTIC purchased 5,000,000 shares on March 31, 1995
at $11.00 per share with a portion of the net proceeds from this offering.
ATLANTIC began a private offering in the fourth quarter of 1995. In
connection with this offering ATLANTIC sold 11,391,030 shares; 8,891,030
shares at $11.50 per share and 2,500,000 shares at $11.568 per share, for an
aggregate total of $131.2 million. In consideration for Security Capital
Group's purchase of $50 million of shares in this offering, ATLANTIC assumed
Security Capital Group's Put Obligation and purchased $28.9 million of
ATLANTIC shares owned by the holder of the Put Obligation; 2,500,000 shares at
$11.568 per share.
F-22
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In December 1995, the holder of the Put Obligation provided notice of its
intent to require Security Capital Group to purchase the remaining Put
Obligation on June 30, 1996. The remaining Put Obligation consists of
2,500,000 shares at $12.265 per share.
Merger/Share Conversion
On April 22, 1994, ATLANTIC, which was previously a Delaware corporation,
was merged with and into a newly formed Maryland corporation so as to change
ATLANTIC's state of domicile to Maryland. Each issued and outstanding ATLANTIC
share was converted into one hundred (100) shares in such merger. All share
and per share information in the financial statements have been adjusted to
retroactively reflect the share conversion. An amount equal to the par value
of the shares issued was transferred from additional paid-in capital to the
common share account.
NOTE 6--REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective June 30, 1995, ATLANTIC entered into an amended and restated REIT
management agreement (the "REIT Management Agreement") with Security Capital
(Atlantic) Incorporated (the "REIT Manager") to provide management services to
ATLANTIC. The REIT Manager is a subsidiary of Security Capital Group (see Note
5). All officers of ATLANTIC are employees of the REIT Manager and ATLANTIC
has no employees. The REIT Manager provides both strategic and day-to-day
management of ATLANTIC, including research, investment analysis, acquisition
and development, asset management, capital markets and legal and accounting
services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow, as defined in the REIT Management Agreement ("Cash Flow"). Cash
Flow is calculated by reference to ATLANTIC's cash flow from operations before
deducting (i) fees paid to the REIT Manager, (ii) extraordinary expenses
incurred at the request of the independent Directors of ATLANTIC, and (iii)
33% of any interest paid by ATLANTIC on convertible subordinated debentures
(of which ATLANTIC has none); and, after deducting (i) regularly scheduled
principal payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which ATLANTIC has none) and (iii) distributions
actually paid with respect to any non-convertible preferred stock of ATLANTIC
(of which ATLANTIC has none).
Cash Flow does not include realized gains or losses from dispositions of
investments or income from cash equivalent investments. The REIT Manager also
receives a fee of .20% per year on the average daily balance of cash
equivalent investments.
REIT management fees aggregated $6,923,000, $3,671,000, and $12,000 for the
years ended December 31, 1995, 1994, and 1993 respectively.
ATLANTIC will also reimburse the REIT Manager for third-party and out-of-
pocket expenses relating to travel, transaction costs, and similar costs
relating to the acquisition, development or disposition of assets or the
obtaining of financing for ATLANTIC and its operations. The REIT Manager will
pay all of its own salary and other overhead expenses. ATLANTIC will not have
any employee expense; however, it will pay all of the third-party costs
related to its normal operations, including legal, accounting, travel,
architectural, engineering, shareholder relations, unaffiliated directors fees
and similar expenses.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. ATLANTIC may terminate the REIT Management Agreement on
60-days notice. Because of the year-to-year nature of the
F-23
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
agreement, its maximum effect on ATLANTIC's results of operations cannot be
predicted, other than that REIT management fees will generally increase or
decrease in proportion to cash flow increases or decreases.
SCG Realty Services Incorporated ("Realty Services") began managing
properties for ATLANTIC on May 12, 1994 and currently manages approximately
82% of ATLANTIC's multifamily properties. Security Capital Group owns 100% of
Realty Services' voting shares. For the years ended December 31, 1995 and
1994, respectively, ATLANTIC paid fees aggregating $3,499,000 and $2,018,000
to Realty Services, including $3,475,000 and $1,536,000 for property
management fees and $24,000 and $482,000 for other services.
The property management agreement, like the REIT Management Agreement, is
renewable annually and subject to the approval of ATLANTIC's independent
Directors. The property management agreement can be terminated by ATLANTIC on
30-days notice. Rates for services performed by Realty Services are subject to
approval by ATLANTIC's independent Directors and are at rates prevailing in
the markets in which ATLANTIC operates.
NOTE 7--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except for per share
amounts) for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
3-31 6-30 9-30 12-31 TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995:
Rental income....................... $22,952 $24,330 $26,969 $29,383 $103,634
======= ======= ======= ======= ========
Net earnings........................ $ 4,175 $ 4,956 $ 5,333 $ 5,175 $ 19,639
======= ======= ======= ======= ========
Net earnings per share.............. $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.45
======= ======= ======= ======= ========
Funds from operations............... $ 8,123 $ 9,058 $ 9,776 $10,178 $ 37,135
======= ======= ======= ======= ========
Weighted average shares............. 37,133 43,284 46,679 48,306 43,889
======= ======= ======= ======= ========
1994:
Rental income....................... $ 1,400 $ 9,730 $21,721 $22,220 $ 55,071
======= ======= ======= ======= ========
Net earnings........................ $ 504 $ 2,305 $ 3,753 $ 3,364 $ 9,926
======= ======= ======= ======= ========
Net earnings per share.............. $ 0.13 $ 0.12 $ 0.10 $ 0.09 $ 0.41
======= ======= ======= ======= ========
Funds from operations............... $ 714 $ 3,995 $ 7,266 $ 7,431 $ 19,406
======= ======= ======= ======= ========
Weighted average shares............. 3,781 19,977 36,459 37,133 24,454
======= ======= ======= ======= ========
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the claims and
litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position, or results of operations.
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development, and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each property prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
F-24
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY PROPERTIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (C) DEPRECIATION
- ---------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
PROPERTIES:
Properties
acquired:
Atlanta, Georgia:
Azalea Park..... $ -- $3,717 $21,076 $ 70 $ 3,717 $ 21,146 $ 24,863 $ 94
Camden at
Ashford......... (a) 3,672 20,841 277 3,672 21,118 24,790 960
Camden at
Briarcliff...... (b) 2,105 11,953 149 2,105 12,102 14,207 557
Camden at
Dunwoody........ (a) 2,486 14,114 197 2,486 14,311 16,797 650
Camden Creek.... (a) 3,627 20,589 215 3,627 20,804 24,431 913
Camden Crest.... (a) 3,525 20,009 215 3,525 20,224 23,749 884
Cameron Brook... 19,500 3,318 18,784 301 3,318 19,085 22,403 764
Cameron Forest.. -- 884 5,008 -- 884 5,008 5,892 11
Cameron Place... -- 1,124 6,372 -- 1,124 6,372 7,496 14
Cameron Station. 14,500 2,338 13,246 -- 2,338 13,246 15,584 --
Clairmont Crest. 11,600 1,603 9,102 223 1,603 9,325 10,928 371
Lake Ridge...... (a) 2,001 11,359 2,690 2,001 14,049 16,050 654
Lenox Villa..... (a) 1,740 9,878 199 1,740 10,077 11,817 441
Morgan's
Landing......... (a) 1,168 6,646 462 1,168 7,108 8,276 400
Oaks at Sandy
Springs......... (a) 1,270 7,212 972 1,270 8,184 9,454 454
Old Salem....... (a) 1,053 6,144 624 1,053 6,768 7,821 295
The Greens...... 10,400 2,004 11,354 363 2,004 11,717 13,721 471
Trolley Square.. -- 2,031 11,528 196 2,031 11,724 13,755 563
Vinings Landing. (a) 1,363 7,902 515 1,363 8,417 9,780 378
WintersCreek.... -- 1,133 6,434 75 1,133 6,509 7,642 68
Woodlands....... (a) 3,785 21,471 96 3,785 21,567 25,352 178
Birmingham,
Alabama:
Cahaba Forest I. (a) 1,020 5,784 173 1,020 5,957 6,977 116
Cahaba Forest
II.............. 8,083 1,688 9,580 272 1,688 9,852 11,540 192
Colony Woods I.. (a) 1,560 8,845 149 1,560 8,994 10,554 406
Morning Sun
Villas.......... (a) 1,260 7,309 548 1,260 7,857 9,117 335
Charlotte, North
Carolina:
Camden Oaks..... (a) 2,255 12,800 189 2,255 12,989 15,244 601
Columbia, South
Carolina:
Greenbrier...... (a) 2,165 12,293 170 2,165 12,463 14,628 606
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY PROPERTIESL YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
OPERATING
PROPERTIES:
Properties
acquired:
Atlanta, Georgia:
Azalea Park..... 1987 1995
Camden at
Ashford......... 1990 1994
Camden at
Briarcliff...... 1989 1994
Camden at
Dunwoody........ 1989 1994
Camden Creek.... 1988 1994
Camden Crest.... 1988 1994
Cameron Brook... 1988 1994
Cameron Forest.. 1981 1995
Cameron Place... 1979 1995
Cameron Station. (e) 1995
Clairmont Crest. 1987 1994
Lake Ridge...... 1979 1993
Lenox Villa..... 1988 1994
Morgan's
Landing......... 1983 1993
Oaks at Sandy
Springs......... 1965 1993
Old Salem....... 1968 1994
The Greens...... 1986 1994
Trolley Square.. 1989 1994
Vinings Landing. 1978 1994
WintersCreek.... 1984 1995
Woodlands....... (f) 1995
Birmingham,
Alabama:
Cahaba Forest I. 1987 1995
Cahaba Forest
II.............. 1990 1995
Colony Woods I.. 1991 1994
Morning Sun
Villas.......... 1985 1994
Charlotte, North
Carolina:
Camden Oaks..... 1989 1994
Columbia, South
Carolina:
Greenbrier...... 1989 1994
</TABLE>
(see notes following table)
F-25
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY PROPERTIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (C) DEPRECIATION
- ---------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... $ (a) $1,225 $ 6,961 $147 $ 1,225 $ 7,108 $ 8,333 $ 78
Parrot's
Landing......... 15,835 2,691 15,276 399 2,691 15,675 18,366 635
Spencer Run..... (b) 2,852 16,194 392 2,852 16,586 19,438 670
Sun Pointe Cove. 8,500 1,367 7,773 190 1,367 7,963 9,330 326
Trails at Meadow
Lakes........... (a) 1,285 7,293 124 1,285 7,417 8,702 81
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 167 2,031 11,707 13,738 486
Jacksonville,
Florida:
Bay Club........ (a) 1,789 10,160 168 1,789 10,328 12,117 477
Memphis,
Tennessee:
Cameron at Kirby
Parkway......... (a) 1,386 7,959 674 1,386 8,633 10,019 429
Stonegate....... (a) 985 5,608 288 985 5,896 6,881 183
Miami, Florida:
Park Hill....... (a) 1,650 9,377 212 1,650 9,589 11,239 372
Nashville,
Tennessee:
Arbor Creek..... (a) -- 17,671 404 -- 18,075 18,075 784
Enclave at
Brentwood....... (a) 2,263 12,847 621 2,263 13,468 15,731 229
Orlando, Florida:
Camden Springs.. (a) 2,477 14,072 710 2,477 14,782 17,259 648
Cedar Bay
Village......... (b) 255 1,454 13 255 1,467 1,722 16
Kingston
Village......... (a) 876 4,973 48 876 5,021 5,897 56
Longwood Villas. 6,402 1,087 6,317 675 1,087 6,992 8,079 281
Wellington...... (b) 1,155 6,565 235 1,155 6,800 7,955 275
Raleigh, North
Carolina:
Camden Square... (a) 2,314 13,143 434 2,314 13,577 15,891 587
Richmond,
Virginia:
Camden at
Wellesley....... (a) 2,878 16,339 143 2,878 16,482 19,360 769
Potomac Hunt.... (b) 1,486 8,452 142 1,486 8,594 10,080 229
Sarasota,
Florida:
Camden at Palmer
Ranch........... (a) 3,534 20,057 381 3,534 20,438 23,972 908
Tampa/St.
Petersburg,
Florida:
Camden Downs.... (a) 1,840 10,447 206 1,840 10,653 12,493 483
Cameron Lakes... (a) 1,126 6,418 999 1,126 7,417 8,543 157
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY PROPERTIESL YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Parrot's
Landing......... 1986 1994
Spencer Run..... 1987 1994
Sun Pointe Cove. 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron at Kirby
Parkway......... 1985 1994
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cedar Bay
Village......... 1981 1995
Kingston
Village......... 1982 1995
Longwood Villas. 1982 1994
Wellington...... 1988 1994
Raleigh, North
Carolina:
Camden Square... 1987 1994
Richmond,
Virginia:
Camden at
Wellesley....... 1989 1994
Potomac Hunt.... 1987 1994
Sarasota,
Florida:
Camden at Palmer
Ranch........... 1988 1994
Tampa/St.
Petersburg,
Florida:
Camden Downs.... 1988 1994
Cameron Lakes... 1986 1995
</TABLE>
(see notes following table)
F-26
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MLTIFAMILY PROPERTIESU BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ---------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tampa/St.
Petersburg,
Florida:
(continued)
Country Place
Village I....... $ 2,038 $ 567 $ 3,219 $ 68 $ 567 $ 3,287 $ 3,854 $ 36
Country Place
Village II...... (a) 644 3,658 56 644 3,714 4,358 41
Foxbridge....... 10,400 1,591 9,036 258 1,591 9,294 10,885 383
Summer Chase.... (b) 542 3,094 87 542 3,181 3,723 130
Washington, D.C.:
Arbors at
Landmark........ (a) 3,434 19,501 579 3,434 20,080 23,514 941
Camden at
Kendall Ridge... (a) 1,708 9,698 195 1,708 9,893 11,601 467
Camden at
Saybrooke....... (a) 2,802 15,906 127 2,802 16,033 18,835 740
Sheffield
Forest.......... -- 2,269 12,859 2,269 12,859 15,128 29
Less amounts held
in principal
reserve fund(d).. (219) -- -- -- -- -- -- --
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total operating
properties
acquired........ $118,524 $108,004 $631,500 $18,482 $ 108,004 $ 649,982 $ 757,986 $23,302
======== ======== ======== ======= ========== ========== ========== =======
PROPERTIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods II. -- 1,254 -- 9,252 1,298 9,208 10,506 59
Charlotte, North
Carolina:
Waterford Hills. -- 1,508 -- 11,083 1,508 11,083 12,591 114
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total operating
properties
developed....... $ -- $ 2,762 $ -- $20,335 $ 2,806 $ 20,291 $ 23,097 $ 173
-------- -------- -------- ------- ---------- ---------- ---------- -------
TOTAL OPERATING
PROPERTIES...... $118,524 $110,766 $631,500 $38,817 $ 110,810 $ 670,273 $ 781,083 $23,475
======== ======== ======== ======= ========== ========== ========== =======
DEVELOPMENTS
UNDER
CONSTRUCTION:
Atlanta, Georgia:
Camden Creek II. -- 2,730 -- 5,553 2,772 5,511 8,283 --
Peachtree
Corners......... -- 889 -- 310 889 310 1,199 --
Charlotte, North
Carolina:
Waterford
Square.......... -- 1,890 -- 16,020 2,041 15,869 17,910 26
Jacksonville,
Florida:
Cameron Lakes... -- 1,759 -- 10,350 1,897 10,212 12,109 --
Cameron
Timberlin Parc
I............... -- 2,167 -- 1,150 2,169 1,148 3,317 --
Raleigh, North
Carolina:
Waterford
Forest.......... -- 2,371 -- 6,120 2,371 6,120 8,491 --
Waterford Point. -- 985 -- 14,947 1,094 14,838 15,932 60
<CAPTION>
CONSTRUCTION YEAR
MLTIFAMILY PROPERTIESU YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Tampa/St.
Petersburg,
Florida:
(continued)
Country Place
Village I....... 1982 1995
Country Place
Village II...... 1983 1995
Foxbridge....... 1986 1994
Summer Chase.... 1988 1994
Washington, D.C.:
Arbors at
Landmark........ 1990 1994
Camden at
Kendall Ridge... 1990 1994
Camden at
Saybrooke....... 1990 1994
Sheffield
Forest.......... 1987 1995
Less amounts held
in principal
reserve fund(d)..
Total operating
properties
acquired........
PROPERTIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods II. 1995(g) 1994
Charlotte, North
Carolina:
Waterford Hills. 1995(g) 1993
Total operating
properties
developed.......
TOTAL OPERATING
PROPERTIES......
DEVELOPMENTS
UNDER
CONSTRUCTION:
Atlanta, Georgia:
Camden Creek II. -- 1994
Peachtree
Corners......... -- 1995
Charlotte, North
Carolina:
Waterford
Square.......... (g) 1994
Jacksonville,
Florida:
Cameron Lakes... (g) 1995
Cameron
Timberlin Parc
I............... -- 1995
Raleigh, North
Carolina:
Waterford
Forest.......... -- 1995
Waterford Point. (g) 1994
</TABLE>
(see notes following table)
F-27
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MLTIFAMILY PROPERTIESU BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ---------------------- ------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Washington, D.C.:
Milestone....... $ -- $ 5,477 $ -- $ 7,333 $ 5,485 $ 7,325 $ 12,810 $ --
Woodway Trinity. -- 5,342 -- 9,900 5,492 9,750 15,242 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
DEVELOPMENTS
UNDER
CONSTRUCTION.... $ -- $ 23,610 $ -- $ 71,683 $ 24,210 $ 71,083 $ 95,293 $ 86
------- -------- -------- -------- ---------- ---------- ---------- -------
DEVELOPMENTS IN
PLANNING:
Charlotte, North
Carolina:
Waterford Square
II.............. -- 2,014 -- 253 2,039 228 2,267 --
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1,328 -- 300 1,342 286 1,628 --
Raleigh, North
Carolina:
Cameron Brooke.. -- 1,353 -- 305 1,378 280 1,658 --
Research
Triangle Park... -- 805 -- 38 805 38 843 --
Richmond,
Virginia:
Cameron at
Wyndham......... -- 2,038 -- 229 2,038 229 2,267 --
Cameron
Crossing........ -- 1,666 -- 343 1,670 339 2,009 --
Tampa/St.
Petersburg,
Florida:
North Airport... -- 511 -- 75 511 75 586 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
DEVELOPMENTS IN
PLANNING........ $ -- $ 9,715 $ -- $ 1,543 $ 9,783 $ 1,475 $ 11,258 $ --
------- -------- -------- -------- ---------- ---------- ---------- -------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1,294 -- -- 1,294 -- 1,294 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ -- $ 1,294 $ -- $ -- $ 1,294 $ -- $ 1,294 $ --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
MULTIFAMILY
PROPERTIES...... $18,524 $145,385 $631,500 $112,043 $ 146,097 $ 742,831 $ 888,928 $23,561
======= ======== ======== ======== ========== ========== ========== =======
<CAPTION>
CONSTRUCTION YEAR
MLTIFAMILY PROPERTIESU YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Washington, D.C.:
Milestone....... -- 1995
Woodway Trinity. -- 1994
TOTAL
DEVELOPMENTS
UNDER
CONSTRUCTION....
DEVELOPMENTS IN
PLANNING:
Charlotte, North
Carolina:
Waterford Square
II.............. -- 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1994
Raleigh, North
Carolina:
Cameron Brooke.. -- 1995
Research
Triangle Park... -- 1995
Richmond,
Virginia:
Cameron at
Wyndham......... -- 1995
Cameron
Crossing........ -- 1995
Tampa/St.
Petersburg,
Florida:
North Airport... -- 1995
TOTAL
DEVELOPMENTS IN
PLANNING........
LAND HELD FOR
FUTURE
DEVELOPMENT:
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1995
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT.....
TOTAL
MULTIFAMILY
PROPERTIES......
</TABLE>
- ----
(a) Pledged to secure $300 million line of credit with Morgan Guaranty Trust
Company of New York.
(b) Pledged as collateral under credit enhancement agreement with the Federal
National Mortgage Association.
(c) For federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1995 was $887,671,000.
(d) The Federal National Mortgage Association credit enhancement agreement
requires payments to be made to a principal reserve fund.
(e) Phase I (108 units) was developed in 1981 and Phase II (240 units) was
developed in 1983.
(f) Phase I (332 units) was developed in 1983 and Phase II (312 units) was
developed in 1985.
(g) As of 12/31/95, property was in lease-up.
F-28
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTE TO SCHEDULE III
AS OF DECEMBER 31, 1995
The following is a reconciliation of the carrying amount and related
accumulated depreciation of ATLANTIC's investment in real estate, at cost (in
thousands):
<TABLE>
<CAPTION>
(FROM
INCEPTION)
CARRYING AMOUNT 1995 1994 1993
--------------- -------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $631,260 $ 31,005 $ --
Acquisitions and renovation expenditures... 187,267 571,288 29,591
Development expenditures, including land
acquisitions.............................. 101,335 28,967 1,414
Dispositions............................... (30,934) -- --
-------- -------- -------
Ending balances............................ $888,928 $631,260 $31,005
======== ======== =======
<CAPTION>
(FROM
INCEPTION)
ACCUMULATED DEPRECIATION 1995 1994 1993
------------------------ -------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $ 8,798 $ 28 $ --
Depreciation for the period................ 15,925 8,770 28
Accumulated depreciation of real estate
sold...................................... (1,162) -- --
-------- -------- -------
Ending balances............................ $ 23,561 $ 8,798 $ 28
======== ======== =======
</TABLE>
F-29
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA FINANCIAL STATEMENTS
SUMMARY OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
The accompanying unaudited pro forma balance sheet as of March 31, 1996 and
the unaudited pro forma statements of earnings for the three-month period
ended March 31, 1996 and the year ended December 31, 1995 of ATLANTIC reflect:
(i) the acquisition and disposition by ATLANTIC of all properties acquired or
disposed of since December 31, 1994 as if these properties had been acquired
or disposed of as of January 1, 1995; (ii) the assumption or retirement of
mortgage debt associated with the acquisition or disposition of the properties
acquired or disposed of since December 31, 1994 as if this mortgage debt had
been assumed or retired on January 1, 1995; (iii) the sale of ATLANTIC Common
Stock through private placement subsequent to December 31, 1994, necessary to
fund pro forma acquisitions, as if the shares had been issued on January 1,
1995; (iv) the sale of $100 million of ATLANTIC Common Stock in this Offering
( shares at per share), net of estimated costs of issuance of
$7.5 million; (v) the spin-off of the Homestead Village properties as if the
Merger had been consummated on January 1, 1995; and, (vi) certain pro forma
adjustments to the historical financial statements of ATLANTIC. For pro forma
purposes, the proceeds from the sale of ATLANTIC Common Stock subsequent to
March 31, 1996 have been used to repay pro forma borrowings on ATLANTIC's line
of credit.
The unaudited pro forma financial statements have been prepared by
management of ATLANTIC and do not purport to be indicative of the results
which would actually have been obtained had the transactions described above
been completed on the dates indicated or which may be obtained in the future.
The pro forma financial statements should be read in conjunction with the
financial statements of ATLANTIC included elsewhere herein.
F-30
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS(A)
-----------------------------------------------------
PROPOSED
ISSUANCE OF COMMON
ACQUISITIONS/ COMMON SHARE
HISTORICAL DISPOSITIONS SHARES ISSUANCE(D) SUBTOTAL HOMESTEAD(E) PRO FORMA
---------- ------------- ----------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Real Estate............. $936,129 $49,771 (a) $ $ $985,900 $(10,437) $975,463
Less accumulated
depreciation.......... 28,364 (699)(a) 27,665 -- 27,665
-------- ------- --------- -------- -------- -------- --------
Net real estate
investments........... 907,765 50,470 958,235 (10,437) 947,798
Cash and cash
equivalents............ 6,553 (3,553)(b) 3,000 (72) 2,928
Other assets............ 15,000 15,000 (1,817) 13,183
-------- ------- --------- -------- -------- -------- --------
Total assets......... $929,318 $46,917 $ $ $976,235 $(12,326) $963,909
======== ======= ========= ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit......... $226,000 $40,129 (b) $(118,835)(c) $(92,475)(d) $ 54,819 $ 36,749 $ 91,568
Mortgages payable...... 123,291 6,000 (b) 129,291 129,291
Accounts payable....... 16,267 16,267 16,267
Accrued expenses and
other liabilities..... 11,409 118 (a) 11,527 (1,452) 10,075
-------- ------- --------- -------- -------- -------- --------
Total liabilities.... 376,967 46,247 (118,835) (92,475) 211,904 35,297 247,201
-------- ------- --------- -------- -------- -------- --------
Shareholders' Equity:
Common shares
(250,000,000 shares
authorized;
55,569,635 issued in
historical period and
issued on
pro forma basis)...... 556 103 (c) 659 659
Additional paid-in
capital............... 576,976 118,732 (c) 92,475 (d) 788,183 788,183
Distributions in
excess of net
earnings.............. (25,181) 670 (a) (24,511) (47,623) (72,134)
-------- ------- --------- -------- -------- -------- --------
Total shareholders'
equity.............. 552,351 670 118,835 92,475 764,331 (47,623) 716,708
-------- ------- --------- -------- -------- -------- --------
Total liabilities and
shareholders'
equity.............. $929,318 $46,917 $ 0 $ 0 $976,235 $(12,326) $963,909
======== ======= ========= ======== ======== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-31
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA STATEMENT OF EARNINGS
THREE-MONTH PERIOD ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS(F)
---------------------- --------------------------------
ACQUISITIONS/
ATLANTIC DISPOSITIONS ACQUISITIONS OTHER SUBTOTAL HOMESTEAD(E) PRO FORMA
-------- ------------- --------------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income
Rental income............ $30,809 $2,138 (g) $ $ $32,947 $ (6) $32,941
Interest income.......... 72 72 72
------- ------ ----------- ------------ ------- ----- -------
Total income............ 30,881 2,138 33,019 (6) 33,013
------- ------ ----------- ------------ ------- ----- -------
Expenses
Rental expenses.......... 12,736 931 (g) 13,667 13,667
Mortgage interest........ 2,041 120 (g)(h) 2,161 2,161
Depreciation............. 4,804 (93)(i) 367 (j) 5,078 5,078
Interest on general debt. 2,301 (1,904)(q) 397 905 1,302
General and
administrative.......... 186 186 (18) 168
REIT management fees..... 2,124 476 (k) 2,600 (143) 2,457
Other.................... 39 39 39
------- ------ ----------- ------------ ------- ----- -------
Total expenses.......... 24,231 958 367 (1,428) 24,128 744 24,872
------- ------ ----------- ------------ ------- ----- -------
Net earnings (loss),
excludes gain on
disposition.............. $ 6,650 $1,180 $ (367) $ 1,428 $ 8,891 $(750) $ 8,141
======= ====== =========== ============ ======= ===== =======
Weighted average shares
outstanding.............. 55,555 (p)
======= ============ ======= =======
Net earnings per share,
excludes gain on
disposition.............. $ 0.12 $ $
======= ======= =======
</TABLE>
See accompanying notes to pro forma financial statements.
F-32
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS(F)
---------------------- -------------------------------
ACQUISITIONS/
ATLANTIC DISPOSITIONS ACQUISITIONS OTHER SUBTOTAL HOMESTEAD(E) PRO FORMA
-------- ------------- --------------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income
Rental income............ $103,634 $21,488 (g) $ $ $125,122 $ (4) $125,118
Interest income.......... 245 245 245
-------- ------- ------------ ----------- -------- ------- --------
Total income............ 103,879 21,488 125,367 (4) 125,363
-------- ------- ------------ ----------- -------- ------- --------
Expenses
Rental expenses.......... 41,450 10,396 (g) (1,223)(l) 50,623 50,623
Mortgage interest........ 7,662 1,104 (g)(m) 8,766 8,766
Depreciation............. 15,925 (1,052)(i) 3,787 (n) 18,660 18,660
Interest on general debt. 11,380 (8,716)(q) 2,664 3,772 6,436
General and
administrative.......... 646 646 (63) 583
REIT management fees..... 6,923 3,152 (o) 10,075 (594) 9,481
Other.................... 254 254 254
-------- ------- ------------ ----------- -------- ------- --------
Total expenses.......... 84,240 10,448 2,564 (5,564) 91,688 3,115 94,803
-------- ------- ------------ ----------- -------- ------- --------
Net earnings (loss),
excludes gain on
disposition.............. $ 19,639 $11,040 $ (2,564) $ 5,564 $ 33,679 $(3,119) $ 30,560
======== ======= ============ =========== ======== ======= ========
Weighted average shares
outstanding.............. 43,889 (p)
======== =========== ======== ========
Net earnings per share,
excludes gain on
disposition.............. $ 0.45 $ $
======== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-33
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS
MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(a) Represents the acquisition of five properties and the disposition of one
property that occurred subsequent to March 31, 1996 as follows:
<TABLE>
<CAPTION>
AMOUNT
PROPERTY DATE (IN 000'S)
-------- ---- ----------
<S> <C> <C>
Acquisitions:
Cameron at Hickory Grove (formerly Es-
prit).................................... April 10, 1996 $ 8,000
Paces Court............................... April 22, 1996 11,007
Park Place at Turtle Run (formerly Park
Place)................................... April 22, 1996 14,355
Pointe at Bayberry Lake................... May 29, 1996 16,650
Cameron Pointe............................ May 30, 1996 14,450
--------
64,462
--------
Disposition:
Greenbrier................................ April 9, 1996 (14,691)(1)
--------
Net acquisitions........................ $ 49,771
========
</TABLE>
- --------
(1) Greenbrier was sold at a gain of $670,000.
(b) Reflects the application of cash on hand and additional borrowings under
ATLANTIC's line of credit to fund the pro forma net acquisitions above.
Additionally, reflects ATLANTIC's assumption of a $6 million mortgage note
payable upon the purchase of the Cameron at Hickory Grove property.
(c) Reflects the sale through a private placement of 10,333,526 common
shares ($.01 par value) at a price of $11.50 subsequent to March 31, 1996. For
pro forma purposes, the net proceeds have been assumed to be used to repay the
pro forma borrowings under ATLANTIC's line of credit as discussed in note (b).
(d) Reflects the proposed issuance of common shares ($.01 par value)
at a price of $ (total proceeds of $100 million, net of estimated costs
of issuance of $7.5 million). For pro forma purposes the total proceeds have
been assumed to be used to repay the pro forma borrowings under ATLANTIC's
line of credit.
(e) Reflects consummation of the Merger Agreement and spin-off of ATLANTIC's
Homestead Village net assets as if the closing of the Homestead transaction,
contemplated in the Merger Agreement, had occurred on January 1, 1995 as
follows:
1) Elimination of the results of operations of ATLANTIC's Homestead Village
properties from the historical financial statements of ATLANTIC for the
three months ended March 31, 1996 and the year ended December 31, 1995.
2) Elimination of the Homestead Village net assets as of March 31, 1996.
3) ATLANTIC's receipt of 4,201,220 shares of Homestead common stock and
2,818,517 Homestead warrants in exchange for ATLANTIC's contribution of
Homestead Village net assets as of March 31, 1996, the Homestead Village
assets expected to be acquired prior to the Merger Closing Date and cash.
4) The additional borrowings under ATLANTIC's line of credit necessary to
finance ATLANTIC's contribution to Homestead as of January 1, 1995.
5) Additional interest expense and a corresponding reduction in the REIT
management fee resulting from the additional pro forma borrowings of
$36,749,000 and the borrowings that financed the Homestead Village net
assets contributed by ATLANTIC. ATLANTIC's weighted average daily interest
rates (7.92% for the year ended December 31, 1995 and 7.61% for the three-
month period ended March 31, 1996) were used to calculate the additional
interest expense.
6) The special dividend to ATLANTIC shareholders of all of the Homestead
common stock and Homestead warrants to be received by ATLANTIC under the
Merger Agreement. For pro forma purposes, a value of $51,699,000 has been
assumed for such Homestead common stock and
F-34
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
Homestead warrants and ATLANTIC's basis in the assets contributed to
Homestead is assumed to be $47,623,000. The resulting gain on the exchange
of $4,076,000 is reflected in "Distributions in excess of net earnings" in
the accompanying pro forma balance sheet as of March 31, 1996.
(f) The pro forma financial statements do not reflect the funding of
ATLANTIC's obligation of approximately $111,000,000 under the Funding
Commitment Agreement or receipt of the related convertible mortgages of
approximately $98,000,000, as this funding is related to future development
costs of the properties contributed to Homestead. The convertible mortgages
will be recorded at a premium of approximately $13,000,000 which will be
amortized as an adjustment to interest income over the ten-year term of the
mortgages.
(g) All of ATLANTIC's acquisitions subsequent to December 31, 1994 were
acquired from unaffiliated third parties. These acquisitions are described
below:
<TABLE>
<CAPTION>
OCCUPANCY
ACQUISITION ACQUISITION AT DATE OF
PROPERTY DATE LOCATION COST (IN 000'S) UNITS PRODUCT TYPE ACQUISITION
-------- ----------- -------- --------------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cameron Lakes........... 2/01/95 Tampa, FL $ 7,544 207 Middle 88.4%
Cameron on the Cahaba I
& II................... 3/24/95 Birmingham, AL 18,072 400 Moderate 96.0%
Enclave at Brentwood.... 4/28/95 Nashville, TN 15,110 380 Middle 97.1%
Cameron Villas II (for-
merly Cedar Bay Vil-
lage).................. 7/20/95 Orlando, FL 1,709 42 Moderate 97.6%
Country Place Village I
& II................... 7/20/95 Tampa, FL 8,088 188 Moderate 89.9%
Cypress Lakes........... 7/20/95 Fort Lauderdale, FL 8,186 176 Moderate 93.2%
Kingston Village........ 7/20/95 Orlando, FL 5,849 120 Middle 97.5%
Trails at Meadow Lakes.. 7/20/95 West Palm Beach, FL 8,578 189 Moderate 94.7%
WintersCreek............ 8/01/95 Atlanta, GA 7,567 200 Moderate 99.0%
Woodlands............... 9/01/95 Atlanta, GA 25,256 644 Moderate 96.0%
Azalea Park............. 11/09/95 Atlanta, GA 24,793 447 Moderate 80.1%
Cameron Forest.......... 12/12/95 Atlanta, GA 5,892 152 Moderate 92.8%
Cameron Place........... 12/12/95 Atlanta, GA 7,496 212 Moderate 93.9%
Sheffield Forest........ 12/15/95 Washington, DC 15,128 256 Middle 88.7%
Cameron Station......... 12/19/95 Atlanta, GA 15,584 348 Moderate 95.7%
Cameron at Hickory Grove
(formerly Esprit)...... 4/10/96 Charlotte, NC 8,000 202 Moderate 93.6%
Paces Court............. 4/22/96 Greenville, SC 11,007 234 Middle 91.0%
Park Place at Turtle Run
(formerly Park Place).. 4/22/96 Coral Springs, FL 14,355 350 Moderate 91.7%
Pointe at Bayberry Lake. 5/29/96 Pembroke Pines, FL 16,650 308 Moderate 90.9%
Cameron Pointe.......... 5/30/96 Atlanta, GA 14,450 214 Middle 96.3%
</TABLE>
This adjustment reflects historical: 1) gross income, 2) rental expenses,
and 3) mortgage interest on mortgage debt assumed, if applicable, for all
properties acquired, subsequent to December 31, 1994 for the period January 1,
1995 to the earlier of the respective dates of acquisition, December 31, 1995
or March 31, 1996, as applicable (results of operations after the date of
acquisition are included in ATLANTIC's historical operating results). Reflects
removal from ATLANTIC's historical balances of: 1) gross income, 2) rental
expenses, and 3) mortgage interest on mortgage debt, if applicable, for all
properties disposed of subsequent to December 31, 1994 to the earlier of the
respective dates of disposition, December 31, 1995 or March 31, 1996, as
applicable. The historical gross income and rental expenses relating to the
period prior to ATLANTIC's acquisition, exclude amounts which would not be
comparable to the proposed future operations of the properties such as certain
interest income and income taxes.
F-35
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize the historical income and expense amounts
shown on the pro forma statements of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL
EXPENSES,
EXCLUDING
RENTAL MORTGAGE MORTGAGE
INCOME INTEREST INTEREST
------- --------- --------
<S> <C> <C> <C>
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996:
Group C Properties............................ $ 1,446 $ 717 $ 120
Other acquisitions in 1996.................... 1,204 471 --
Less: Post acquisition amounts already
included in ATLANTIC's historical
balances................................. -- -- --
Less: Disposition............................. (512) (257) --
------- ------- ------
Net adjustment to ATLANTIC's historical bal-
ances...................................... $ 2,138 $ 931 $ 120
======= ======= ======
FOR THE YEAR ENDED DECEMBER 31, 1995:
Group A properties............................ $14,032 $ 6,398 $ 159
Group B properties............................ 9,662 4,395 887
Group C properties............................ 5,876 3,043 480
Other acquisitions in 1995.................... 4,005 1,578 620
Other acquisitions in 1996.................... 4,917 2,110 --
------- ------- ------
Totals for the year......................... 38,492 17,524 2,146
Less: Post acquisition amounts already in-
cluded in ATLANTIC's historical balances. (10,338) (4,142) (583)
Less: Dispositions............................ (6,666) (2,986) (459)
------- ------- ------
Net adjustment to ATLANTIC's historical bal-
ances...................................... $21,488 $10,396 $1,104
======= ======= ======
</TABLE>
The following analysis reconciles the audited information for the Group A
properties, the Group B properties and the Group C properties to the amounts
contained in the pro forma statements of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL
EXPENSES,
EXCLUDING
RENTAL MORTGAGE MORTGAGE
INCOME INTEREST INTEREST
------- --------- --------
<S> <C> <C> <C>
Group A Properties: Audited results of
operations for the year ended December
31, 1994................................ $13,338 $6,330 $ 159
Adjustment to reflect the results of
operations of Group A properties for
1995.................................. 694(i) 68(i) 0(i)
------- ------ -----
Total 1995 Group A................... $14,032 $6,398 $ 159
======= ====== =====
Group B Properties: Audited results of
operations for the nine months ended
September 30, 1995...................... $ 7,126 $3,298 $ 653
Adjustment to reflect fourth quarter
1995 results of operations of Group B
properties............................ 2,536(ii) 1,097(ii) 234(ii)
------- ------ -----
Total 1995 Group B................... $ 9,662 $4,395 $ 887
======= ====== =====
Group C Properties: Audited results of
operations for the year ended December
31, 1995................................ $ 5,876 $3,043 $ --
Adjustment to reflect interest on
mortgage debt assumed................. -- -- 480
------- ------ -----
Total 1995 Group C................... $ 5,876 $3,043 $ 480
======= ====== =====
</TABLE>
- --------
(i) Represents incremental income and expense adjustments necessary to
reconcile the 1994 audited results with the 1995 actual results.
(ii) Represents fourth quarter 1995 actual results which are added to the
audited results for the nine months ended September 30, 1995. This
adjustment is necessary to present twelve months of information for Group
B properties.
F-36
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(h) Reflects pro forma interest expense for the three-month period ended
March 31, 1996 on a $6 million mortgage note which bears interest at 8%. The
mortgage note was assumed in connection with a property acquisition in April
1996.
(i) Represents the removal of depreciation expense recognized on properties
disposed of subsequent to December 31, 1994 which is included in ATLANTIC's
historical balances.
(j) Reflects depreciation expense for the three-month period ended March 31,
1996 for the properties acquired subsequent to March 31, 1996. This
depreciation adjustment is based on ATLANTIC's purchase cost assuming asset
lives of 10 to 40 years. Depreciation is computed using a straight-line
method.
(k) Reflects the additional REIT management fee that would have been
incurred in the three-month period ended March 31, 1996 had the property
acquisitions subsequent to March 31, 1996 occurred on January 1, 1995.
(l) Reflects the difference for the year ended December 31, 1995 between 1)
historical property management fee expense and ATLANTIC's pro forma property
management fee expense of $(107,000) and 2) historical make-ready expense and
ATLANTIC's pro forma make-ready expense of $(1,116,000).
(m) Reflects pro forma interest expense on mortgage notes payable assumed
subsequent to December 31, 1994 as if these mortgages were assumed by ATLANTIC
on January 1, 1995. The interest rates on the mortgage notes varies from 5.98%
to 7.75%.
(n) Reflects depreciation expense from January 1, 1995 through the
acquisition date for all properties acquired subsequent to December 31, 1994
(depreciation expense after the date of acquisition is included in ATLANTIC's
historical operating results). This depreciation adjustment is based on
ATLANTIC's purchase cost assuming asset lives of 10 to 40 years. Depreciation
is computed using a straight-line method.
(o) Reflects the additional REIT management fee that would have been
incurred in 1995 had the property acquisitions subsequent to December 31, 1994
and the pro forma paydowns on the line of credit all occurred on January 1,
1995.
(p) The number of shares used in the calculation of the pro forma per share
data was based on the weighted average number of common shares outstanding
during the period adjusted to give effect to common shares assumed to have
been issued on January 1, 1995 as necessary to complete the property
acquisitions which are all assumed to have been financed with equity proceeds
to the extent mortgage debt was not assumed and to make the pro forma paydowns
on the line of credit.
(q) Represents the reduction to interest expense resulting from the pro
forma paydowns on the line of credit. The interest reduction is calculated
using the weighted average daily interest rate for the applicable period
(7.61% for 1996 and 7.92% for 1995).
F-37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group A
Properties described in Note 1 for the year ended December 31, 1994. This
combined Historical Summary is the responsibility of the Group A Properties
management. Our responsibility is to express an opinion on this combined
Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group A Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group A Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group A Properties for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
March 5, 1996
F-38
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Gross income:
Rental........................................................... $12,951,378
Other............................................................ 387,073
-----------
Total gross income............................................. 13,338,451
-----------
Direct operating expenses:
Utilities and other property operating expenses.................. 3,051,955
Real estate taxes................................................ 1,255,172
Repairs and maintenance.......................................... 997,451
Management fees.................................................. 601,533
Interest on certain obligations assumed.......................... 159,253
Advertising...................................................... 217,925
Insurance........................................................ 205,648
-----------
Total direct operating expenses................................ 6,488,937
-----------
Excess of gross income over direct operating expenses.............. $ 6,849,514
===========
</TABLE>
See accompanying notes.
F-39
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1994
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the year ended December 31, 1994 relates
to the operations of the following Group A Properties which were acquired from
unaffiliated parties by Security Capital Atlantic Incorporated (the Company)
between April 1, 1995 and September 30, 1995:
<TABLE>
<CAPTION>
ACQUISITION DATE PROPERTY NAME LOCATION ACQUISITION COST
---------------- --------------------------- ------------------------ ----------------
(IN 000'S)
<S> <C> <C> <C>
April 28,
1995 Enclave at Brentwood Nashville, Tennessee $15,110
July 20,
1995 Trails at Meadowlakes West Palm Beach, Florida 8,578
July 20,
1995 Country Place Village I Tampa, Florida 3,786
July 20,
1995 Country Place Village II Tampa, Florida 4,302
July 20,
1995 Kingston Village Orlando, Florida 5,849
July 20,
1995 Cypress Lakes Fort Lauderdale, Florida 8,186
July 20, Cameron Villas II (formerly
1995 Cedar Bay Village) Orlando, Florida 1,709
August 1,
1995 WintersCreek Atlanta, Georgia 7,567
September
1, 1995 Woodlands I & II Atlanta, Georgia 25,256
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group A
Properties for the year ended December 31, 1994, as certain costs such as
depreciation, amortization, certain mortgage interest, professional fees and
other costs not directly related to the future operations of the Group A
Properties have been excluded. These costs are not considered to be direct
operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-40
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Management fees of $601,533 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
The Company assumed outstanding debt in connection with the acquisition of
Country Place Village I and WintersCreek.
Country Place Village I
A 7.75% mortgage note with an outstanding balance of $2,051,078 at July 20,
1995 (the date of acquisition) was assumed by the Company. The note, which is
secured by the property, matures on November 1, 2000. The mortgage note
provides for monthly principal and interest payments of $15,862 through
maturity and for a balloon payment of $1,844,613 at maturity.
At December 31, 1994, the mortgage note had an outstanding balance of
$2,037,830. The Company's assumption of this mortgage note did not provide for
any modification to the original terms, therefore, interest expense incurred
prior to the Company's assumption is representative of future interest
expense. Accordingly, interest expense of $159,253 is recognized in the
accompanying combined Historical Summary.
WintersCreek
A variable rate mortgage note securing a $5,000,000 tax-exempt bond issue
was assumed by the Company in connection with the acquisition of WintersCreek
on August 1, 1995. The mortgage note, which is secured by the property,
provides for monthly interest payments at the variable rate with the principal
amount of the bonds due at maturity on October 1, 2004.
Subsequent to the debt assumption, the Company obtained an interest rate
protection agreement which provides for interest payments on a fixed rate. On
a continuing basis, the interest expense incurred will differ from the amounts
incurred prior to the Company's assumption of the debt. Accordingly, no
interest expense is recognized in the accompanying combined Historical
Summary.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group B
Properties described in Note 1 for the period from January 1, 1995 through
September 30, 1995. This combined Historical Summary is the responsibility of
the Group B Properties' management. Our responsibility is to express an
opinion on this combined Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group B Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group B Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group B Properties for the period from January 1,
1995 through September 30, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
March 5, 1996
F-42
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
PERIOD FROM JANUARY 1, 1995
THROUGH SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Gross income:
Rental............................................................ $6,825,589
Other............................................................. 300,734
----------
Total gross income.............................................. 7,126,323
----------
Direct operating expenses:
Utilities and other property operating expenses................... 1,685,757
Real estate taxes................................................. 503,766
Repairs and maintenance........................................... 582,710
Management fees................................................... 283,974
Interest on certain obligations assumed........................... 652,500
Advertising....................................................... 157,178
Insurance......................................................... 84,802
----------
Total direct operating expenses................................. 3,950,687
----------
Excess of gross income over direct operating expenses............... $3,175,636
==========
</TABLE>
See accompanying notes.
F-43
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the period from January 1, 1995 to
September 30, 1995, relates to the operations of the following Group B
Properties which were acquired from unaffiliated parties by Security Capital
Atlantic Incorporated (the Company) between October 1, 1995 and December 31,
1995:
<TABLE>
<CAPTION>
ACQUISITION DATE PROPERTY NAME LOCATION ACQUISITION COST
----------------- ---------------- ---------------- ----------------
(IN 000'S)
<S> <C> <C> <C>
November 9, 1995 Azalea Park Atlanta, Georgia $24,793
December 12, 1995 Cameron Place Atlanta, Georgia 7,496
December 12, 1995 Cameron Forest Atlanta, Georgia 5,892
December 15, 1995 Sheffield Forest Washington, D.C. 15,128
December 19, 1995 Cameron Station Atlanta, Georgia 15,584
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group B
Properties for the period from January 1, 1995 through September 30, 1995, as
certain costs such as depreciation, amortization, certain mortgage interest,
professional fees and other costs not directly related to the future
operations of the Group B Properties have been excluded. These costs are not
considered to be direct operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-44
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Management fees of $283,974 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
The Company assumed outstanding debt in connection with the acquisition of
Cameron Station and Azalea Park.
Cameron Station
A 6% fixed rate mortgage note securing a $14,500,000 tax-exempt bond issue
was assumed by the Company in connection with the acquisition of Cameron
Station on December 19, 1995. The mortgage note, which is secured by the
property, provides for monthly interest payments with the amount of the bonds
due at maturity on June 1, 2007.
The Company's assumption of this mortgage note did not provide for any
modification to the original terms, therefore, interest expense incurred prior
to the Company's assumption is representative of future interest expense.
Accordingly, interest expense of $652,500 is recognized in the accompanying
combined Historical Summary.
Azalea Park
A 12.76% mortgage note securing a $15,500,000 tax-exempt bond issue was
assumed by the Company in connection with the acquisition of Azalea Park on
November 9, 1995. The mortgage note, which is secured by the property,
provides for monthly interest payments with the principal amount of the bonds
due at maturity on February 1, 2008.
The Company intends to include this bond issue in its existing credit
enhancement agreement which will result in a reduction to the 12.76% interest
rate. On a continuing basis, the interest expense incurred will differ from
the amounts incurred prior to the Company's assumption of the debt.
Accordingly, no interest expense is recognized in the accompanying combined
Historical Summary.
F-45
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group C
Properties described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group C Properties'
management. Our responsibility is to express an opinion on this combined
Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group C Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group C Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group C Properties for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
April 26, 1996
F-46
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP C PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Gross income:
Rental...................................................... $5,760,923
Other....................................................... 114,949
----------
Total gross income........................................ 5,875,872
----------
Direct operating expenses:
Utilities and other property operating expenses............. 1,279,237
Real estate taxes........................................... 615,907
Repairs and maintenance..................................... 783,851
Management fees............................................. 228,903
Advertising................................................. 88,289
Insurance................................................... 47,163
----------
Total direct operating expenses........................... 3,043,350
----------
Excess of gross income over direct operating expenses......... $2,832,522
==========
</TABLE>
See accompanying notes.
F-47
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP C PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the year ended December 31, 1995,
relates to the operations of the following Group C Properties which were
acquired from unaffiliated parties by Security Capital Atlantic Incorporated
(the Company) between January 1, 1996 and April 29, 1996:
<TABLE>
<CAPTION>
ACQUISITION DATE PROPERTY NAME LOCATION ACQUISITION COST
---------------- ------------- -------------------------- ----------------
(IN 000S)
<C> <S> <C> <C>
April 10, 1996 Cameron at Charlotte, North Carolina $ 8,000
Hickory
Grove
(formerly
Esprit)
April 22, 1996 Park Place Coral Springs, Florida 14,355
at Turtle
Run
(formerly
Park
Place)
Paces
April 22, 1996 Court Greenville, South Carolina 11,007
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group C
Properties for the year ended December 31, 1995, as certain costs such as
depreciation, amortization, certain mortgage interest, professional fees and
other costs not directly related to the future operations of the Group C
Properties have been excluded. These costs are not considered to be direct
operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
3. RELATED PARTY TRANSACTIONS
Management fees of $228,903 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
During 1995, the Cameron at Hickory Grove Apartments secured an 8.75%,
interest-only mortgage note with a balance of $6,660,000. The Company assumed
this mortgage note on April 10, 1996 in connection with the acquisition of the
property. Substantial modifications in the terms of the note were made prior
to the assumption by the Company. Therefore, on a continuing basis, the
interest expense incurred will differ from the amounts incurred prior to the
Company's assumption of the debt. Accordingly, no interest expense is
recognized in the accompanying combined Historical Summary.
F-48
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THE PROSPECTUS (OF WHICH THIS APPENDIX A FORMS A PART) +
+SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY +
+NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
APPENDIX A
SUBJECT TO COMPLETION DATED JUNE 28, 1996
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
-----------
This Appendix A is a part of the Prospectus of Security Capital Atlantic
Incorporated ("ATLANTIC") to which this Appendix A is attached. This Appendix A
also constitutes part of the Prospectus of Homestead Village Properties
Incorporated ("Homestead") in connection with the distribution (the
"Distribution") by Security Capital Pacific Trust ("PTR") and ATLANTIC of all
of the shares of Common Stock, $0.01 par value per share, of Homestead (the
"Homestead Common Stock"), and warrants to purchase shares of Homestead Common
Stock (the "Homestead Warrants" and, together with the Homestead Common Stock,
the "Homestead Securities") owned by them. The Distribution will result in all
of the Homestead Securities issuable to PTR and ATLANTIC in connection with the
Transaction (as hereafter defined) being distributed to holders of PTR common
shares of beneficial interest, $1.00 par value per share (the "PTR Common
Shares"), and holders of shares of ATLANTIC common stock, $0.01 par value per
share (the "ATLANTIC Common Stock"), as of the record date to be established
for the Distribution (the "Distribution Record Date").
There has been no public trading market for the shares of Homestead Common
Stock or the Homestead Warrants. Homestead will apply for quotation of the
Homestead Common Stock and the Homestead Warrants on the Nasdaq Stock Market
(National Market), although no assurance can be given that such application
will be approved.
SEE "RISK FACTORS" AT PAGE A-7 OF THIS APPENDIX A FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF HOMESTEAD SECURITIES.
-----------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS (OF WHICH THIS APPENDIX
A FORMS A PART) HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS (OF WHICH THIS APPENDIX A
FORMS A PART). ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
-----------
The date of this Appendix A is , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... A-2
RISK FACTORS.............................................................. A-7
Significant Influence of Principal Shareholder.......................... A-7
Limited Operating History............................................... A-7
Risks of Borrowing...................................................... A-7
General Real Estate Investment Risks.................................... A-8
Development Risks....................................................... A-8
Risks Associated with Rapid Growth...................................... A-9
Risks Associated with the Lodging Industry.............................. A-9
Competition in the Lodging Industry..................................... A-9
Need for Additional Capital............................................. A-9
Impact of Environmental Regulations..................................... A-10
Government Regulation and Compliance with Americans with Disabilities
Act.................................................................... A-10
Losses in Excess of Insurance Coverage.................................. A-10
Reliance on Key Personnel............................................... A-11
Limitations on Changes in Control....................................... A-11
Absence of Prior Public Market.......................................... A-12
Shares Eligible for Future Sale......................................... A-12
Absence of Dividends.................................................... A-13
DIVIDEND POLICY........................................................... A-13
CAPITALIZATION............................................................ A-14
HOMESTEAD PRO FORMA SELECTED FINANCIAL INFORMATION........................ A-15
PTR-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION................ A-16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PTR-HOMESTEAD VILLAGE GROUP................................ A-17
Overview................................................................ A-17
Environmental Matters................................................... A-17
Liquidity and Capital Resources......................................... A-17
Results of Operations................................................... A-17
ATLANTIC-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION........... A-19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATLANTIC-HOMESTEAD VILLAGE GROUP........................... A-20
Overview................................................................ A-20
Environmental Matters................................................... A-20
Liquidity and Capital Resources......................................... A-20
Results of Operations................................................... A-20
SCG-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION................ A-21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SCG-HOMESTEAD VILLAGE GROUP................................ A-22
Overview................................................................ A-22
Liquidity and Capital Resources......................................... A-22
Results of Operations................................................... A-22
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS................................................................... A-23
Objectives............................................................... A-23
History.................................................................. A-24
The Facilities........................................................... A-25
Growth and Development Strategy.......................................... A-26
Operating Strategy....................................................... A-27
Homestead Village Properties............................................. A-28
Administrative Services Agreement........................................ A-28
Industry Overview........................................................ A-29
Competition.............................................................. A-30
Environmental Matters.................................................... A-31
Governmental Regulation.................................................. A-31
Trademarks............................................................... A-32
Insurance................................................................ A-32
Employees................................................................ A-32
Legal Proceedings........................................................ A-32
MANAGEMENT................................................................. A-32
Directors and Executive Officers......................................... A-32
Other Officers of Homestead.............................................. A-34
Management Philosophy.................................................... A-36
Management Compensation.................................................. A-36
Stock Option Plan........................................................ A-37
RELATIONSHIP WITH SECURITY CAPITAL GROUP INCORPORATED...................... A-38
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... A-38
Protection of Business Agreement......................................... A-38
SCG Investor Agreement................................................... A-39
Funding Commitment Agreements............................................ A-40
ATLANTIC and PTR Investor Agreements..................................... A-41
Escrow Agreement......................................................... A-41
Finder's Agreements...................................................... A-42
PRINCIPAL SHAREHOLDERS..................................................... A-43
DESCRIPTION OF HOMESTEAD SECURITIES........................................ A-44
General.................................................................. A-44
Homestead Common Stock................................................... A-44
Preferred Stock.......................................................... A-45
Purchase Rights.......................................................... A-45
Homestead Warrants....................................................... A-47
Convertible Mortgage Notes............................................... A-47
CERTAIN PROVISIONS OF MARYLAND LAW AND OF HOMESTEAD'S CHARTER AND BYLAWS... A-50
Classification of the Homestead Board.................................... A-50
Business Combinations.................................................... A-50
Control Share Acquisitions............................................... A-51
Advance Notice Provisions................................................ A-51
SHARES AVAILABLE FOR FUTURE SALE........................................... A-52
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS................................. A-52
ADDITIONAL INFORMATION..................................................... A-53
INDEX TO HOMESTEAD FINANCIAL STATEMENTS.................................... F-1
</TABLE>
A-ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in the ATLANTIC Prospectus, including this
Appendix A. Shareholders are urged to review the entire ATLANTIC Prospectus and
this Appendix and the Annexes thereto. All references to Homestead Village
Properties Incorporated's operations include PTR, ATLANTIC and Security Capital
Group Incorporated ("SCG") operations with respect to Homestead Village(R)
properties. Homestead Village(R) is a registered trademark of SCG, which will
be assigned to Homestead as a part of the Transaction. The term "Homestead
Village" as used herein shall include a reference to such registered trademark.
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
The first Homestead Village facility was opened in 1992 by PTR, which since
then has built and placed into operation 26 additional Homestead Village
facilities. Homestead was organized in January 1996 to continue the operations
of PTR, ATLANTIC and SCG with respect to their respective moderate priced,
extended-stay lodging facilities. Homestead will develop, own and manage
moderate priced, extended-stay lodging facilities designed to appeal to value-
conscious customers on temporary assignment, undergoing relocation or in
training. PTR's stabilized Homestead Village facilities have produced annual
returns (based on funds from operations over actual investment cost) in excess
of 14% for 1994 and 1995. No assurance can be given that Homestead will be able
to achieve or sustain such returns in the future.
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead currently operates 27 facilities, has begun construction of six
additional facilities and has an additional 47 properties in pre-development
planning. The term "in pre-development planning" means developments owned or
under control (land which is under control through contingent contract) with
construction anticipated to commence within 12 months. Homestead's facilities
are designed and built to uniform plans developed by Homestead. Homestead
expects to have a total of 31 facilities operational and 41 facilities under
construction by the end of 1996 and plans to continue an active development
program thereafter. Homestead's plans call for the average facility to have
approximately 136 extended-stay rooms and take approximately eight to ten
months to construct.
The average length of stay for a customer is in excess of four weeks. For the
quarter ended March 31, 1996, average economic occupancy and average weekly
rate for stabilized properties was 87% and $217 per week, respectively.
Homestead categorizes its operating properties (which include all properties
not in development) as either "stabilized" or "pre-stabilized." The term
"stabilized" means that development and initial marketing of properties has
been completed and in effect for a sufficient period of time to achieve market
rates and market occupancy. All properties have been newly developed by
Homestead.
Homestead believes that it is distinguished from its competitors in the
moderate priced, extended-stay lodging business in several respects.
. Homestead has been developing and operating moderate priced, extended-
stay facilities since 1992. It has in place a staff of 66 professionals
who have substantial experience in the real estate and lodging industries
and has 318 site-level employees. Most of these individuals were
previously employed by affiliates of SCG which operated and managed the
Homestead Village
A-2
<PAGE>
properties on behalf of PTR and ATLANTIC in similar capacities to those
they will have with Homestead.
. Homestead currently operates 27 facilities in seven cities and will
operate nationally. It expects to have 31 facilities in eight cities
operating by the end of 1996.
. Homestead has access to substantial financing through (i) the Funding
Commitment Agreements with PTR and ATLANTIC (described herein), under
which PTR and ATLANTIC have agreed to provide funding of $133 million and
$111 million, respectively, and to receive convertible mortgage notes in
respect thereof and (ii) the Investor Agreement with SCG (described
herein) under which SCG has agreed to exercise upon notice from Homestead
all of the Homestead Warrants it will receive directly and indirectly as
part of the Transaction with an aggregate exercise price of approximately
$51 million. This access to capital should provide Homestead with
sufficient capital to fund its national development program through mid-
1997 without having to seek additional external financing.
. Homestead is affiliated with SCG, which will be the principal shareholder
of Homestead and will be entitled to representation on the board of
directors of Homestead (the "Homestead Board"). Homestead will be self-
managed but will have access to various services which SCG offers to its
real estate affiliates, including payroll and tax services, data
processing and other computer services, human resources, research,
insurance administration services, cash management and legal support.
These and other services will be available to Homestead under an
Administrative Services Agreement (described herein). Homestead believes
that it can purchase these services from SCG at a price which would be
less expensive than hiring the necessary personnel to perform these
services, and that the level of services SCG can provide would be higher
than Homestead could provide internally due to SCG's large, experienced
staff and economies of scale.
Homestead was formed in 1996 as a Maryland corporation and will operate as a
Subchapter C corporation. Its executive offices are located at 125 Lincoln
Avenue, Santa Fe, New Mexico 87501 and its telephone number is (505) 982-9292.
THE TRANSACTION
Assuming that the conditions to the Merger and Distribution Agreement, dated
as of May 21, 1996 (the "Merger Agreement" and, collectively with all of the
transactions contemplated thereby and the Distribution, the "Transaction"),
among PTR, ATLANTIC, SCG and Homestead, have been satisfied or waived, each of
PTR, ATLANTIC and SCG will contribute, through a series of merger transactions
(the "Mergers"), all of their respective assets related to Homestead Village
properties in return for shares of Homestead Common Stock as follows:
. PTR will contribute 54 properties (or the rights to acquire such
properties) to Homestead in exchange for 9,485,727 shares of Homestead
Common Stock.
. ATLANTIC will contribute 26 properties (or the rights to acquire such
properties) to Homestead in exchange for 4,201,220 shares of Homestead
Common Stock. Pursuant to the Merger Agreement, ATLANTIC will provide an
estimated cash payment of $18.6 million to Homestead at the date of the
closing of the Mergers (the "Closing Date"). This payment is required
because ATLANTIC's Homestead Village properties are in earlier stages of
development than PTR's Homestead Village properties, therefore ATLANTIC
has not funded the same percentage of total costs as PTR. This payment
also assures that ATLANTIC receives all of its shares of Homestead Common
Stock at the Closing Date rather than being received in smaller
increments over time as funds are expended for Homestead Village
properties contributed by ATLANTIC.
A-3
<PAGE>
. SCG will contribute to Homestead its anticipated future cash flows from
the PTR and ATLANTIC real estate investment trust ("REIT") management
agreements and property management agreements relating to the Homestead
Village properties in exchange for 4,062,788 shares of Homestead Common
Stock of which 2,243,038 shares will be placed in escrow and released as
funds are advanced under the Funding Commitment Agreements. In addition,
SCG will contribute the Homestead Village trademark and the operating
system. No separate consideration was attributed to the Homestead Village
trademark or the operating system, as the trademark and the operating
system would be necessary to achieve the anticipated fees. There are
additional Homestead Village facilities which are in early stages of
planning, but which are not owned or under control and are not included
in the 80 facilities which will be contributed in the Transaction, and
are being planned outside the target markets of PTR or ATLANTIC by SCG
with its own funds. SCG will contribute the rights to certain properties
to Homestead for no additional consideration.
. Simultaneous with the transactions described above, PTR and ATLANTIC will
receive 6,363,789 and 2,818,517 Homestead Warrants, respectively, in
exchange for their entering into the Funding Commitment Agreements. Each
Homestead Warrant is exercisable at $10.00 per share and expires one year
after the Closing Date.
. Pursuant to the applicable Funding Commitment Agreement, PTR and ATLANTIC
have agreed to provide funding of $133 million and $111 million,
respectively, and to receive convertible mortgage notes in respect
thereof. These notes will have a term of approximately ten years, bear
interest at 9% per year, will not be callable for five years and will be
convertible at the option of ATLANTIC or PTR, as the case may be, into
shares of Homestead Common Stock after March 31, 1997 on the basis of one
share of Homestead Common Stock for every $11.50 of principal amount
outstanding, subject to adjustment. The PTR mortgage loans and ATLANTIC
mortgage loans will be used to finance the acquisition and development
properties contributed by PTR and ATLANTIC, respectively. In addition,
PTR subsidiaries currently have $77,289,000 in convertible mortgage loans
with PTR which will be assumed by Homestead at the Closing Date. These
loans have substantially the same terms as the mortgage loans described
above. If all such mortgage loans were made and converted, an additional
19,246,402 and 8,524,215 shares of Homestead Common Stock would be issued
to PTR and ATLANTIC, respectively.
. SCG will receive 817,694 Homestead Warrants in exchange for providing
funding to Homestead during the time between the execution of the Merger
Agreement and the Closing Date and the use of office facilities for one
year.
. The relative percentage ownership interests of PTR, ATLANTIC and SCG in
Homestead, giving effect to the issuance of the Homestead Common Stock at
the Closing Date, the exercise of all Homestead Warrants and the
conversion of all mortgage loans outstanding and which could be made
under the Funding Commitment Agreements, would be 63.21%, 28.00% and
8.79%, respectively. These percentages are different than the relative
percentage ownership interests described elsewhere because the
convertible mortgage loans issuable to PTR and ATLANTIC have a conversion
price of $11.50 per share rather than the $10.00 per share used in
calculating the original issuance of the Homestead Common Stock.
. After giving effect to the distribution of the Homestead Securities by
PTR and ATLANTIC, the exercise of all Homestead Warrants and the
conversion of all mortgage loans and the subsequent distribution of the
Homestead Common Stock issuable upon such conversion to the shareholders
of PTR and ATLANTIC, SCG would own approximately 51.4% of the outstanding
Homestead Common Stock.
A-4
<PAGE>
THE DISTRIBUTION
The shares of Homestead Common Stock and Homestead Warrants being distributed
hereby are being issued in connection with the Distribution by PTR and ATLANTIC
of all of the Homestead Securities owned by them to their respective
shareholders. Set forth below is a summary of the number of shares of Homestead
Common Stock and Homestead Warrants being issued in connection with the
Transaction.
<TABLE>
<S> <C>
Homestead Common Stock...................................... 17,749,735 shares
Homestead Warrants.......................................... 10,000,000 warrants
Fully Exercised and Converted(1)............................ 55,520,352 shares
</TABLE>
- --------
(1) Assumes the exercise of all 10,000,000 Homestead Warrants and conversion of
the outstanding $77,289,000 principal amount of convertible mortgage loans
and $242,073,091 principal amount of convertible mortgage loans issuable
pursuant to the Funding Commitment Agreements.
A-5
<PAGE>
HOMESTEAD PRO FORMA SUMMARY FINANCIAL INFORMATION
The following table sets forth certain unaudited selected pro forma condensed
consolidated financial information for Homestead after giving effect to the
Transaction, as if it had been consummated, with respect to statements of
operations data, as of January 1, 1995, or, with respect to balance sheet data,
as of the date presented. The information presented is derived from, should be
read in conjunction with, and is qualified in its entirety by reference to, the
historical balance sheet and the notes thereto and unaudited pro forma
condensed consolidated financial data and the notes thereto appearing elsewhere
in this Appendix A. The unaudited selected pro forma condensed consolidated
financial data have been included for comparative purposes only and do not
purport to be indicative of the results of operations or financial position
which actually would have been obtained if the Transaction had been effected at
the dates indicated or of the financial position or results of operations which
may be obtained in the future. See "Homestead Pro Forma Selected Financial
Information" and "Homestead Pro Forma Financial Statements".
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATIONS SUMMARY:
Room Revenue....................................... $ 6,753 $ 18,337
Total Revenue...................................... 6,874 18,721
Property Operating Expenses........................ 2,946 7,600
Corporate Operating Expenses....................... 2,000 6,188
EBITDA(1).......................................... 1,928 4,933
Net Income (Loss).................................. 48 (937)
PER SHARE DATA:
EBITDA(1).......................................... $ 0.11 $ 0.28
Net Income (Loss).................................. .003 (.053)
Net Book Value..................................... $ 8.55 N/A
Weighted Average Number of Shares of Homestead
Common Stock Outstanding.......................... 17,749,735 17,749,735
<CAPTION>
PRO FORMA
MARCH 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION:
Property and Equipment, net........................ $ 156,988
Total Assets....................................... 211,538
Convertible Mortgage Notes Payable................. 51,563
Total Liabilities.................................. 59,766
Shareholders' Equity............................... $ 151,772
Common Stock Outstanding........................... 17,749,735
</TABLE>
- --------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement as
a measure of operating performance and is not necessarily indicative of
cash available to fund cash needs. Homestead has included EBITDA herein
because Homestead believes that it is one measure used by certain investors
to determine operating cash flow.
A-6
<PAGE>
RISK FACTORS
Holders of Homestead Securities should consider carefully the specific
factors set forth below as well as the other information contained in the
ATLANTIC Prospectus, as appropriate, including this Appendix A.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
SCG beneficially owns approximately 37.9% of the issued and outstanding PTR
Common Shares and 66.5% of the issued and outstanding shares of ATLANTIC
Common Stock. Immediately after completion of the Mergers, SCG is expected to
beneficially own 4,062,788 shares of Homestead Common Stock of which 2,243,038
shares of Homestead Common Stock will be held in escrow and released to SCG as
funding is made by ATLANTIC and PTR under their Funding Commitment Agreements.
See "Certain Relationships and Transactions--Escrow Agreement". As a result of
the distribution by PTR and ATLANTIC to their respective shareholders, SCG
expects to beneficially own an additional 3,595,091 and 2,793,811 shares of
Homestead Common Stock, respectively, for a total of 10,451,690 shares of
Homestead Common Stock or approximately 58.9% of the outstanding shares of
Homestead Common Stock. SCG will also own Homestead Warrants to acquire an
additional 5,103,884 shares of Homestead Common Stock. Through its beneficial
ownership of Homestead Common Stock, it is expected that SCG will control
58.9% of the vote on all matters submitted for Homestead shareholder action.
SCG may, over time, dispose of some of the shares of Homestead Common Stock it
acquires in the Transaction to reduce its beneficial ownership in Homestead to
below 50%. In addition, pursuant to an Investor Agreement between SCG and
Homestead, SCG has agreed to exercise at the request of Homestead all
Homestead Warrants it receives in the Transaction. In exchange for its
agreement to exercise Homestead Warrants, Homestead has granted SCG the right,
among other things, to nominate up to two directors to the Homestead Board,
depending upon SCG's level of ownership of shares of Homestead Common Stock,
and to be consulted on certain business decisions made by Homestead. In
addition, pursuant to Investor Agreements with PTR and ATLANTIC, each of PTR
and ATLANTIC will have the right to nominate one director to the Homestead
Board. See "Certain Relationships and Transactions--PTR and ATLANTIC Investor
Agreements" and "--SCG Investor Agreement".
LIMITED OPERATING HISTORY
Although the first Homestead Village property was opened in 1992, Homestead
has a limited operating history as a separate entity upon which investors may
evaluate Homestead's performance. There can be no assurance that Homestead
will be profitable in the future.
RISKS OF BORROWING
As of the Closing Date, Homestead will assume approximately $77 million of
indebtedness secured by convertible mortgages on Homestead's properties and
various accounts and other assets. Homestead will incur additional debt
(including up to approximately $242 million of additional convertible
mortgages from PTR and ATLANTIC) from time to time, including construction
loans to finance the construction of extended-stay lodging facilities and
future acquisitions of land for development. The obligations under the
mortgage loans with PTR and ATLANTIC and the terms thereof, including the
maturity date and interest rate, have been fixed as of the date of the Merger
Agreement. There can be no assurance that Homestead could not obtain better
terms for such mortgage loans, if the terms were to be determined on the date
a mortgage loan is made to Homestead. In addition, leverage increases the
risks to Homestead of any variations in its results of operations,
construction cost overruns, or any other factors affecting its cash flow or
liquidity. In addition, Homestead's interest costs could increase as the
result of general market increases in interest rates because Homestead expects
to enter into a revolving credit facility which will bear interest at floating
rates. See "Description of Other Indebtedness".
A-7
<PAGE>
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments 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 conditions (such as an
oversupply of extended-stay properties or a reduction in rental demand in an
area), the quality and philosophy of management, competition from other
available extended-stay properties, the ability of the owner to provide
adequate maintenance and insurance and to control operating costs. Although
Homestead seeks to minimize these risks through its market research and asset
management capabilities, these risks cannot be eliminated entirely. Real
estate cash flows and values are also affected by such factors as government
regulations, including zoning and tax laws, interest rate levels, the
availability of financing and potential liability under, and changes in,
environmental and other laws.
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of Homestead 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 maintenance costs) are generally not reduced when circumstances
cause a reduction in income from the investments. There can be no assurance
that Homestead will be able to dispose of an investment when it finds
disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of Homestead's investment.
DEVELOPMENT RISKS
Homestead intends to grow by developing additional company-owned moderate
priced, extended-stay lodging facilities. Development involves substantial
risks, including the risk that development costs will exceed budgeted or
contracted amounts, the risk of delays in completion of construction, the risk
of failing to obtain all necessary zoning and construction permits, the risk
that financing might not be available on favorable terms, the risk that
developed properties will not achieve desired revenue or profitability levels
once opened, the risk of competition for suitable development sites from
competitors which have greater financial resources than Homestead, the risks
of incurring substantial costs in the event a development project must be
abandoned prior to completion, changes in governmental rules, regulations, and
interpretations (including interpretations of the requirements of the
Americans with Disabilities Act of 1990 (the "ADA")), and general economic and
business conditions. Although Homestead intends to manage development to
reduce such risks, there can be no assurance that present or future
developments will perform in accordance with Homestead's expectations.
Homestead currently has six facilities under construction, expects to have 41
facilities under construction at the end of 1996 and plans to continue an
active development program thereafter. All construction will be performed by
third party general contractors overseen by Homestead's development group.
Under the Funding Commitment Agreements with PTR and ATLANTIC, if there are
cost overruns Homestead must complete the development of each property funded
by PTR or ATLANTIC consistent with the development plans for such project with
its own funds. There can be no assurance, however, that Homestead will
complete the development and construction of the facilities, or that any such
developments will be completed in a timely manner or within budget.
RISKS ASSOCIATED WITH RAPID GROWTH
Homestead's rapid development plans will require the implementation of
enhanced operational and financial systems and will require additional
management, operational, and financial resources. For example, Homestead will
be required to recruit and train property managers and other personnel for
each new lodging facility as well as additional accounting personnel. There
can be no assurance that Homestead will be able to manage its expanding
operations effectively. The failure to implement such systems and add such
resources on a cost-effective basis could have a material adverse effect on
Homestead's results of operations and financial condition.
A-8
<PAGE>
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The moderate priced, extended-stay segment of the lodging industry, in which
Homestead operates, may be adversely affected by changes in national or local
economic conditions and other local market conditions, such as an oversupply
of hotel space or a reduction in demand for hotel space in a geographic area,
changes in travel patterns, extreme weather conditions, changes in
governmental regulations which influence or determine wages, prices, or
construction costs, changes in interest rates, the availability of financing
for operating or capital needs, and changes in real estate tax rates and other
operating expenses. Homestead's principal assets will consist of real
property, and real estate values are sensitive to changes in local market and
economic conditions and to fluctuations in the economy as a whole. In
addition, due in part to the strong correlation between the lodging industry's
performance and economic conditions, the lodging industry is subject to
cyclical changes in revenue and profits. These risks may be exacerbated by the
relatively illiquid nature of real estate holdings. The ability of Homestead
to vary its portfolio in response to changes in economic and other conditions
will be limited. There can be no assurance that downturns or prolonged adverse
conditions in real estate or capital markets or in national or local
economies, and the inability of Homestead to dispose of an investment when it
finds disposition to be advantageous or necessary, will not have a material
adverse impact on Homestead.
COMPETITION IN THE LODGING INDUSTRY
There is no single competitor or small number of competitors of Homestead
that is or are dominant in the moderate priced, extended-stay lodging market.
Competition in the U.S. 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 lodging facilities, and the services and the guest
amenities provided by it to be among the most important factors in its
business. Demographic or other changes in one or more of Homestead's markets
could impact the convenience or desirability of the sites of certain lodging
facilities, which would adversely affect their operations. Further, there can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services, or amenities or significantly
expand or improve facilities in a market in which Homestead's facilities
compete, thereby adversely affecting Homestead's operations. There have been a
number of recent announcements indicating that a substantial number of
competitors intend to enter the moderate priced or economy extended-stay
lodging market, which could adversely affect Homestead's business. See
"Business--Competition".
NEED FOR ADDITIONAL CAPITAL
PTR and ATLANTIC have agreed to make convertible mortgage loans to Homestead
to develop the properties being contributed by them (see "Certain
Relationships and Transactions--Funding Commitment Agreements") and SCG has
agreed to exercise at the request of Homestead all of its Homestead Warrants
which it will receive in the Transaction. Homestead anticipates that the
proceeds from the loans and exercise of warrants will provide sufficient
capital for its operations through mid-1997. Thereafter, Homestead may need to
procure additional financing over time, the amount of which will depend on a
number of factors including the number of properties Homestead constructs and
the cash flow generated by its properties. If additional financing is needed,
there can be no assurance regarding the availability or terms of such
financing Homestead may be able to procure over time. Any future debt
financings or issuances of preferred stock by Homestead will be senior to the
rights of the holders of Homestead Common Stock, and any future issuances of
Homestead Common Stock will result in the dilution of the then existing
shareholders' proportionate equity interests in Homestead. Although Homestead
is unable to quantify its needs for additional financing, such needs will
depend upon a number of factors, including the pace of Homestead's development
activities and its ability to generate cash from operations.
A-9
<PAGE>
IMPACT OF ENVIRONMENTAL REGULATIONS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of such removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials. Homestead has not been notified by any governmental authority of
any non-compliance, liability, or other claim in connection with any of the
properties currently owned or being acquired, and Homestead is not aware of
any environmental condition with respect to any of the properties, which is
likely to be material. Homestead has subjected each of its properties to a
Phase I environmental site assessment ("Phase I Survey") (which does not
involve invasive procedures such as soil sampling or ground water analysis) by
independent consultants. While some of these assessments have led to further
investigation and sampling, none of the environmental assessments has
revealed, nor is Homestead aware of, any environmental liability (including
asbestos related liability) that management believes would have a material
adverse effect on Homestead's business, financial condition or results of
operations. No assurance can be given, however, that these assessments and
investigations reveal all potential environmental liabilities, that no prior
owner or operator created any material environmental condition not known to
Homestead or the independent consultants or that future uses and conditions
(including, without limitation, resident actions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities.
GOVERNMENT REGULATION AND COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
The lodging industry is subject to numerous federal, state and local
government regulations including those relating to building and zoning
requirements. Also, Homestead is subject to laws governing its relationships
with employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. An increase in the minimum wage rate,
employee benefit costs or other costs associated with employees could
adversely impact Homestead's results of operations or financial condition. In
addition, in accordance with the provisions of the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While Homestead believes that its
facilities are in compliance with these requirements, a determination that
Homestead is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use
and operation of the facilities, including changes to building codes and fire
and life-safety codes, may occur. If Homestead were required to make
substantial modifications at its facilities to comply with interpretations of
the ADA or other changes in governmental rules and regulations, Homestead's
financial condition and ability to develop new facilities could be materially
adversely affected.
LOSSES IN EXCESS OF INSURANCE COVERAGE
Homestead intends to maintain comprehensive insurance on each of its
properties, including liability, fire, and extended coverage, in the types and
amounts customarily obtained by an owner and operator in Homestead's industry.
Nevertheless, there are certain types of losses, generally of a
A-10
<PAGE>
catastrophic nature, such as hurricanes, earthquakes, and floods, that may be
uninsurable or not economically insurable. Homestead uses its discretion in
determining amounts, coverage limits, and deductibility provisions of
insurance, with a view to obtaining appropriate insurance on Homestead's
properties at a reasonable cost and on suitable terms. This may result in
insurance coverage that in the event of a loss would not be sufficient to pay
the full current market value or current replacement value of Homestead's lost
investment and the insurance proceeds received by Homestead might not be
adequate to restore its economic position with respect to such property.
RELIANCE ON KEY PERSONNEL
Homestead's success will depend to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly David C.
Dressler, Jr., Chairman and President, John Patterson and Donald Schultz, each
a Senior Vice President, and Gary DeLapp, a Vice President. The loss of the
services of any of these individuals could have a material adverse effect upon
Homestead. See "Management--Directors and Officers". Homestead does not have
employment or consulting agreements with any of its officers nor does it carry
key man life insurance on any of its officers.
LIMITATIONS ON CHANGES IN CONTROL
SHAREHOLDER PURCHASE RIGHTS. On May 16, 1996, the Homestead Board declared a
dividend of one preferred share purchase right (a "Purchase Right") for each
share of Homestead Common Stock outstanding. Each Purchase Right entitles the
holder under certain circumstances to purchase from Homestead one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share (the "Participating Preferred Shares"), at a price of
$50.00 per one one-hundredth of a Participating Preferred Share, subject to
adjustment. Purchase Rights are exercisable when a person or group of persons
(other than SCG, PTR or ATLANTIC) acquires beneficial ownership of 20% or more
of the outstanding shares of Homestead Common Stock or announces a tender
offer for beneficial ownership of 25% or more of the outstanding shares of
Homestead Common Stock. Under certain circumstances, each Purchase Right
entitles the holder to purchase, at the Purchase Right's then current exercise
price, a number of shares of Homestead Common Stock having a market value of
twice the Purchase Right's exercise price. The acquisition of Homestead
pursuant to certain mergers or other business transactions would entitle each
holder to purchase, at the Purchase Right's then current exercise price, a
number of the acquiring company's common shares having a market value at that
time equal to twice the Purchase Right's exercise price. The Purchase Rights
held by certain 20% shareholders (other than SCG, PTR or ATLANTIC) would not
be exercisable. The Purchase Rights will expire in May 2006 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 Homestead Common Stock or any other form of
consideration determined by the Homestead Board.
The Purchase Rights may have certain anti-takeover effects, may have the
effect of delaying, deferring or preventing a change in control of Homestead
and may adversely affect the voting and other rights of shareholders. See
"Description of Homestead Securities--Purchase Rights".
PREFERRED SHARES. The Homestead charter (the "Homestead Charter") authorizes
the Homestead Board to issue shares of preferred stock and to establish the
preferences and rights of any shares of preferred stock so issued. See
"Description of Homestead Securities--Preferred Stock". The issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control of Homestead even if a change in control were in the
shareholders' interests.
ADVANCE NOTICE PROVISIONS. For nominations or other business to be properly
brought before an annual meeting of shareholders by a shareholder, the
Homestead Bylaws require such shareholder to deliver a notice to the
Secretary, absent specified circumstances, not less than 60 days nor more than
90 days prior to the first anniversary of the preceding year's annual meeting
setting forth: (i) as to each
A-11
<PAGE>
person whom the shareholder proposes to nominate for election or reelection as
a director all information relating to such person that is required to be
disclosed in solicitations of proxies for the election of directors, pursuant
to Regulation 14A of the Securities Exchange Act of 1934 (the "Exchange Act");
(ii) as to any other business that the shareholder proposes to bring before
the meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business of such shareholder and
of the beneficial owner, if any, on whose behalf the proposal is made; and
(iii) as to the shareholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made, (x) the name and
address of such shareholder as it appears on Homestead's books and of such
beneficial owner and (y) the number of shares of each class of Homestead
Common Stock which are owned beneficially and of record by such shareholder
and such beneficial owner, if any.
CLASSIFIED BOARD. The Homestead Board has been divided into three classes.
One class will hold office initially for a term expiring at the annual meeting
of shareholders to be held in 1997, another class will hold office initially
for a term expiring at the annual meeting of shareholders to be held in 1998
and another class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1999. As the term of each class expires,
directors in that class will be elected for a term of three years and until
their successors are duly elected and qualified. Since at least two annual
meetings will generally be required to effect a change in a majority of the
Homestead Board, this provision could have the effect of delaying, deferring
or preventing a change in control of Homestead even if a change in control
were in the shareholders' interests.
CERTAIN STATUTORY PROVISIONS. Homestead is subject to the Maryland General
Corporation Law (the "MGCL"), which imposes certain restrictions and requires
certain procedures with respect to the acquisition of certain levels of share
ownership and business combinations, including combinations with interested
shareholders. These provisions of the MGCL could have the effect of delaying,
deferring or preventing a change in control of Homestead even if a change in
control were in the shareholders' interest. Additionally, the Homestead
Articles exempt SCG and its affiliates from these provisions, allowing SCG and
its affiliates to take actions that other persons are prohibited from taking,
which actions may not be in the best interests of the shareholders other than
SCG. See "Certain Provisions of Maryland Law and of Homestead's Charter and
Bylaws".
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the consummation of the Transaction, there will be no public market
for the Homestead Securities. Application will be made to quote the Homestead
Common Stock and the Homestead Warrants on the Nasdaq Stock Market (National
Market). Although such quotation is a condition to closing of the Mergers,
there can be no assurance that such application will be accepted or that, if
accepted, an active trading market will develop. In addition, there can be no
assurance of the price at which holders of the Homestead Common Stock or
Homestead Warrants will be able to sell such Homestead Securities. From time
to time, the stock market experiences significant price and volume volatility,
which may affect the market price of the Homestead Common Stock or Homestead
Warrants for reasons unrelated to Homestead's performance.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Homestead Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market price for Homestead Common Stock. Upon completion of the Distribution,
Homestead will have 17,749,735 shares of Homestead Common Stock outstanding.
Except for shares issued to SCG, all such shares, as well as 10,000,000 shares
issuable upon exercise of Homestead Warrants (other than those issued to SCG),
may be sold in the public markets without limitation. Additionally, up to
6,720,783 shares of Homestead Common Stock
A-12
<PAGE>
may be issuable upon exercise of outstanding convertible mortgage notes and up
to 21,049,834 shares of Homestead Common Stock may be issuable upon exercise
of convertible mortgage notes to be issued pursuant to the Funding Commitment
Agreements (described herein). All such shares of Homestead Common Stock may
be sold in the public markets pursuant to registration rights or available
exemptions from registration. See "Shares Available for Future Sale". No
prediction can be made regarding the effect of future sales of Homestead
Common Stock on the market price thereof.
ABSENCE OF DIVIDENDS
Homestead intends to retain its earnings to finance its growth and for
general corporate purposes and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy".
DIVIDEND POLICY
Homestead is a newly organized company. For Federal income tax purposes,
Homestead is organized as a Subchapter C corporation rather than a real estate
investment trust. As a result, it is under no obligation to distribute
substantially all or any of its earnings to shareholders. The declaration and
payment of dividends by Homestead are subject to the discretion of the
Homestead Board. Any determination as to the payment of dividends will depend
upon the results of operations, capital requirements and financial condition
of Homestead and such other factors as the Homestead Board deems relevant. The
Homestead Board intends to follow a policy of retaining earnings to finance
Homestead's growth and for general corporate purposes and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
A-13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Homestead as of March
31, 1996 and as adjusted to give effect to the Transaction. This table should
be read in conjunction with the pro forma selected financial information, the
historical Balance Sheet and Pro Forma Condensed Consolidated Balance Sheet of
Homestead, and the related notes thereto contained elsewhere herein. See
"Homestead Pro Forma Selected Financial Information" and "Index to Homestead
Financial Statements".
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term notes payable.... $ -- $ --
Convertible mortgage notes
payable.................... -- 51,563
Shareholders' equity:
Common Stock, par value
$.01 per share, 1,000
shares authorized
(250,000,000 shares
authorized pro forma);
0 shares issued and
outstanding (17,749,735
shares issued and
outstanding pro forma)... -- (1) 177 (2)
Additional paid-in
capital/contributed
capital.................. -- 176,108
Shares in escrow.......... -- (29,797)(3)
Retained earnings......... -- 5,284
--------- -------------
Total shareholders'
equity................. $ -- $151,772 (2)
--------- -------------
Total capitalization.... $ -- $203,335 (4)
========= =============
</TABLE>
- --------
(1) Homestead was initially capitalized on April 18, 1996 in the amount of
$1,000 in respect of the issuance of 1,000 shares.
(2) Does not include 10,000,000 shares of Homestead Common Stock issuable upon
exercise of outstanding Homestead Warrants or any shares of Homestead
Common Stock which may be issuable upon the conversion of any convertible
mortgage notes payable.
(3) Reflects the shares of Homestead Common Stock to be issued to and held in
escrow for SCG. As each property is funded under the Funding Commitment
Agreements, the shares of Homestead Common Stock would be transferred to
SCG.
(4) The total capitalization does not reflect the additional funding to be
provided by PTR and ATLANTIC in the form of convertible mortgage notes
pursuant to the Funding Commitment Agreements subsequent to the date of
the Transaction. Therefore, the total capitalization as reflected in the
pro forma above does not reflect the entire Transaction.
A-14
<PAGE>
HOMESTEAD PRO FORMA SELECTED FINANCIAL INFORMATION
The following table sets forth certain unaudited pro forma selected
condensed consolidated financial information for Homestead after giving effect
to the Transaction, as if it had been consummated, with respect to statements
of operations data, as of January 1, 1995, or, with respect to balance sheet
data, as of the date presented. The information presented is derived from,
should be read in conjunction with, and is qualified in its entirety by
reference to, the historical balance sheet and the notes thereto and unaudited
pro forma condensed consolidated financial information and the notes thereto
appearing elsewhere in this Appendix A. The unaudited selected pro forma
condensed consolidated financial information have been included for
comparative purposes only and do not purport to be indicative of the results
of operations or financial position which actually would have been obtained if
the Transaction had been effected at the dates indicated or of the financial
position or results of operations which may be obtained in the future. See
"Homestead Pro Forma Summary Financial Information" and "Homestead Pro Forma
Financial Statements".
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATIONS SUMMARY
Room Revenue....................................... $ 6,753 $ 18,337
Total Revenue...................................... 6,874 18,721
Property Operating Expenses........................ 2,946 7,600
Corporate Operating Expenses....................... 2,000 6,188
EBITDA(1).......................................... 1,928 4,933
Net Income (Loss).................................. 48 (937)
PER SHARE DATA:
EBITDA(1).......................................... $ 0.11 $ 0.28
Net Income (Loss).................................. .003 (.053)
Net Book Value..................................... $ 8.55 N/A
Weighted Average Number of Shares of Homestead
Common Stock Outstanding.......................... 17,749,735 17,749,735
<CAPTION>
PRO FORMA
MARCH 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION:
Property and Equipment, net........................ $ 156,988
Total Assets....................................... 211,538
Convertible Mortgage Notes Payable................. 51,563
Total Liabilities.................................. 59,766
Shareholders' Equity............................... $ 151,772
Common Stock Outstanding........................... 17,749,735
</TABLE>
- --------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund cash needs. Homestead has included EBITDA herein
because Homestead believes that it is one measure used by certain
investors to determine operating cash flow.
A-15
<PAGE>
THE TRANSACTION DESCRIBED HEREIN INVOLVES THE SUBSIDIARIES OF PTR (THE "PTR-
HOMESTEAD VILLAGE GROUP"), ATLANTIC (THE "ATLANTIC-HOMESTEAD VILLAGE GROUP")
AND SCG (THE "SCG-HOMESTEAD VILLAGE GROUP") ENGAGED IN THE DEVELOPMENT,
OWNERSHIP AND MANAGEMENT OF HOMESTEAD VILLAGE FACILITIES. SET FORTH BELOW ARE
SELECTED FINANCIAL INFORMATION ON A COMBINED BASIS FOR SUCH HOMESTEAD RELATED
SUBSIDIARIES PRESENTED SEPARATELY FOR EACH OF THE ABOVE ENTITIES. HOMESTEAD
MANAGEMENT BELIEVES THAT PRESENTING SUCH INFORMATION ON A COMBINED BASIS
RESULTS IN A MORE MEANINGFUL PRESENTATION THAN PRESENTING THE SEPARATE
INFORMATION OF EACH SUBSIDIARY.
PTR-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the PTR-Homestead Village Group.
The financial information for the three-month periods is not necessarily
indicative of results for subsequent periods or the full year. This selected
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
PTR-Homestead Village Group" and the historical combined financial statements
and related notes thereto of the PTR-Homestead Village Group contained
elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ -------------------------------------
1996 1995 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Room Revenue.......... $ 6,753 $ 3,359 $ 18,337 $ 7,827 $ 2,554 $ 377
Property Operating
Expenses............. 3,446 1,458 8,618 3,606 1,302 254
Corporate Operating
Expenses............. 563 371 1,933 1,158 413 16
Total Expenses........ 5,829 2,766 15,852 7,018 2,204 367
Net Income............ 1,039 683 2,851 974 409 10
OTHER DATA:
EBITDA(1) $ 2,859 $ 1,620 $ 8,152 $ 3,228 $ 898 $ 107
Net cash provided by
(used in):
Operating
activities......... 2,264 200 6,019 2,381 599 374
Investing
activities......... (16,724) (10,480) (48,116) (35,474) (15,751) (7,007)
Financing
activities......... 15,495 9,985 43,065 33,832 15,275 6,699
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1996 1995 1994 1993 1992
--------- -------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Property and Equipment, net........ $120,871 $105,002 $59,099 $23,898 $6,972
Total Assets....................... 126,390 108,965 60,866 24,921 7,076
Current Liabilities................ 6,742 5,850 3,667 2,529 367
Intercompany Debt.................. 11,185 80,144 45,131 19,290 5,123
Convertible Mortgage Notes Payable. 77,289 -- -- -- --
Total Liabilities.................. 95,216 85,994 48,798 21,818 5,490
Owners' Equity..................... 31,174 22,971 12,068 3,103 1,586
</TABLE>
- --------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. The PTR-Homestead Village Group has
included EBITDA herein because the PTR-Homestead Village Group believes
that it is one measure used by certain investors to determine operating
cash flow.
A-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PTR-HOMESTEAD VILLAGE GROUP
OVERVIEW
The PTR-Homestead Village Group historical operating results reflect the
growth and evolution of both the Homestead Village concept and the extended-
stay lodging business as a whole. Since the first Homestead Village facility
opened in 1992, the PTR-Homestead Village Group has developed an additional 26
properties in less than four years.
ENVIRONMENTAL MATTERS
The PTR-Homestead Village Group is not aware of, nor does it expect, any
environmental condition on its properties to have a material adverse affect
upon its business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, PTR-Homestead Village Group invested
$125.2 million for the acquisition and development of 36 Homestead Village
properties, 23 of which are operating, seven of which are under construction
and six of which are in pre-development planning. These investments have been
financed through a combination of intercompany debt borrowed from PTR and
contributed capital.
At March 31, 1996, the PTR-Homestead Village Group expects to invest an
additional $158.8 million for the acquisition, development and construction of
18 properties over the next two years. The foregoing transactions are subject
to a number of conditions, and Homestead cannot predict with certainty that
any of them will be consummated.
PTR-Homestead Village Group expects to finance construction, development and
land acquisitions primarily with cash on hand, convertible mortgage loans to
be made under the Funding Commitment Agreements, exercise of Homestead
Warrants by SCG pursuant to the SCG Investor Agreement, possible exercise of
Homestead Warrants by other warrantholders and cash from future securities
offerings.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Total revenue for the year ended December 31, 1995 was $18.7 million,
representing an increase of $10.7 million over the previous year. This
increase was due primarily to (i) a 67% increase in the number of operating
properties from twelve to twenty and (ii) a 14% increase in the average weekly
rate for stabilized properties, from $186 to $212 per week.
Total costs and expenses for the year ended December 31, 1995 were $15.9
million, representing an increase of $8.8 million over the previous twelve
months. Property operating expense increases of approximately $5.0 million can
be attributed to the (i) increase in the number of operating properties noted
above, (ii) an increase in property taxes as a result of the additional
operating properties and (iii) refinements in the number and quality of
property-level programs and services. Corporate operating expenses increased
approximately $0.8 million due to additional REIT management fees incurred as
a result of increased property cash flow.
A-17
<PAGE>
Depreciation of the cost of properties and improvements is provided using
the straight-line method over the estimated useful lives. Depreciation expense
increased $1.5 million in 1995 primarily due to the eight new properties
opened in 1995 and the full year of depreciation being charged for the nine
properties opened in 1994.
Interest expense increased $1.5 million over 1994 due primarily to eight
additional properties opening in 1995. Additionally, a full year of interest
was incurred on the nine properties which opened in 1994.
1994 COMPARED TO 1993
PTR-Homestead Village Group ended 1994 with twelve operating properties
versus three operating properties at the end of 1993. These nine new
properties generated a $4.5 million revenue increase over the prior twelve
months. The remaining $0.9 million increase in revenue can be attributed to an
increase in average weekly rates for stabilized properties increasing from
$169 to $186 per week or approximately 10%.
Total costs and expenses increased by $4.8 million over the same period,
from $2.2 million to $7.0 million. Most of the $2.3 million increase in
property expenses is attributable to the nine new property openings. The major
component of the increase is due to property taxes that are expensed on
operating properties. Corporate operating expenses related to REIT management
fees increased approximately $0.7 million during this period as a result of
increased property cash flow.
Depreciation expense for December 31, 1994 increased $0.6 million over 1993
primarily due to the addition of nine new properties in 1994. Interest expense
for the period increased $1.2 million due primarily to the completion of the
nine new properties referred to above incurring interest plus a full year of
interest on the properties which opened in 1993.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Total revenue for the three months ended March 31, 1996 was $6.9 million, an
increase of $3.4 million over the three months ended March 31, 1995. This
increase was due to both the addition of eleven properties over the period, as
well as a 6.9% increase in the average weekly rates for stabilized properties
from $203 to $217 per week.
Total costs and expenses increased from $2.8 million to $5.8 million over
the same period, an increase of $3.0 million. Property operating expenses
contributed $2.0 million to this increase, due to a greater number of
operating properties and the addition of certain customer amenities and
property level programs and services. Corporate operating expenses increased
approximately $0.2 million due to additional REIT management fees incurred as
a result of increased property cash flow.
The increase in depreciation expense of $0.5 million is primarily due to the
additional eleven properties which were opened between April 1995 and March
1996. An increase of $0.4 million in interest expense resulted from additional
operating properties and from the issuance of 9.00% convertible mortgage notes
payable to PTR on January 24, 1996, replacing intercompany debt bearing
interest at 7.37%.
A-18
<PAGE>
ATLANTIC-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the Atlantic-Homestead Village
Group. The financial information for the three month period ended March 31,
1996 is not necessarily indicative of results for subsequent periods or the
full year. These selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Atlantic-Homestead Village Group" and the combined historical
financial statements and related notes thereto of the Atlantic-Homestead
Village Group contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS INCEPTION
ENDED (APRIL 3, 1995)
MARCH 31, TO
1996 DECEMBER 31, 1995
------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATIONS SUMMARY:
Corporate operating expenses................... $ 18 $ 63
Net Loss....................................... (12) (59)
OTHER DATA:
Net Cash Provided by (used in):
Operating activities......................... $ 158 $ 81
Investing activities......................... (6,994) (4,118)
Financing activities......................... 6,724 4,221
<CAPTION>
MARCH 31,
1996 DECEMBER 31, 1995
------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION:
Properties under development................... $10,437 $ 2,627
Total Assets................................... 12,326 4,317
Development Costs Payable...................... 1,142 15
Total Current Liabilities...................... 1,452 155
Intercompany Debt.............................. 9,295 2,627
Total Liabilities.............................. 10,747 2,782
Owners' Equity................................. 1,579 1,535
</TABLE>
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF ATLANTIC-HOMESTEAD VILLAGE GROUP
OVERVIEW
The Atlantic-Homestead Village Group's historical combined financial
statements reflect the acquisition and development of Homestead Village
properties. There are currently no operating properties. As of March 31, 1996,
the Atlantic-Homestead Village Group has one property under construction and
25 in pre-development planning (as defined).
ENVIRONMENTAL MATTERS
The Atlantic-Homestead Village Group is not aware of, nor does it expect,
any environmental condition on its properties to have a material adverse
affect upon its business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, Atlantic-Homestead Village Group
invested $10.4 million for the acquisition and development of Homestead
Village properties. These investments have been financed through intercompany
debt.
At March 31, 1996, Atlantic-Homestead Village Group plans to invest an
additional $148.3 million for the acquisition, development and construction of
26 Homestead Village properties over approximately the next eighteen months.
Atlantic-Homestead Village Group expects to finance construction,
development and acquisitions primarily from convertible mortgage loans to be
made under the Funding Commitment Agreements, exercise of Homestead Warrants
by SCG pursuant to the SCG Investor Agreement, possible exercise of Homestead
Warrants by other warrantholders and cash from future securities offerings.
RESULTS OF OPERATIONS
PERIOD FROM APRIL 3, 1995 (DATE OF FORMATION) THROUGH DECEMBER 31, 1995 AND
THE THREE MONTHS ENDED MARCH 31, 1996
The Atlantic-Homestead Village Group consists of several entities that are
subsidiaries of ATLANTIC. During 1995 and the three months ended March 31,
1996, the Atlantic-Homestead Village Group has been developing Atlantic-
Homestead Village properties. As described in the combined financial
statements of the Atlantic-Homestead Village Group, property acquisitions and
development costs are assumed to have been funded via intercompany debt
borrowed from ATLANTIC. All interest related to the intercompany debt during
1995 and the three months ended March 31, 1996 has been capitalized and
included in "Properties under development". Operating expenses during 1995 and
the three months ended March 31, 1996 pertain to pursuit costs relating to
abandoned projects and various administrative expenses.
A-20
<PAGE>
SCG-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the SCG-Homestead Village Group.
The financial information for the three month period ended March 31, 1996 is
not necessarily indicative of results for subsequent periods or the full year.
These selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of SCG-Homestead Village Group and the historical combined
financial statements and related notes thereto of the SCG-Homestead Village
Group contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------
1996 1995 1995 1994 1993 1992
--------- ------- ------- ------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
REIT and Property
Management Fees.......... $ 861 $ 402 $ 2,007 $ 792 $ 254 $ 43
Payroll and related
expenses................. 1,909 665 4,276 1,713 707 152
Total Expenses............ 3,097 920 7,176 2,454 922 233
Net Loss.................. $(2,236) $ (518) $(5,155) $(1,662) $(668) $(190)
OTHER DATA:
EBITDA(1)................. $(2,177) $ (510) $(5,046) $(1,640) $(668) $(190)
Net Cash Provided by (used
in):
Operating activities.... (2,573) (737) (4,951) (1,545) (565) (206)
Investing activities.... (73) (55) (234) (55) -- --
Financing activities.... 2,658 792 5,185 1,600 565 206
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------
1996 1995 1994 1993 1992
--------- ------- ------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
REIT and Property
Management Fees
Receivable............... $ 481 $ 470 $ 55 $ 10 $ 16
Furniture and Equipment,
net...................... 233 228 47 -- --
Total Assets.............. 802 779 102 10 16
Intercompany Debt......... 2,043 1,147 -- -- --
Current Liabilities....... 2,543 2,046 251 96 --
Total Liabilities......... 2,543 2,046 251 96 --
Owners' Equity (Deficit).. (1,741) (1,267) (149) (86) 16
</TABLE>
- --------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. The SCG-Homestead Village Group has
included EBITDA herein because the SCG-Homestead Village Group believes
that it is one measure used by certain investors to determine operating
cash flow.
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF SCG-HOMESTEAD VILLAGE GROUP
OVERVIEW
The SCG-Homestead Village Group's business consists of providing development
and property and REIT management services for the Homestead Village properties
developed, owned and operated by the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group. SCG-Homestead Village Group earns REIT
management fees which in general are 16% of cash flow (as defined) and
property management fees which are computed as a percentage (5%-7%) of gross
revenues (as defined).
LIQUIDITY AND CAPITAL RESOURCES
The SCG-Homestead Village Group has incurred operating deficits since
inception as a result of performing development services for the PTR-Homestead
Village Group and the Atlantic-Homestead Village Group without compensation.
Under the respective REIT management agreements, fees are paid from the cash
flow of operating Homestead Village properties. Deficits are a result of
having a significant number of properties under development thus incurring
higher development overhead. The deficits have been and are expected to
continue to be funded through intercompany borrowings and contributed capital
from SCG.
From inception through March 31, 1996, SCG-Homestead Village Group invested
$0.3 million in furniture and equipment for the support of the operations and
development of the Homestead Village properties.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
REIT and property management fees for the year ended December 31, 1995 were
$2.0 million, an increase of $1.2 million, or approximately 153%, over the
year ended December 31, 1994. These additional fees are primarily attributable
to the revenues and cash flow generated by the new Homestead Village
properties opened in 1995 (eight) as well as Homestead Village properties
experiencing their first full year of operations during 1995 (nine).
Costs and expenses increased by $4.7 million, or approximately 192%, to $7.2
million for the year ended December 31, 1995 from $2.5 million for the year
ended December 31, 1994. The additional expenses resulted primarily from
increased payroll, recruiting and relocation and other expenses associated
with increased staffing given (i) the additional Homestead Village properties
receiving property management services and (ii) the additional property
acquisition and development activities applicable to the current and future
growth of the Homestead Village properties.
1994 COMPARED TO 1993
REIT and property management fees for the year ended December 31, 1994 were
$0.8 million, which is an increase of $0.5 million, or approximately 212%,
over the year ended December 31, 1993. These additional fees are primarily
attributable to the revenue and cash flow generated by Homestead Village
properties which opened in 1994 (eight) as well as the effect of one Homestead
Village property experiencing its first full year of operations during 1994.
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<PAGE>
Costs and expenses increased $1.5 million (166%), to $2.4 million for the
year ended December 31, 1994 from $0.9 million for the year ended December 31,
1993. The additional expenses resulted primarily from increased payroll and
other expenses associated with increased staffing resulting from the growth in
operating properties and property acquisitions and development activity.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
REIT and property management fees for the three months ended March 31, 1996
were $0.9 million, an increase of $0.5 million, or approximately 114%, over
the three months ended March 31, 1995. These additional fees are primarily
attributable to (i) the increased revenue and cash flow generated by four
Homestead Village properties which opened during the three months ended
March 31, 1996 as well as seven Homestead Village properties which opened
during the period April 1, 1995 to December 31, 1995 and (ii) the property
management fee percentage which increased to 7% of gross revenues commencing
January 1, 1996.
Costs and expenses increased $2.2 million, or approximately 237%, to $3.1
million for the three months ended March 31, 1996 from $0.9 million for the
three months ended March 31, 1995. The additional expenses resulted primarily
from increased payroll, recruiting and relocation, overhead allocated by SCG
and other expenses associated with increased staffing as a result of the
continued growth in operating Homestead Village properties and property
acquisition and development activities.
BUSINESS
OBJECTIVES
The objective of Homestead is to be the preeminent developer, owner, and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead intends to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead currently owns and operates 27 facilities in seven cities, has
begun construction on six additional facilities and has an additional 47
properties in pre-development planning. (See "--Homestead Village
Properties".)
Homestead seeks to offer a purpose-built standardized product for the value-
conscious business customer on temporary assignment, undergoing relocation or
in training. Homestead will offer as its primary amenities price and value.
Secondary amenities include location and site livability--convenience to the
targeted business base and services--in an environment that is attractive,
well landscaped, and secure.
Customer research indicates that the primary Homestead Village customer stay
is work-related. The largest proportion of these relate to temporary business
assignments. Average income of Homestead customers exceeds $50,000. Homestead
believes the customer's foremost reason for selecting Homestead is the high
level of value delivered to the customer in relation to the price. Forty-four
percent (44%) of Homestead customers pay for their stay either out-of-pocket
(are not reimbursed) or on a per diem. Twenty-five percent (25%) of Homestead
Village customers are direct employer referrals, in many cases due to
training. The average length of stay for a customer is in excess of four
weeks. Management believes that Homestead will benefit from well-defined
trends in business including an increased focus on cost-efficiency, reduction
in travel expenses, out-sourcing, and geographic dispersion of customers and
operations.
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<PAGE>
Homestead is founded on research. The Homestead product was conceived and
has evolved to meet consumer needs through research, testing, and the
operating experience gained through the development and operation of twenty-
seven properties over the past four years. Homestead believes its operating
experience and its affiliation with Security Capital Investment Research
Incorporated ("Security Capital Investment Research") allow it to better
target markets where supply and demand factors permit high occupancies at
increasing rental rates. Homestead targets submarkets that exhibit strong
employment and demographic trends in selecting locations with barriers to
extensive competitive development. Homestead believes it brings a strategic
discipline to determining an investment focus which provides favorable initial
returns and long-term growth prospects. Through its Investment Committee,
described below, and due diligence process, Homestead employs uniform systems
and procedures to achieve its investment goals.
Homestead believes that the Homestead Village brand identity and the market
opportunity in extended-stay lodging is best served by a property specifically
designed and built to Homestead's standards and specifications. Accordingly,
while Homestead intends to be an active national developer, it has no plans or
intention to acquire existing extended-stay properties or to convert other
existing lodging properties to extended-stay use. To ensure maximum control
over the brand identity and quality of operations, Homestead has no plans or
intention to franchise the Homestead Village concept.
Homestead minimizes development risks by having zoning, site planning,
construction budgets and similar risks resolved or assumed by third parties
prior to Homestead's commitment to a transaction. Homestead incorporates into
its development process certain proprietary technologies, design and
purchasing aimed at enhancing occupancy and rental growth while reducing
ongoing maintenance costs. Homestead has had the opportunity to evaluate and
refine its product through its history of development. Homestead focuses on
the quality of construction, materials and design with a view towards
minimizing long term operation and maintenance costs. Homestead uses
independent general contractors for the construction of its properties and
intends to use a number of such contractors depending upon the geographic
area, costs of construction and physical capacities of the contractors.
Homestead personnel will oversee the progress of construction on a regular
basis during the development cycle.
HISTORY
Homestead was initially created as a byproduct of the multifamily
development activities of PTR. The PTR REIT Manager (defined herein)
identified a customer need not ideally addressed through its traditional
multifamily garden apartment product or through corporate apartments operated
within a garden apartment context. The PTR REIT Manager believed that a
product which offered greater flexibility of rental term, a fully furnished
studio apartment with cooking facilities, a focused array of services (such as
limited maid service, voice mail, cable or satellite television), at an
affordable price would meet the needs of a significant and growing segment of
demand for those business customers on temporary assignment, training, or
relocating.
In conjunction with its research affiliate, Security Capital Investment
Research, the PTR REIT Manager engaged in extensive study to determine an
optimum approach to what it originally termed "Corporate Affordable Housing".
Beginning in 1992, the PTR REIT Manager initiated development projects in
Dallas and Houston, Texas. It was the PTR REIT Manager's express intention to
gain operating experience and to fully understand market characteristics prior
to committing to full-scale Homestead Village development on a broad
geographical basis. SCG funded the early stages of development of the
Homestead Village concept.
Homestead properties which opened in 1992 and 1993 enjoyed substantial
occupancy and customer acceptance. During this period, management reviewed
Homestead Village properties and
A-24
<PAGE>
operations to refine and improve its approach to serving the Homestead
customer. Management believes its initial operating experience allowed it to
not only better understand the depth and scope of the available market
opportunity for Homestead Village but also to create a better development
process and operating system in response to that opportunity.
During 1995, a distinct and separate management team was created to support
and expand the opportunity for Homestead Village in PTR and ATLANTIC. PTR and
ATLANTIC are affiliates of SCG and are REITs which own, operate and develop
multifamily properties. PTR's target market is the western United States and
ATLANTIC's target market is the southeastern United States. Homestead projects
were developed by each entity in its own region. From January 1995 to April
1996 the number of professional employees focused exclusively on Homestead
Village increased from eight to 66 and the number of on-site personnel is
currently 318. Operations and development were organized within PTR and
ATLANTIC to meet the distinct needs of the moderate priced, extended-stay
lodging business. Homestead believes it has not only brought a focused
approach to the development and operations of moderate priced, extended-stay
properties, but that Homestead currently has superior management depth and
experience in the industry.
As a result of the Mergers, Homestead will become a separate entity. It has
been organized as a Subchapter C corporation and is internally managed.
However, Homestead has a relationship with SCG which it intends to continue
through the Administrative Services Agreement and will enjoy the benefits of
SCG's organization and service. See "--Administrative Services Agreement".
THE FACILITIES
Homestead has developed, owns and operates 27 Homestead Village properties
representing in the aggregate 3,747 units in seven cities. Homestead currently
has six Homestead Village properties under construction totaling 833 units
within two of these cities as well as two additional cities. In addition,
Homestead owns or controls through contracts 47 development sites for which it
plans to initiate construction within the next 12 months. Units operating,
under construction, or in pre-development planning aggregate 10,908 units in
23 cities. Homestead has 46 additional sites under review and is continually
searching for additional appropriate sites.
The average size and development cost of the initial 80 Homestead Village
properties is 136 units and $40,593 per unit, respectively. It is expected,
however, that the size and cost to develop a property will vary significantly
by geographic location. The six Homestead Village properties currently under
construction average 139 units at an average project cost of $5.7 million with
an average cost per unit of $41,350.
Homestead Village properties are designed and built to uniform plans
developed and periodically refined since 1991. Units generally contain 260 to
325 square feet of fully furnished living space, with kitchen facilities
including full-size refrigerator, microwave, sink and cook-top. Generally,
units include combination work station/eating area, chair and features such as
individual voice mail, cable/satellite television, weekly housekeeping,
dataport and free local telephone calls.
For the quarter ended March 31, 1996, the stabilized Homestead Village
properties had an average economic occupancy of 87% with an average weekly
rate of $217 per unit.
Each Homestead Village property employs a General Manager who is responsible
for the operations of the particular property. The General Manager shares
duties with and oversees a staff typically consisting of a Guest Services
Manager, Operations Manager, a Maintenance Supervisor, front desk clerk and
housekeeping/laundry staff of five to seven individuals (some of whom are
part-time employees). The office at each property is generally open daily from
7:00 am to 7:00 pm.
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<PAGE>
Homestead expects that the majority of daily operational decisions will be
made by the General Manager under the supervision of a Regional Manager who
will be responsible for six to twelve properties, depending on geographic
location. The Regional Manager oversees the performance of the General
Managers in such areas as guest service, property maintenance, staffing and
cost control. Each Homestead Village property is measured against a detailed
revenue and expense budget, as well as against the performance of Homestead's
other properties. Homestead employs a series of incentive programs,
encompassing all employees, based on guest service, cleanliness, recruiting
and retaining people and property level performance.
Homestead has invested substantially in training for its regional and on-
site personnel. Twelve separate training modules with subjects ranging from
personal selling and guest service to guest safety are conducted on a regular
basis. Training design and organizational development are administered on a
corporate basis with field implementation personnel located within a
geographic region. Homestead views its investment in training and developing
its site-level personnel as essential to its goal of providing a high
customer-service standard consistent with the objective of becoming the
preeminent operator in the moderate priced, extended-stay lodging business.
GROWTH AND DEVELOPMENT STRATEGY
Homestead's goal is to become a national provider of moderate priced,
extended-stay lodging in its target markets. Homestead intends to achieve this
goal by developing properties in a disciplined manner in its target markets,
providing high value accommodations for its customers, actively managing its
existing properties to increase revenues and reduce operating costs, and
increasing awareness of the moderate priced, extended-stay concept and the
Homestead Village name. Homestead currently owns and operates 27 properties,
has begun construction of six additional properties and has an additional 47
properties in pre-development planning. Homestead expects to have a total of
31 properties operational by the end of 1996. Homestead plans to continue an
active development program thereafter. Homestead's plans call for the average
facility to have approximately 136 extended-stay rooms and to take
approximately eight to ten months to construct.
Homestead targets major metropolitan areas which, based on its own research,
it has determined have suitable submarkets with favorable employment and
demographic trends. To achieve and maintain certain management efficiencies,
Homestead has elected not to enter markets where its submarket research
indicates that Homestead is not likely to be successful in achieving multiple
desirable site locations. Homestead employs dedicated site acquisition
professionals who evaluate each site against a set of eighteen separate
criteria where optimum standards have been established.
As part of its development strategy, Homestead employs contingent contracts
which allow it to conduct thorough due diligence and obtain entitlements prior
to taking title to a site. Homestead employs a dedicated due diligence staff
of six experienced professionals which reviews each investment according to
uniform standards concerning environmental, legal, entitlement and
geotechnical risk.
Each investment transaction undergoes a detailed and comprehensive review by
operational and development senior management and a subsequent review by
Homestead's Investment Committee. Members of the Investment Committee include
David Dressler, Jr., Chairman and President, John Patterson and Donald
Schultz, each a Senior Vice President, and Gary DeLapp, a Vice President. The
Investment Committee process is designed to review both the specific
investment as well as to ensure its conformance to Homestead's investment
policies and goals.
Sites for development will be selected by Homestead's real estate
professionals, subject to review and approval of the Investment Committee.
Homestead currently maintains offices in Atlanta, Dallas and Santa Fe.
Homestead expects to open regional offices in other geographic areas in the
future as Homestead increases the number of regions in which it is focusing
its development. Homestead will
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<PAGE>
utilize independent general contractors for the construction of its lodging
facilities and intends to use a number of such contractors depending upon
geographic area, costs of construction, and financial and physical capacities
of the contractors. Homestead's personnel will oversee the progress of
construction on a regular basis during the development cycle.
OPERATING STRATEGY
Homestead's business strategy is to develop moderate priced, extended-stay
facilities providing an affordable and attractive lodging alternative for
value conscious business customers looking for extended-stay accommodations.
Homestead's goal is to provide its customers with a level of amenities needed
to optimize room and occupancy rates while maintaining high operating margins
at its facilities. Homestead attempts to achieve this goal through the
following:
APPEAL TO VALUE CONSCIOUS GUESTS. Homestead's facilities are designed to
offer quality accommodations for guests at substantially lower rates than most
other extended-stay lodging providers and hotels. Homestead's properties
currently offer extended-stay accommodations at a standard weekly rate of
between $189 and $259 per week. Room rates at Homestead's facilities may vary
significantly, however, depending upon specific market factors and the size of
the room. These rates contrast with average weekly rates of approximately $500
for traditional extended-stay hotels.
LODGING FACILITY FEATURES. Homestead's facilities are designed and built to
uniform plans. Units generally contain 260 to 325 square feet of fully
furnished living space, with kitchen facilities including full-size
refrigerator, microwave, sink and cook-top. Generally, units include
combination work station/eating area, chair and features such as individual
voice mail, cable/satellite television, weekly housekeeping, dataport and free
local telephone calls.
STANDARDIZED CONCEPT. Homestead has developed standardized plans and
specifications for its properties which lower construction and purchasing
costs and establish uniform quality and operational standards.
OPERATING EFFICIENCIES. Homestead believes that the design and price level
of its properties attract guest stays of several weeks or more, which result
in a more stable revenue stream and, coupled with low-labor amenities, will in
turn lead to reduced administrative and operational costs and higher operating
margins.
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<PAGE>
HOMESTEAD VILLAGE PROPERTIES
Operating and development properties are located in 23 metropolitan areas in
14 states. The table below demonstrates the geographic distribution of
Homestead's initial 80 property investments at May 20, 1996:
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES
----------------------------------
UNDER IN PRE- PERCENTAGE OF
OPERA- CONSTRUC- DEVELOPMENT ASSETS BASED
CITY TING TION PLANNING TOTAL ON COST(1)
---- ------ --------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
Albuquerque, NM......... 1 1 2 2%
Atlanta, GA............. 1 5 6 8%
Austin, TX.............. 2 1 1 4 4%
Dallas, TX.............. 9 1 10 9%
Denver, CO.............. 2 2 4 5%
Houston, TX............. 8 8 7%
Jacksonville, FL........ 1 1 1%
Kansas City, MO......... 1 1 1%
Los Angeles, CA......... 1 1 1%
Miami/Ft. Lauderdale,
FL..................... 3 3 5%
Nashville, TN........... 2 2 3%
Orange County, CA....... 1 1 1%
Phoenix, AZ............. 2 2 4 5%
Portland, OR............ 1 1 2%
Raleigh, NC............. 3 3 4%
Richmond, VA............ 1 1 2%
Salt Lake City, UT...... 2 2 3%
San Antonio, TX......... 3 3 3%
San Diego, CA........... 2 2 3%
San Francisco, CA....... 2 5 7 11%
Seattle, WA............. 4 4 6%
Tampa, FL............... 3 3 4%
Washington, DC.......... 7 7 10%
--- --- --- --- ----
Total............... 27 6 47 80 100%
=== === === === ====
</TABLE>
- --------
(1) Represents budgeted development costs, which includes the cost of land,
fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period, for properties under development.
ADMINISTRATIVE SERVICES AGREEMENT
SCG currently provides certain administrative services to Homestead through
Security Capital Pacific Incorporated (the "PTR REIT Manager") and Security
Capital (Atlantic) Incorporated (the "ATLANTIC REIT Manager") and the property
managers for the Homestead Village properties currently owned and developed by
PTR and ATLANTIC. Certain employees of the PTR and ATLANTIC REIT Managers who
performed various services for the Homestead predecessor entities controlled
by PTR and ATLANTIC and who participated in various benefit plans maintained
by SCG will become employees of Homestead and perform similar services.
At or prior to the consummation of the Mergers, Homestead and SCG will enter
into an administrative services agreement (the "Administrative Services
Agreement"), pursuant to which SCG will provide Homestead with certain
administrative, office facility and other services with respect to certain
aspects of Homestead's business. These services will include, but are not
limited to, payroll and tax services, data processing and other computer
services, human resources, research, insurance
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<PAGE>
administration services, cash management, and legal support. The fees payable
to SCG will be based on market rates as mutually agreed. The Administrative
Services Agreement will be for an initial term expiring on December 31, 1996
and will automatically be renewed for one-year terms, subject to approval by a
majority of the disinterested members of the Homestead Board and the approval
by the disinterested members of the Homestead Board of the annual compensation
payable to SCG for services rendered to Homestead.
Homestead believes its relationship with SCG under this agreement provides
certain advantages to Homestead. Homestead believes that a properly structured
Administrative Services Agreement provides Homestead with access to greater
quality and depth of management personnel and resources, highly focused
research, information systems, insurance, cash management and legal support
provided at substantial economies of scale, than it could provide internally.
INDUSTRY OVERVIEW
TRADITIONAL LODGING INDUSTRY
The United States lodging industry is estimated to have generated
approximately $52.7 billion in annual room revenues in 1995 and had
approximately 3.3 million rooms at the end of 1995. Over 62.7% of the
industry's rooms are owned, managed, or franchised by the 10 largest lodging
chains.
Industry statistics, which Homestead believes to be reliable, indicate that
the United States lodging industry's performance is strongly correlated to
economic activity. Room supply and demand historically have been sensitive to
shifts in economic growth, which has resulted in cyclical changes in average
daily room and occupancy rates. Overbuilding in the lodging industry in the
mid and late 1980s, when approximately 500,000 rooms were added, resulted in
an oversupply of rooms. Homestead believes this oversupply and the general
downturn in the economy led to depressed industry performance and a lack of
capital available to the industry in the late 1980s and early 1990s.
Homestead believes that the lodging industry has benefited from a gradually
improving supply and demand balance, evidenced by increased average daily room
and occupancy rates. Room supply growth in the lodging industry has slowed in
recent years as the industry absorbs the oversupply of rooms that resulted
from an annual room supply growth range of approximately 3% to 4% from 1987 to
1990. According to industry reports, which Homestead believes are reliable,
this growth slowed to 1.0% in 1993, 1.4% in 1994, and 1.6% in 1995. The 4.0%
and 2.7% increases in demand (measured by occupied rooms) from 1993 to 1994
and 1994 to 1995, respectively, as compared to increases in supply during the
same periods reflect an improved supply and demand balance in the industry.
Homestead believes these factors were primarily responsible for the increase
in industry occupancy rates from 63.8% in 1993 to 65.4% in 1994 and to 66.1%
in 1995 and the increase in average daily room rates from $60.35 in 1993 to
$62.62 in 1994 and to $65.62 in 1995.
The lodging industry generally can be segmented by the level of service
provided and the pricing of the rooms. Segmentation by level of service is
divided into the following categories: full service hotels, which offer food
and beverage services, meeting rooms, room service, and similar guest
services; limited service hotels, which generally offer only rooms with
amenities such as swimming pools, continental breakfast, or similar limited
services; and all-suites, which generally have limited public spaces but
provide guests with two rooms or distinct partitioned areas and which may or
may not offer food and beverage service to guests. Segmentation by price level
may generally be divided into the following categories with the respective
average daily room rates for 1995: budget ($36), economy-priced ($47), mid-
price ($61), upscale ($80), and luxury ($118).
The all-suites segment of the lodging industry is a relatively new segment,
having developed largely over the past 10 years, and is principally oriented
toward business travelers in the mid-price to
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<PAGE>
upscale price levels. All-suite hotels were developed partially in response to
the increasing number of corporate relocations, transfers, and temporary
assignments and the need of business travelers for more than just a room. To
address those needs, all-suite hotels began to offer suites with additional
space and, in some cases, an efficiency kitchen, and guests staying for
extended periods of time were offered discounts to daily rates when they paid
on a weekly or monthly basis. Because of the perceived positive price/value
relationship, all-suite hotels have generally outperformed the lodging
industry as a whole over the last five years.
EXTENDED-STAY MARKET
Homestead believes that the extended-stay market, in which Homestead
participates, is a continuation of the all-suites phenomenon, and that the
same price/value relationship which has enabled the all-suites segment to
achieve higher than industry average occupancy rates and operating margins
will also carry through to the extended-stay market. Demand for extended-stay
lodging has been stimulated by the economic and social changes resulting from
the increased volume of corporate reorganizations and trends toward down-
sizing and out-sourcing of various functions, the break-up and geographic
dispersion of the traditional family, and technological improvements which
have allowed businesses to relocate outside of large metropolitan areas. These
changes have created new accommodation needs for, among others, corporate
executives and trainees, consultants, sales representatives, construction
workers, and relocating individuals.
MODERATE PRICED, EXTENDED-STAY CONCEPT
Moderate priced, extended-stay lodging competes on the basis of price and
value compared to the extended-stay market generally, thereby providing an
economic inducement to guests who are already attracted to the extended-stay
concept. In addition, moderate priced, extended-stay lodging provides a new
and affordable lodging alternative for guests who are value conscious, have
lower incomes, or are on limited expense accounts. Based on published
occupancy rates for other participants in the extended-stay market, Homestead
believes that there is a strong demand for moderate priced, extended-stay
accommodations and that in certain areas of the country there is no organized
competition for that business. Of the approximately 3.3 million total
available rooms in the United States lodging industry at the end of 1995,
there were approximately 44,000, or 1.4%, dedicated extended-stay rooms at
approximately 380 separate properties. More than 225 of these extended-stay
properties were controlled by only two other competitors, both of which are
priced toward the upscale segment of the extended-stay market.
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service
levels, convenience of location, reputation, reservation systems, name
recognition and supply and availability of alternative lodging in local
markets, including short-term lease lodging facilities. Homestead's facilities
will compete with a number of competitors, including budget and economy
segment hotels and other companies focusing on the extended-stay market. Each
of Homestead's existing properties is located in a developed area that
includes competing lodging facilities. In addition, each of Homestead's
proposed properties is likely to be located in an area that includes competing
facilities. The number of competitive lodging facilities in a particular area
could have a material adverse effect on the levels of occupancy and average
weekly room rates of Homestead's existing and future properties.
Homestead anticipates that competition within the moderate priced, extended-
stay lodging market will substantially increase as participants in other
segments of the lodging industry and others focus on this relatively new
market. A number of other extended-stay lodging facilities exist, many of
which are oriented toward the upscale segment; however, recent announcements
indicate a substantial
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number of competitors intend to enter the mid-priced or economy extended-stay
segment. Homestead may compete for development sites with established entities
which have greater financial resources than Homestead and better relationships
with lenders and sellers. These entities may generally 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,
improve or develop facilities in a market in which Homestead competes, thereby
adversely affecting Homestead's operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
a hazardous substance at a property owned by another may be liable for the
costs of removal or remediation of hazardous substances released into the
environment at that property. The costs of remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of its
properties, Homestead may be potentially liable for any such costs.
Homestead has obtained recent Phase I Surveys on its existing properties and
intends to obtain Phase I Surveys prior to the purchase of any future
properties. The Phase I Surveys are intended to identify potential
environmental contamination and regulatory compliance concerns. Phase I
Surveys generally include historical reviews of the properties, reviews of
certain public records, preliminary investigations of the sites and
surrounding properties and the preparation and issuance of written reports.
Phase I Surveys generally do not include invasive procedures, such as soil
sampling or ground water analysis.
The Phase I Surveys have not revealed any environmental liability or
compliance concern that Homestead believes would have a material adverse
effect on Homestead's business, financial condition or results of operations
nor is Homestead aware of any such liability or concern. Nevertheless, it is
possible that Phase I Surveys will not reveal all environmental liabilities or
compliance concerns or that there will be material environmental liabilities
or compliance concerns of which Homestead will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of Homestead's existing and future properties will not
be affected by the condition of neighboring properties (such as the presence
of leaking underground storage tanks) or by third parties unrelated to
Homestead.
GOVERNMENTAL REGULATION
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 facilities 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 facilities. In
addition, Homestead is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working conditions
and work permit requirements. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could adversely affect
Homestead. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.
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<PAGE>
Under the ADA, all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. Although Homestead
has attempted to satisfy ADA requirements in the designs for its facilities, no
assurance can be given that a material ADA claim will not be asserted against
Homestead, 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. These and other initiatives could
adversely affect Homestead as well as the lodging industry in general.
TRADEMARKS
The Homestead Village name has been registered with the United States Patent
and Trademark office.
INSURANCE
Homestead currently has the types and amounts of insurance coverage that it
considers appropriate for a company in its business. While management believes
that its insurance coverage is adequate, if Homestead were held liable for
amounts exceeding the limits of its insurance coverage or for claims outside of
the scope of its insurance coverage, Homestead's business, results of
operations or financial condition could be materially and adversely affected.
EMPLOYEES
Upon consummation of the Mergers, Homestead will employ approximately 66
professionals and 318 on site personnel. Homestead expects that it will
significantly increase the number of its employees as it expands its business.
Homestead's employees are not subject to any collective bargaining agreements
and management believes that its relationship with its employees is good.
LEGAL PROCEEDINGS
Homestead is not a party to any litigation or claims, other than routine
matters incidental to the operation of the business of Homestead. To date, no
claims have had a material adverse effect on Homestead nor does Homestead
expect that the outcome of any pending claims will have such an effect.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are Homestead's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David C. Dressler, Jr. 42 Chairman, President and Director
C. Ronald Blankenship 46 Director
John P. Frazee, Jr. 51 Director
Mark G. Conroe 38 Senior Vice President
Jeffrey A. Klopf 48 Senior Vice President and Secretary
John R. Patterson 44 Senior Vice President
Donald J. Schultz 41 Senior Vice President
</TABLE>
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<PAGE>
DAVID C. DRESSLER, JR.--42--Director; Chairman of Homestead since May 1996
and President since January 1996; Director and Chairman of Homestead Village
Incorporated since June 1995; Managing Director of PTR since May 1993 and
Director and Managing Director of the PTR and ATLANTIC REIT Managers since
April 1992; from 1984 to May 1991, Regional Partner, Trammell Crow
Residential, Boston, Massachusetts (multifamily real estate development and
property management). While with Trammell Crow Residential, Mr. Dressler was
on the Management Board for Trammell Crow Residential Services (managing
90,000 multifamily units nationwide) and was co-founder and a board member of
Trammell Crow Residential Services-North, which managed 10,000 multifamily
units in the Midwest and Northeast. In his various positions prior to his
affiliation with PTR, Mr. Dressler supervised the development of approximately
6,500 multifamily units.
C. RONALD BLANKENSHIP--46--Director; Chairman of PTR and the PTR REIT
Manager and Managing Director of SCG since March 1991; Director of ATLANTIC
and the ATLANTIC REIT Manager since April 1996; from June 1988 to March 1991,
Regional Partner, Trammell Crow Residential, Chicago, Illinois (multifamily
real estate development and property management); prior thereto Executive Vice
President and Chief Financial Officer, The Mischer Corporation, Houston, Texas
(multibusiness holding company with investments primarily in real estate).
While with Trammell Crow Residential, Mr. Blankenship was on the Management
Board for Trammell Crow Residential Services, a property management company
that managed approximately 90,000 multifamily units nationwide, and was chief
executive officer of Trammell Crow Residential Services-North, which managed
10,000 multifamily units in the Midwest and Northeast. In his various
positions prior to his affiliation with the PTR REIT Manager, Mr. Blankenship
supervised the development of approximately 9,300 multifamily units. Mr.
Blankenship supervises the overall operations of PTR and the PTR REIT Manager.
JOHN P. FRAZEE, JR.--51--Director; private investor; formerly President and
Chief Operating Officer of Sprint Corporation; prior to the March 1993 merger
with Sprint, Mr. Frazee was the Chairman and Chief Executive Officer of Centel
Corporation (a major telecommunications company he joined in 1972). He is a
member of the Board of Directors of Nalco Chemical Company, Dean Foods
Company, Paging Network Inc., C-Span and SCG. He is a life trustee of Rush-
Presbyterian-St. Luke's Medical Center, a national trustee of The Newberry
Library and a trustee of the Florida State University Foundation.
MARK G. CONROE--38--Senior Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; Vice President of ATLANTIC since February 1994; from
October 1991 to February 1994, President of Classic Communities, Inc., a home
building company; prior thereto, General Partner and Executive Vice President
of the Mozart Development Company, a real estate development company.
JEFFREY A. KLOPF--48--Senior Vice President of Homestead since May 1996 and
Secretary since January 1996 and Senior Vice President and Secretary of
Homestead Village Incorporated, PTR, ATLANTIC and SCG since January 1996,
where he provides securities offerings and corporate acquisition services and
oversees the provision of legal services for affiliates of the firm; from
January 1988 to December 1995, partner of Mayer, Brown & Platt where he
practiced corporate and securities law.
JOHN R. PATTERSON--44--Senior Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
operations group; Vice President of PTR since January 1995; from July 1993 to
January 1995, a Senior Vice President in business development at NationsBank
in Atlanta; prior thereto, Division President and Partner of Trammell Crow
Residential Services.
DONALD J. SCHULTZ--41--Senior Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; from
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<PAGE>
November 1993 to June 1995, Senior Vice President of Construction with Avalon
Properties, Inc.; and from March 1986 to November 1993, President of
Construction for Trammell Crow Residential (Northwest Region).
OTHER OFFICERS OF HOMESTEAD
LAURIE B. BURNS--33--Vice President of Homestead since May 1996, and
Homestead Village Incorporated since November 1995 where she is a member of
the development group; from March 1994 to November 1995, Director of the Real
Estate division of Apple South, Inc.; and from June 1986 to March 1994, with
the Real Estate Division of Taco Bell Corporation where her most recent
position was a Director of the Real Estate Division.
ROBERT E. CLARK--36--Vice President, Treasurer and Controller of Homestead
since May 1996 and Vice President of Homestead Village Incorporated since
September 1995 where he is responsible for accounting and financial reporting;
from September 1990 to August 1995, Director of accounting for the Residence
Inn, Courtyard and Fairfield Inn divisions of Marriott International; and from
February 1989 to September 1990, controller of business travel programs for
Marriott where he was responsible for all accounting and finance for
Marriott's marketing programs.
GARY A. DELAPP--36--Vice President of Homestead since May 1996 and of
Homestead Village Incorporated since February 1996 where he is a member of the
operations group; from July 1983 to February 1996 with Vista Host Inc. where
his most recent position was Senior Vice President of Operations.
ROBERT W. FROST JR.--49--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since November 1995 where he is a member of the
development group; from February 1982 to November 1995, Vice President of
Payless Shoesource, Inc. where he was responsible for the real estate and
construction in a 23-state region. Prior thereto, Mr. Frost was a Group
Development Manager of The Southland Corporation where he was responsible for
expanding Chief Auto Parts stores in California, Nevada and Texas.
FREDRIC A. GOERS--53--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since November 1995 where he is a member of the
development group; from September 1993 to October 1995 Vice President of
Discovery Zone, Inc. where he was responsible for design and construction; and
from May 1990 to August 1993, a partner of Garrison Goers Associates, Inc., a
construction and development firm providing service to institutional lenders,
developers and investors.
BRADLEY P. GRIGGS--39--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since September 1995 where he is a member of
the development group; from November 1990 to September 1995; Project Manager
with The Fieldstone Company where he directed all aspects of project
management; and from November 1987 to November 1990, Operations Manager with
M.J. Brock and Sons, Inc. for Riverside and San Diego Counties.
A. DAVID HALE--38--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group; from May 1992 to June 1995, Director of Human Resources of Ryland Homes
mid-Atlantic region; and from April 1989 to May 1992, Vice President of
Acquisition and Development at Questar Properties.
LAURA L. HAMILTON--33--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since January 1996 where she supervises
Homestead's due diligence group, and a member of the PTR due diligence group
since April 1992; prior thereto Ms. Hamilton was a real estate paralegal with
the law firm of Poole, Kelly & Ramo in Albuquerque, New Mexico.
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<PAGE>
W. GEOFFREY JEWETT--48--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since January 1996 where he is a member of the
operations group; Vice President of PTR since March 1995; from November 1994
to March 1995, Vice President of Security Capital Pacific Incorporated which
merged into PTR in March 1995 ("PACIFIC"), where he was involved with and had
overall responsibility for acquisitions; from May 1994 to November 1994, Vice
President of ATLANTIC, where he had overall responsibility for the
acquisitions group; from September 1993 to April 1994, member of the
acquisition group of PACIFIC; prior thereto, Vice President of LaSalle
Partners Limited in its acquisitions and property finance group, where he
provided investment property sale, financing and acquisition services on
behalf of corporate and institutional clients throughout the western United
States.
JEFFREY A. JONES--37--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group and with PTR since February 1995; from June 1993 to January
1995, Vice President of SENTRE Partners where he was responsible for
investment acquisitions and development activities in Mexico; and from
November 1989 to April l993, a Development Manager with Stark Companies
International where he was responsible for site acquisitions and entitlement
processing for residential and hotel projects.
ARTHUR G. MAY--36--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group and with PTR since September 1994; from August 1989 to September 1994,
Vice President and Chief Financial Officer at Western Development Group, Inc.
where he was responsible for residential development projects. Prior thereto,
Mr. May was a Project Manager at J.R. Abbott Construction Co., Inc.
GREGG A. PLOUFF--39--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; Vice President of PTR since March 1995; from July 1994 to
March 1995, Vice President of PACIFIC; from November 1993 to July 1994, a
member of the acquisitions group of PTR; prior to November 1993, Mr. Plouff
served in an acquisitions consulting capacity for PTR; prior thereto, Mr.
Plouff was with Trammell Crow Residential, most recently as a partner, where
he was involved with residential development in the Dallas, Chicago and
Southern California markets.
MARK E. RILEY--37--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group; from September 1993 to September 1994, co-founder of Southeast Lodges
Development Company where he developed and operated economy extended-stay
facilities across the Southeast; and from May 1990 to September 1993, Vice
President of Suburban Lodges of America Inc., where he was responsible for
franchising and financing activities of economy extended-stay facilities.
WILLIAM C. STEAD--53--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since September 1995 where he is a member of
the development group; from March 1991 to September 1995, Vice President of
Heritage Construction Company where he has managed all development and
construction activities; and from May 1988 to February 1991, Partner of
Morgan-Stead & Associates which complete projects abandoned by financial
institutions in Tennessee, Florida and Georgia.
S. SCOTT STEWART--32--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; from May 1993 to January 1995, President of Potomac Land &
Development Company; and from November 1991 to May 1993 with Providence
Savings Bank as a Real Estate Owned Manager.
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<PAGE>
MANAGEMENT PHILOSOPHY
Homestead believes that the quality of management should be assessed in the
light of the following factors:
MANAGEMENT DEPTH/SUCCESSION. Management should have several senior
executives with the leadership, operational, investment and financial skills
and experience to oversee the entire operations of Homestead. Homestead
believes that several of its senior officers could serve as the principal
executive officer and continue Homestead's performance.
STRATEGIC VISION. Management should have the strategic vision to determine
an investment focus that provides both favorable initial yields and strong
long-term growth prospects. Homestead will demonstrate its strategic vision by
focusing Homestead on the extended-stay lodging business in target markets
where demographic and supply factors will permit high occupancies at
increasing rates.
RESEARCH CAPABILITY. Management should have the means for researching both
markets and product to determine appropriate investment opportunities.
Homestead divides its target markets into multiple submarkets for analysis
purposes. Through its relationship with Security Capital Investment Research,
Homestead will have several professionals devoting substantial time to
research, on a submarket-by-submarket basis, who are closely supervised by the
directors and executive officers of Homestead.
INVESTMENT COMMITTEE PROCESS. Investment committees should provide
discipline and guidance for the investment activities of Homestead in order to
achieve its long-term strategic objectives. The four members of Homestead's
Investment Committee have a combined 56 years of experience in the real estate
industry. The Investment Committee receives detailed written analyses and
research, in a standardized format, from Homestead's development and
acquisition personnel and evaluates all prospective investments pursuant to
uniform underwriting criteria prior to submission of investment
recommendations to the Homestead Board. The quality of the Investment
Committee's process will be evident from the ability of Homestead to achieve
its investment goals, generally exceeding its projected initial returns and
growth from the extended-stay lodging business.
DEVELOPMENT CAPABILITY. Homestead has no plans or intentions of acquiring
existing hotel properties and converting them to the Homestead Village
concept. Homestead's personnel have substantial development experience.
Homestead has 39 full-time professionals committed to development activities.
Homestead has engaged in substantial development at attractive yields that
have generally exceeded projections.
DUE DILIGENCE PROCESS. Management should have experienced personnel
dedicated to performing intelligent and thorough due diligence. Homestead has
six full-time due diligence professionals and has developed uniform systems
and procedures for due diligence.
OPERATING CAPABILITY. Management can substantially improve cash flow by
actively and effectively managing assets. Homestead has devoted substantial
personnel and financial resources to developing value-added operating systems,
which control and effectively administer the operation of Homestead's
extended-stay lodging business.
MANAGEMENT COMPENSATION
DIRECTORS' COMPENSATION. Directors who are not employees of Homestead or SCG
will receive $14,000 per year for serving as a director and will be reimbursed
for their travel and other expenses incurred in connection with attending
meetings of the Homestead Board or committees thereof.
EXECUTIVE COMPENSATION. Homestead was incorporated in January 1996 and did
not conduct any operations prior to that time. Homestead anticipates that
during 1996 its most highly compensated officers, with estimated salary
amounts for each such individual on an annualized basis, will be
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<PAGE>
David C. Dressler, Jr., $195,000; Robert W. Frost, Jr., $160,000; John R.
Patterson, $160,000; Mark G. Conroe, $150,000; and Donald J. Schultz,
$160,000, (the "Named Executive Officers"). Each Named Executive Officer will
also be eligible for discretionary bonuses.
STOCK OPTION PLAN
LONG-TERM INCENTIVE PLAN
Prior to consummation of the Mergers, Homestead anticipates adoption of the
Homestead Village Properties Incorporated Long-Term Incentive Plan (the
"Incentive Plan"), subject to approval of Homestead shareholders, which, it is
expected, will contain the following terms and conditions. The number of
shares of Homestead Common Stock which may be awarded under the Incentive Plan
shall not exceed 5,000,000 shares in the aggregate. Shares of Homestead Common
Stock issued under the Incentive Plan may be authorized and unissued shares or
treasury shares. In the event of certain transactions affecting the type or
number of outstanding shares, the number of shares subject to the Incentive
Plan, the number or type of shares subject to outstanding awards, and the
exercise price thereof, will be appropriately adjusted. The Incentive Plan
will authorize the award of stock options, stock appreciation rights ("SARs"),
stock grants (which may be subject to restrictions), performance stock and
performance units, and authorizes the establishment of one or more stock
purchase programs. A committee of the Homestead Board (the "Committee") will
be appointed to administer the Incentive Plan. Subject to the terms of the
Incentive Plan, the Committee will determine which employees or other
individuals providing services to Homestead shall be eligible to receive
awards under the Incentive Plan, and the amount, price, timing and other terms
and conditions applicable to such awards.
Options awarded under the Incentive Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Code, or non-qualified stock options which are not intended to satisfy Section
422 of the Code. SARs may be granted in tandem or otherwise in connection with
options, or may be granted as free-standing awards. Exercise of an option will
result in the corresponding surrender of any tandem SAR. Options and SARs will
become exercisable in accordance with the terms established by the Committee,
which may include conditions relating to completion of a specified period of
service or achievement of performance standards. Options and SARs will expire
on the date determined by the Committee which shall not be later than the
earliest to occur of (i) the tenth anniversary of the grant date, (ii) the
first anniversary of the participant's termination of employment by reason of
death or disability, (iii) the third anniversary of the participant's
termination of employment by reason of retirement, or (iv) the three month
anniversary of the participant's termination of employment for any other
reason. Shares transferred to a participant pursuant to the exercise of an
option may be subject to such additional restrictions or limitations as the
Committee may determine.
Under the Incentive Plan, the Committee may grant awards of Homestead Common
Stock to participants, which shall be subject to such conditions and
restrictions, if any, as the Committee may determine. During the period a
stock award is subject to restrictions or limitations, the Committee may award
the participant dividend rights with respect to such shares. The Incentive
Plan may also provide that the Committee may establish one or more stock
programs which may permit purchases of Homestead Common Stock.
The Committee may award participants performance stock, the distribution of
which is subject to achievement of performance objectives, or performance
units which entitle the participant to receive value for the units at the end
of a performance period to the extent provided under the award. In either
case, the number of shares or units and the performance measures and periods
shall be established by the Committee at the time the award is made.
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<PAGE>
RELATIONSHIP WITH SECURITY CAPITAL GROUP INCORPORATED
Prior to consummation of the Mergers, portions of Homestead's properties,
assets and operations were owned by subsidiaries of each of PTR, ATLANTIC and
SCG. SCG is a private real estate company which owns controlling positions in
several real estate operating companies, including PTR and ATLANTIC, and owns
several REIT managers which direct these operating businesses.
Immediately after completion of the Mergers, SCG is expected to beneficially
own 10,451,690 shares of Homestead Common Stock or approximately 58.9% of the
outstanding shares of Homestead Common Stock, of which 2,243,038 will be
issued to and held in escrow by an escrow agent pending funding of convertible
mortgages loans under the Funding Commitment Agreements. See "Certain
Relationships and Transactions--Escrow Agreement." SCG will also own Homestead
Warrants to acquire an additional 5,103,884 shares of Homestead Common Stock.
Through its beneficial ownership of Homestead Common Stock, SCG will control
58.9% of the vote on all matters submitted for Homestead shareholder action.
In addition, pursuant to an Investor Agreement between SCG and Homestead, SCG
will agree to exercise at the request of Homestead all Homestead Warrants it
receives in the Transaction. In exchange for its agreement to exercise
Homestead Warrants, Homestead will grant SCG the right, among other things, to
nominate up to two directors to the Homestead Board, depending upon SCG's
level of ownership of shares of Homestead Common Stock, and to be consulted on
certain business decisions made by Homestead. In addition, pursuant to
investor agreements with ATLANTIC and PTR, each of ATLANTIC and PTR will have
the right to nominate one director to the Homestead Board. See "Certain
Relationships and Transactions--PTR and ATLANTIC Investor Agreements" and "--
SCG Investor Agreement".
SCG has funded the development of the Homestead Village concept since 1991.
As part of the Transaction, SCG will contribute, for no additional
consideration, the Homestead Village trademark, the Homestead Village
operating system and Homestead Village properties which it is developing in
areas outside the target markets of PTR and ATLANTIC. SCG will also provide
financing to Homestead for additional developments undertaken between the
execution of the Merger Agreement and the Closing Date.
Prior to the Mergers, Homestead obtained certain services from affiliates of
SCG and the SCG employees who performed services for Homestead under the PTR
and ATLANTIC REIT management agreements and the property management agreements
participated in a number of employee benefit plans maintained by SCG. Prior to
completion of the Transaction, SCG and Homestead will enter into certain
agreements relating to these matters. See "Business--Administrative Services
Agreement" and "Certain Relationships and Transactions."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
PROTECTION OF BUSINESS AGREEMENT
Each of PTR, ATLANTIC and SCG will enter into a protection of business
agreement dated as of the Closing Date (the "Protection of Business
Agreement") with Homestead which will prohibit PTR, ATLANTIC, SCG and their
respective affiliates from engaging, directly or indirectly, in the extended-
stay lodging business for a period of 10 years except through Homestead and
its subsidiaries. The Protection of Business Agreement also prohibits
Homestead from, directly or indirectly, engaging in the ownership, operation,
development, management or leasing of multifamily properties. The Protection
of Business Agreement does not prohibit any of PTR, ATLANTIC or SCG from: (i)
owning securities of Homestead; (ii) owning up to 5% of the outstanding
securities of another person engaged in owning, operating, developing,
managing or leasing extended-stay lodging properties, so long as they do not
actively participate in the business of such person; (iii) owning the
outstanding securities of another
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person, a majority owned subsidiary, division, group, franchise or segment of
which is engaged in owning, operating, developing, managing or leasing
extended-stay lodging properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties; and (iv) owning
securities of another person primarily engaged in business other than a
business owning, operating, developing, managing or leasing extended-stay
lodging properties, including a person primarily engaged in business as an
owner, operator or developer of hotel properties, whether or not such person
owns, operates, develops, manages or leases extended-stay lodging properties.
The Protection of Business Agreement does not prohibit Homestead from: (i)
owning securities of ATLANTIC, PTR or SCG; (ii) owning up to 5% of the
outstanding securities of another person engaged in owning, operating,
developing, managing or leasing garden style multifamily properties; and (iii)
owning the outstanding securities of another person, a majority owned
subsidiary, division, group, franchise or segment of which is engaged in
owning, operating, developing, managing or leasing garden style multifamily
properties, so long as not more than 5% of such person's consolidated revenues
are derived from such properties. The Protection of Business Agreement will
terminate in the event of an acquisition, directly or indirectly (other than
by purchase from PTR, ATLANTIC and SCG), by any person (or group of associated
persons acting in concert), other than PTR, ATLANTIC, SCG, or their respective
affiliates, of 25% or more of the outstanding voting stock of Homestead,
without the prior written consent of the Homestead Board. Subject to earlier
termination pursuant to the preceding sentence, the Protection of Business
Agreement will terminate on the tenth anniversary of the Closing Date.
SCG INVESTOR AGREEMENT
Homestead and SCG will enter into an investor agreement (the "SCG Investor
Agreement"), which will require SCG, upon notice from Homestead, to exercise
all of the Homestead Warrants (at an exercise price of $10.00 per share)
received by SCG in connection with the Transaction. Homestead may call for the
exercise of Homestead Warrants by SCG upon 10 days' prior written notice. The
SCG Investor Agreement, among other things, provides that, without having
first consulted with the nominee of SCG designated in writing, Homestead may
not seek Homestead Board approval of (i) Homestead's annual budget, (ii)
incurring expenses in any year exceeding (A) any line item in the annual
budget by 20% and (B) the total expenses set forth in the annual budget by 5%,
(iii) acquisitions or dispositions in a single transaction or group of related
transactions where the purchase price paid or received exceeds $5 million,
(iv) new contracts with a service provider for (A) investment management,
property management or leasing services, or (B) that reasonably contemplates
annual contract payments by Homestead in excess of $200,000, (v) the
declaration or payment of any dividend or other distribution, (vi) the
approval of stock option plans, (vii) the offer or sale of any shares of stock
of Homestead or any securities convertible into shares of stock of Homestead
(other than the sale or grant of any stock or grants of options or exercise of
options granted under any benefit option plan approved by stockholders) and
(viii) the incurrence, restructuring, renegotiation or repayment of
indebtedness for borrowed money in which the aggregate amount involved exceeds
$5 million. The SCG Investor Agreement also provides that, so long as SCG owns
at least 10% of the outstanding shares of Homestead Common Stock, Homestead
may not increase the number of persons serving on the Homestead Board to more
than seven. SCG also will be entitled to designate one or more persons as
directors of Homestead, as follows: (i) so long as SCG owns at least 10% but
less than 30% of the outstanding shares of Homestead Common Stock, it is
entitled to nominate one person; and (ii) so long as SCG owns at least 30% of
the outstanding shares of Homestead Common Stock, it is entitled to nominate
that number of persons as shall bear approximately the same ratio to the total
number of members of the Homestead Board as the number of shares of Homestead
Common Stock beneficially owned by SCG bears to the total number of
outstanding shares of Homestead Common Stock, provided, that, SCG shall be
entitled to designate no more than two persons so long as the Homestead Board
consists of no more than seven members. Any person who is employed by SCG or
who is an employee, a 25% shareholder or a director of any corporation of
which SCG is a 25%
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shareholder shall be deemed to be a designee of SCG. The nominee(s) of SCG
may, but need not, be the same person(s) nominated by either PTR pursuant to
the PTR Investor Agreement or ATLANTIC pursuant to the ATLANTIC Investor
Agreement.
In addition, because SCG is an affiliate of Homestead, the SCG Investor
Agreement provides SCG with registration rights pursuant to which, in certain
specified circumstances, SCG may request, at any time after the first
anniversary of the date on which the Homestead Common Stock is registered with
the Securities and Exchange Commission (the "Commission") under either Section
12(b) or 12(g) of the Exchange Act, and on not more than three occasions,
registration of all of SCG's Homestead Common Stock pursuant to Rule 415 under
the Securities Act of 1933 (the "Securities Act").
FUNDING COMMITMENT AGREEMENTS
Pursuant to funding commitment agreements to be dated as of the Closing Date
(the "Funding Commitment Agreements") each of PTR and ATLANTIC will agree to
make mortgage loans to Homestead of up to $144,044,620 and $98,028,471,
respectively. The obligations of PTR and ATLANTIC are limited to a specific
dollar amount for each property identified in the respective Funding
Commitment Agreements. Upon any determination by Homestead to commence
development of a property identified in the Funding Commitment Agreement,
Homestead is required to notify PTR or ATLANTIC, as the case may be, and PTR
or ATLANTIC, as the case may be, is required to fund up to the full amount of
its obligation with respect to such property. Homestead is required to
complete the development of such property consistent with the development
plans for such property. Each mortgage loan issued by Homestead pursuant to a
Funding Commitment Agreement will be convertible into shares of Homestead
Common Stock on the basis of one share of Homestead Common Stock for every
$11.50 of principal outstanding on the mortgage loan. The obligation of
Homestead to call for funding of, and the obligations of PTR and ATLANTIC to
provide funding for, the mortgage loans expires on March 31, 1998, except with
respect to properties for which Homestead has given notice that it intends to
develop. Interest on the mortgage loans accrues at the rate of 9% on the
unpaid principal balance, payable every six months. The mortgages are
scheduled to mature on October 31, 2006, and are not callable until five years
after the Closing Date. Homestead has pledged substantially all of its assets
as collateral for the mortgage loans.
Pursuant to each Funding Commitment Agreement, PTR and ATLANTIC will provide
Homestead aggregate funding on such developments in the amounts of up to
approximately $133 million and $111 million, respectively, which amounts are
anticipated to be sufficient to complete the development of the respective
Homestead Village facilities contributed by them. PTR and ATLANTIC will
receive convertible mortgage notes in respect of such fundings in stated
amounts of up to approximately $144 million and $98 million, respectively. The
effect of these provisions is that PTR will fund $898,000 for each $1,000,000
of convertible mortgage loans and ATLANTIC will fund $1,133,535 for each
$1,000,000 of convertible mortgage loans. The differences between the funded
amounts and the stated amounts of the convertible mortgage loans arise because
the rate of return on the existing Homestead Village facilities contributed by
PTR is projected to exceed the rate of return on the Homestead Village
facilities contributed by PTR and ATLANTIC to Homestead which are under
construction or in pre-development planning. In calculating the relative
ownership interests of PTR and ATLANTIC, SCG took into account the fact that
as of July 1, 1996 PTR will have 28 Homestead Village facilities in operation
and generating income, while ATLANTIC will have none. In addition, SCG expects
that the average property development costs for the existing PTR Homestead
Village properties will, on balance, be less than those for the PTR and
ATLANTIC Homestead Village properties projected to be built in the future
because a large portion of the existing PTR Homestead Village properties were
in planning or under development during 1992 and 1993 when land prices and
construction costs were less than they are now and are anticipated to be over
the next 18 months. The stated amount of the convertible mortgage loans was
determined based on a 9% interest rate to
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provide an effective yield to each of PTR and ATLANTIC that is reflective of
the relative rates of return anticipated to be realized on all of the
facilities contributed by PTR and ATLANTIC, respectively.
ATLANTIC AND PTR INVESTOR AGREEMENTS
ATLANTIC and PTR will each enter into an investor and registration rights
agreement with Homestead (the "ATLANTIC and PTR Investor Agreements") pursuant
to which ATLANTIC and PTR each are entitled to designate one person for
nomination to the Homestead Board, and Homestead will use its best efforts to
cause the election of such nominee(s), until March 31, 1998 and for so long
thereafter as PTR or ATLANTIC has the right to convert in excess of $20
million in principal amount of loans made pursuant to the Funding Commitment
Agreement. Such nominee(s) may, but need not, be the same person(s) nominated
by SCG pursuant to the SCG Investor Agreements. In addition, Homestead has
granted to each of ATLANTIC and PTR registration rights with respect to the
issuance upon conversion and the distribution of all of the shares of
Homestead Common Stock issuable upon conversion of the convertible mortgage
notes. Prior to the one-year anniversary of the date the Homestead Common
Stock is registered under the Exchange Act, each of ATLANTIC and PTR may
request one registration of those shares of Homestead Common Stock which are
issued upon conversion of any or all the convertible mortgage notes converted
during such one-year period and which it intends to distribute to its
stockholders. After such one-year anniversary, each of ATLANTIC and PTR may
request three additional registrations pursuant to Rule 415 promulgated under
the Securities Act of all shares of Homestead Common Stock issued or issuable
upon conversion of the convertible mortgage notes. Such registration, except
for the fees and disbursements of counsel to ATLANTIC or PTR, shall be at the
expense of Homestead.
ESCROW AGREEMENT
Pursuant to an escrow agreement to be dated the Closing Date (the "Escrow
Agreement") among Homestead, SCG and State Street Bank and Trust Company
("Escrow Agent"), a portion of the shares of Homestead Common Stock issuable
to SCG in the Transaction will be placed in an escrow account maintained with
the Escrow Agent. In general, as PTR and ATLANTIC advance funds to Homestead
in accordance with the terms of their respective Funding Commitment
Agreements, a portion of the shares of Homestead Common Stock in the escrow
account will be released to SCG, together with a proportionate amount of
accrued dividends, if any. On January 1, 2000, unless all of the shares of
Homestead Common Stock placed in the escrow account have been released to SCG
sooner in accordance with the provisions of the Escrow Agreement, the Escrow
Agent will release to Homestead all of the shares of Homestead Common Stock
remaining in the escrow account. All dividends or other distributions paid by
Homestead in respect of the shares of Homestead Common Stock held in the
escrow account shall be retained by the Escrow Agent for the benefit of the
party to whom the related shares of Homestead Common Stock are ultimately
issued. The Escrow Agent will vote all shares of Homestead Common Stock held
in the escrow account in accordance with the written instructions of SCG. In
the event that written instructions are not received, the Escrow Agent will
not vote such shares.
Because the number of shares of Homestead Common Stock being received by SCG
is based on the anticipated future REIT management fees and property
management fees SCG would have received under existing agreements with PTR and
ATLANTIC for the 80 Homestead Village properties contributed to Homestead, net
of overhead of SCG related to those properties, and since many of the
contributed Homestead Village properties are either in the development or
planning stage, the purpose of the Escrow Agreement is to time SCG's receipt
of the shares of Homestead Common Stock pursuant to the Merger Agreement with
the time the properties are actually funded and supported by a completion
guaranty.
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FINDER'S AGREEMENTS
Pursuant to a series of agreements between PTR and the unaffiliated person
who brought the Homestead concept to PTR and certain of his affiliates
(collectively, "Finder"), Finder agreed to assist PTR in locating, developing
and operating temporary corporate affordable housing facilities. In accordance
with these agreements, Finder is entitled to receive: (i) with respect to four
Homestead properties currently in operation and located in the Dallas area
(collectively, the "Dallas Properties"), an annual amount of $535,000; (ii)
with respect to the first 35 Homestead facilities constructed by Homestead
(other than the Dallas Properties), an annual amount of $7,500 per property
(such amount subject to proportionate increase or decrease if the property has
less than 120 units or more than 150 units) for each fiscal year beginning on
the date the facility achieves 80% occupancy and provided that Homestead
expects to receive for such fiscal year an annual return from the facility
equal to 12% of its undepreciated cost in the facility; (iii) upon the sale of
any of the Dallas Properties to an unaffiliated third party, 20% of the net
proceeds received by Homestead from the sale of such property; and (iv) upon
the sale of any of the other 35 properties to an unaffiliated third party, 10%
of the net proceeds received by Homestead from the sale of such property. The
annual payments for each facility are payable until the earliest to occur of
the sale of the facility to an unaffiliated third party, a breach of the
agreements by Finder (subject to various cure provisions), and February 2043.
In addition, Finder has agreed, until December 31, 1996, not to compete,
directly or indirectly, with Homestead in certain states in which Homestead
operates. Finder is not affiliated with Homestead, PTR, ATLANTIC or SCG.
Homestead does not currently have an intention to sell any of its properties.
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PRINCIPAL SHAREHOLDERS
As of May 20, 1996, there were 1,000 shares of Homestead Common Stock issued
and outstanding, which were held of record by SCG. The following table sets
forth, as of May 20, 1996 and as adjusted to give effect to the Transaction,
certain information regarding the beneficial ownership of Homestead Common
Stock by each person who is expected to be the beneficial owner of five
percent or more of the outstanding Homestead Common Stock, by each of
Homestead's directors and Named Executive Officers, and by all directors and
executive officers of Homestead as a group. As of such date, there are
expected to be approximately 3,400 record holders of Homestead Common Stock.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF
NAME AND ADDRESS OR NUMBER OF PERSONS IN BENEFICIAL HOMESTEAD
GROUP OWNERSHIP(1) COMMON STOCK
---------------------------------------- ------------ ------------
<S> <C> <C>
Security Capital Group Incorporated.......... 15,555,574(2) 68.1%
125 Lincoln Avenue
Santa Fe, New Mexico 87501
William D. Sanders (Corporate Ownership)... 15,555,574(3) 68.1%
7777 Market Center Avenue
El Paso, Texas 79912
William D. Sanders (Personal Ownership).... 64,593(4) *
7777 Market Center Avenue
El Paso, Texas 79912
C . Ronald Blankenship....................... 7,962 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
David C. Dressler, Jr........................ 909 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
John P. Frazee, Jr........................... 3,143 *
9512 Bull Headley Road
Tallahassee, Florida 32312
Marc G. Conroe............................... 501 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Robert W. Frost, Jr.......................... 0 *
Six Piedmont Center
Atlanta, Georgia 30305
John R. Patterson............................ 0 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Donald J. Schultz............................ 199 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Directors and Executive Officers as a group
(7 persons)................................. 12,714 *
</TABLE>
- --------
* Less than 1%.
(1) Includes for SCG, Messrs. Sanders, Blankenship, Dressler, Frazee, Conroe
and Schultz and all directors and executive officers as a group,
5,103,884, 25,935, 3,197, 365, 1,262, 201, 80 and 5,105 shares of
Homestead Common Stock, respectively, that may be acquired upon exercise
of Homestead Warrants.
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(2) These shares of Homestead Common Stock will be owned of record by SC
Realty Incorporated, a wholly owned subsidiary of SCG, and are pledged to
secure SCG's $300 million revolving line of credit facility with a
syndicate of banks. As of May 20, 1996, there were $30 million of
borrowings outstanding under the line of credit. The line of credit is
also secured by securities owned by SCG of PTR, ATLANTIC, Security Capital
Industrial Trust, a publicly-traded REIT affiliatd with SCG, and Security
Capital U.S. Realty, an entity based in Luxembourg that is affiliated with
SCG and which invests in real estate operating companies in the United
States. SCG estimates that the aggregate market value of the pledged
securities exceeded $1.9 billion as of May 20, 1996. SCG was in compliance
with all covenants under the line of credit as of March 31, 1996.
2,243,038 of these shares of Homestead Common Stock with respect to which
SCG has sole voting power will be held in escrow. See "Certain
Relationships and Transactions--Escrow Agreement."
(3) Mr. Sanders may be deemed to beneficially own these shares of Homestead
Common Stock, which will be owned by SCG, because Mr. Sanders shares
voting and dispositive power with respect to all shares of Homestead
Common Stock owned by SCG. SCG and Mr. Sanders intend to play a major role
in the direction of Homestead for the purpose of maximizing the value of
Homestead.
(4) 3,455 of these shares of Homestead Common Stock will be owned by Mr.
Sanders directly. Mr. Sanders may be deemed to beneficially own 58,395 of
these shares of Homestead Common Stock which will be owned by Sanders
Partners Incorporated and CAMPR Partners Limited, family entities with
respect to which Mr. Sanders shares voting and dispositive power, and
2,743 of these shares of Homestead Common Stock will be owned by a
foundation of which Mr. Sanders is a director.
DESCRIPTION OF HOMESTEAD SECURITIES
The following summary of the terms of the securities of Homestead does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Homestead Charter and Bylaws, copies of which have been filed
as exhibits to the Registration Statement of which this Appendix A forms a
part.
GENERAL
The authorized stock of Homestead consists of 250,000,000 shares of common
stock, $0.01 par value per share. The Homestead Board may classify or
reclassify any unissued shares of stock from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such stock. No holder
of any class of stock of Homestead will have any preemptive right to subscribe
to any securities of Homestead except as may be granted by the Homestead Board
in authorizing the issuance of a class of preferred stock. Under Maryland law,
stockholders are generally not liable for Homestead's debts or obligations.
For a description of certain provisions that could have the effect of
delaying, deferring or preventing a change in control, see "Risk Factors--
Limitations on Changes in Control," "Certain Relationships and Transactions--
SCG Investor Agreement" and "Certain Provisions of Maryland Law and of
Homestead's Charter and Bylaws."
The transfer agent and registrar for the Homestead Common Stock is The First
National Bank of Boston, 150 Royall Street, Canton, Massachusetts 02021.
HOMESTEAD COMMON STOCK
The outstanding shares of Homestead Common Stock are fully paid and non-
assessable. Each share of Homestead Common Stock entitles the holder to one
vote on all matters requiring a vote of
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stockholders, including the election of directors. Stockholders do not have
the right to cumulate their votes in the election of directors, which means
that the holders of a majority of the outstanding shares of Homestead Common
Stock can elect all of the directors then standing for election. Stockholders
are entitled to such dividends as may be authorized from time to time by the
directors out of assets legally available therefor.
In the event of any liquidation, dissolution or winding-up of the affairs of
Homestead, holders of Homestead Common Stock will be entitled, subject to the
preferential rights of holders of preferred stock, if any, to share ratably in
the assets of Homestead remaining after provision for payment of liabilities
to creditors.
All shares of Homestead Common Stock have equal distribution, liquidation
and other rights, and shall have no preference, appraisal, conversion or
exchange rights. Upon completion of the Distribution, 17,749,735 shares of
Homestead Common Stock will be issued and outstanding.
PREFERRED STOCK
The Homestead Board is empowered by the Homestead Charter, without the
approval of stockholders, to cause shares of preferred stock to be issued in
one or more series and to determine, among other things, the number of
preferred shares of each series and the rights, preferences, powers and
limitations of each series which may be senior to the rights of Homestead
Common Stock. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of Homestead and may
adversely affect the voting and other rights of stockholders. Upon completion
of the Transaction, no shares of preferred stock will be outstanding and
Homestead has no present plans to issue any preferred stock following
completion of the Distribution other than as contemplated by the Rights
Agreement (as defined below).
PURCHASE RIGHTS
On May 16, 1996, the Board of Directors declared a dividend of one Purchase
Right for each share of Homestead Common Stock outstanding at the close of
business on May 16, 1996 (the "Rights Record Date") to the holders of
Homestead Common Stock of record as of the Rights Record Date. The dividend
was paid on the Rights Record Date. The holders of any additional shares of
Homestead Common Stock issued after the Rights Record Date and before the
redemption or expiration of the Purchase Rights will also be entitled to one
Purchase Right for each such additional share. Each Purchase Right entitles
the registered holder under certain circumstances to purchase from Homestead
one-hundredth of a Participating Preferred Share of Homestead at a price of
$50.00 per one-hundredth of a Participating Preferred Share (the "Purchase
Price"), subject to adjustment. The description and terms of the Purchase
Rights are set forth in the Rights Agreement dated as of May 16, 1996 between
Homestead and The First National Bank of Boston, as rights agent (the "Rights
Agreement").
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earlier to occur of: (1) 10 days following a
public announcement that a person or group of affiliated or associated persons
(excluding certain affiliates of Homestead) has acquired beneficial ownership
of 20% or more of the outstanding shares of Homestead Common Stock (thereby
becoming an "Acquiring Person") or (2) 15 business days (or such later date as
may be determined by action of the Homestead Board prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of persons (excluding certain affiliates of
Homestead) of 25% or more of the outstanding shares of Homestead Common Stock
(the first to occur of such dates being called the "Rights Distribution
Date"). With respect to any of the stock certificates outstanding as of the
Rights Record
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Date, until the Rights Distribution Date the Purchase Rights will be evidenced
by such stock certificate. Until the Rights Distribution Date (or earlier
redemption or expiration of the Purchase Rights), new stock certificates
issued after the Rights Record Date upon transfer or new issuance of shares of
Homestead Common Stock will contain a notation incorporating the Rights
Agreement by reference. Notwithstanding the foregoing, if the Homestead Board
in good faith determines that a person who would otherwise be an Acquiring
Person under the Rights Agreement has become such inadvertently, and such
person divests as promptly as practicable a sufficient number of shares of
Homestead Common Stock so that such person would no longer be an Acquiring
Person, then such person shall not be deemed to be an Acquiring Person for
purposes of the Rights Agreement.
The Purchase Rights will expire on May 16, 2006 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Purchase
Rights are earlier redeemed or exchanged by Homestead, in each case as
described below.
The Purchase Price payable, and the number of Participating Preferred Shares
or other securities or property issuable, upon exercise of the Purchase Rights
are subject to adjustment under certain circumstances from time to time to
prevent dilution. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase
Rights will not be redeemable. Each Participating Preferred Share will be
entitled to a minimum preferential quarterly distribution payment of $1 per
share but will be entitled to an aggregate distribution of 100 times the
distribution declared per share of Homestead Common Stock. Each Participating
Preferred Share will have 100 votes, voting together with the shares of
Homestead Common Stock. In the event of liquidation, the holders of the
Participating Preferred Shares will be entitled to a minimum preferential
liquidation payment of $1 per share but will be entitled to an aggregate
payment of 100 times the payment made per share of Homestead Common Stock. In
the event of any merger, consolidation or other transaction in which shares of
Homestead Common Stock are exchanged, each Participating Preferred Share will
be entitled to receive 100 times the amount received per share of Homestead
Common Stock. In the event of issuance of Participating Preferred Shares upon
exercise of the Purchase Rights, in order to facilitate trading, a depositary
receipt may be issued for each one-hundredth of a Participating Preferred
Share. The Purchase Rights will be protected by customary antidilution
provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of shares of Homestead Common Stock
having a market value (determined in accordance with the Rights Agreement) of
twice the Purchase Price. In lieu of the issuance of shares of Homestead
Common Stock upon exercise of Purchase Rights, the Homestead Board may under
certain circumstances, and if there is an insufficient number of shares of
Homestead Common Stock authorized but unissued or held by Homestead to permit
the exercise in full of the Purchase Rights, the Homestead Board is required
to, take such action as may be necessary to cause Homestead to issue or pay
upon the exercise of Purchase Rights, cash (including by way of a reduction of
purchase price), property, other securities or any combination of the
foregoing having an aggregate value equal to that of the shares of Homestead
Common Stock which otherwise would have been issuable upon exercise of
Purchase Rights.
In the event that, after any person or group becomes an Acquiring Person,
Homestead is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Purchase Right will thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price, a
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number of shares of common stock of the acquiring company having a market
value (determined in accordance with the Rights Agreement) of twice the
Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
shares of Homestead Common Stock, the Homestead Board may exchange the
Purchase Rights (other than Purchase Rights owned by that person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of Homestead Common Stock (or one-hundredth of a Participating Preferred
Share) per Purchase Right (subject to adjustment).
As soon as practicable after a Rights Distribution Date, Homestead is
obligated to use its best efforts to file a registration statement under the
Securities Act relating to the securities issuable upon exercise of Purchase
Rights and to cause such registration statement to become effective as soon as
practicable.
At any time prior to the time a person or group of persons becomes an
Acquiring Person, the Homestead Board may redeem the Purchase Rights in whole,
but not in part, at a price of $0.01 per Purchase Right (the "Redemption
Price") payable in cash, shares of Homestead Common Stock or any other form of
consideration deemed appropriate by the Homestead Board. The redemption of the
Purchase Rights may be made effective at such time, on such basis and with
such conditions as the Homestead Board in its sole discretion may establish.
Immediately upon the effectiveness of any redemption of the Purchase Rights,
the right to exercise the Purchase Rights will terminate and the only right of
the holders of Purchase Rights will be to receive the Redemption Price.
The terms of the Purchase Rights may be amended by the Homestead Board
without the consent of the holders of the Purchase Rights, except that from
and after the time any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the
interests of the holders of the Purchase Rights and in no event shall any such
amendment change the 20% threshold at which a person acquiring beneficial
ownership of shares of Homestead Common Stock becomes an Acquiring Person.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
Homestead on terms not approved by the Homestead Board, except pursuant to an
offer conditioned on a substantial number of Purchase Rights being acquired.
The Purchase Rights should not interfere with any merger or other business
combination approved by the Homestead Board since the Purchase Rights may be
redeemed by Homestead at the Redemption Price prior to the time that a person
or group has acquired beneficial ownership of 20% or more of the shares of
Homestead Common Stock. The foregoing description of the Purchase Rights does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Rights Agreement, including the definitions therein of
certain terms, a copy of which has been filed as an exhibit to the
Registration Statement on Form S-4 filed with the Commission by Homestead (the
"Homestead Registration Statement").
HOMESTEAD WARRANTS
The Homestead Warrants are to be issued under a Warrant Agreement (the
"Warrant Agreement") between Homestead and The First National Bank of Boston,
as Warrant Agent (the "Warrant Agent"). The following is a summary of the
material terms of the Homestead Warrants and the Warrant Agreement. The
summary is subject to, and is qualified in its entirety by reference to, all
the provisions of the Homestead Warrants and the Warrant Agreement, including
the definitions therein of certain terms, a copy of which has been filed as an
exhibit to the Homestead Registration Statement.
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GENERAL
Each Homestead Warrant will entitle the registered holder thereof, subject
to and upon compliance with the provisions thereof and of the Warrant
Agreement, at such holder's option, to purchase at an exercise price of $10.00
per share from Homestead one share of Homestead Common Stock. The number of
shares of Homestead Common Stock for which a Homestead Warrant may be
exercised is subject to adjustment as set forth in the Warrant Agreement.
Homestead Warrants may be exercised at any time by surrendering the
certificate evidencing such Homestead Warrants (the "Warrant Certificates")
with the form of election to purchase shares set forth on the reverse side
thereof duly completed and executed by the holder thereof and paying in full
the exercise price for such Homestead Warrant at the office or agency
designated for such purpose, which will initially be the corporate trust
office of the Warrant Agent in New York, New York. Each Homestead Warrant may
be exercised only in whole and the exercise price may be paid only in cash or
by certified or official bank check. The Homestead Warrants will expire at
5:00 p.m., New York time on the first anniversary of the date on which the
Transaction is consummated.
The Warrant Certificates evidencing the Homestead Warrants may be
surrendered for exercise or exchange, and the transfer of Warrant Certificates
will be registrable, at the office or agency of Homestead maintained for such
purpose, which initially will be the corporate trust office of the Warrant
Agent in New York, New York. The Warrant Certificates will be issued only in
fully registered form. No service charge will be made for any exercise,
exchange or registration of transfer of Warrant Certificates, but Homestead
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Fractional shares of Homestead Common Stock will not be issued upon exercise
of Homestead Warrants. In lieu thereof Homestead will pay a cash adjustment
based on the Current Market Value (as defined in the Warrant Agreement) of a
share of Homestead Common Stock on the date the Warrant Certificate is
surrendered for conversion.
Holders of Homestead Warrants will not be entitled, by virtue of being such
holders, to receive dividends, vote, receive notice of any meetings of
stockholders or otherwise have any right of stockholders of Homestead.
ADJUSTMENTS
The number of shares of Homestead Common Stock issuable upon exercise of a
Homestead Warrant (the "Exercise Rate") is subject to adjustment upon the
occurrence of certain events, including (a) dividends or distributions on
Homestead Common Stock payable in Homestead Common Stock or certain other
capital stock of Homestead; (b) subdivisions, combinations or certain
reclassifications of Homestead Common Stock; (c) distributions to all holders
of Homestead Common Stock of rights, warrants or options entitling them to
subscribe for Homestead Common Stock at a price per share less than 94% of the
Current Market Value at the Time of Determination (each as defined in the
Warrant Agreement); (d) sales by Homestead of Homestead Common Stock or of
securities convertible into or exchangeable or exercisable for Homestead
Common Stock (other than pursuant to (1) the exercise of the Homestead
Warrants and (2) any security convertible into, or exchangeable or exercisable
for, Homestead Common Stock as to which the issuance thereof has previously
been the subject of any required adjustment pursuant to the Warrant Agreement)
at a price per share less than the Current Market Value at the Time of
Determination; and (e) distributions to stockholders of assets or debt
securities of Homestead or certain rights, warrants or options to purchase
assets, debt securities or other securities of Homestead (excluding cash
dividends or other cash distributions from consolidated retained earnings
other than any Extraordinary Cash Dividend (as defined in the Warrant
Agreement)). No adjustment in the Exercise Rate will be required unless such
adjustment would require an increase
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<PAGE>
or decrease of at least one percent (1%) in the Exercise Rate; provided that
any adjustment that is not made will be carried forward and taken into account
in any subsequent adjustment.
If Homestead is a party to a consolidation or merger, or certain transfers
of all or substantially all of its assets occur, the right to exercise a
Homestead Warrant for Homestead Common Stock may be changed into a right to
receive securities, cash or other assets of Homestead or another person.
In the event of a taxable distribution to holders of Homestead Common Stock
which results in an adjustment to the number of shares of Homestead Common
Stock or other consideration for which a Homestead Warrant may be exercised,
the holders of the Homestead Warrants may, in certain circumstances, be deemed
to have received a distribution subject to United States Federal income tax.
CONVERTIBLE MORTGAGE NOTES
As of the Closing Date, Homestead will assume the $77,289,000 principal
amount of promissory notes of its predecessors in connection with funding the
acquisition and construction costs and expenses incurred in connection with
acquiring and developing various real properties as Homestead Village
properties. Pursuant to the Funding Commitment Agreements, PTR and ATLANTIC
have agreed to provide Homestead aggregate funding on the respective Homestead
Village properties contributed by such party in the amounts of up to
approximately $133 million and $111 million, respectively. PTR and ATLANTIC
will receive convertible mortgage notes in respect of such fundings in stated
amounts of up to $144,044,620 and $98,028,471, respectively. The differences
between the funded amounts and the stated amounts of the convertible mortgage
loans arise because the rate of return on the existing Homestead Village
facilities contributed by PTR is projected to exceed the rate of return on the
Homestead Village facilities contributed by PTR and ATLANTIC to Homestead
which are under construction or in pre-development planning. In calculating
the relative ownership interests of PTR and ATLANTIC, SCG took into account
the fact that as of July 1, 1996 PTR will have 28 Homestead Village facilities
in operation and generating income, while ATLANTIC will have none. In
addition, SCG expects that the average property development costs for the
existing PTR Homestead Village properties will, on balance, be less than those
for the PTR and ATLANTIC Homestead Village properties projected to be built in
the future because a large portion of the existing PTR Homestead Village
properties were in planning or under development during 1992 and 1993 when
land prices and construction costs were less than they are now and are
anticipated to be over the next 18 months. The stated amount of the
convertible mortgage loans was determined based on a 9% interest rate to
provide an effective yield to each of PTR and ATLANTIC that is reflective of
the relative rates of return anticipated to be realized on all of the
facilities contributed by PTR and ATLANTIC, respectively.
Interest on the promissory notes accrues at the rate of 9% on the unpaid
principal balance payable every six months. The promissory notes are scheduled
to mature on October 31, 2006. Homestead has pledged substantially all of its
assets as collateral for the promissory notes. PTR and ATLANTIC have the
right, beginning on or after March 31, 1997, to convert all of the outstanding
principal amount of the promissory notes into shares of Homestead Common Stock
on the basis of one share of Homestead Common Stock for each $11.50 aggregate
principal amount outstanding on the promissory notes being converted. This
conversion rate is subject to adjustment on substantially the same terms as
the Homestead Warrants.
A-49
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
HOMESTEAD'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Homestead Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law
and the Homestead Charter and Bylaws.
CLASSIFICATION OF THE HOMESTEAD BOARD
Homestead's Bylaws provide that the number of directors may be established
by the Homestead Board but may not be fewer than three nor more than fifteen.
Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that
a vacancy resulting from an increase in the number of directors will be filled
by a majority of the entire Homestead Board. Pursuant to the Homestead
Charter, the directors are divided into three classes. One class will hold
office initially for a term expiring at the annual meeting of shareholders to
be held in 1997, another class will hold office initially for a term expiring
at the annual meeting of shareholders to be held in 1998 and another class
will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1999. As the term of each class expires, directors
in that class will be elected for a term of three years and until their
successors are duly elected and qualify. Homestead believes that
classification of the Homestead Board will help to assure the continuity and
stability of Homestead's business strategies and policies as determined by the
Homestead Board.
The classified director provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of Homestead, even though such an attempt might
be beneficial to Homestead and its shareholders. At least two annual meetings
of shareholders, instead of one, will generally be required to effect a change
in a majority of the Homestead Board. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Homestead Board has exempted from these provisions
of the MGCL any business combination with SCG and its affiliates and
successors. As a result, SCG and its affiliates and successors may be able to
enter into business
A-50
<PAGE>
combinations with Homestead that may not be in the best interests of its
stockholders without compliance by Homestead with the super-majority vote
requirements and other provisions of the statute.
CONTROL SHARE ACQUISITIONS
Maryland law provides that "Control Shares" of a Maryland corporation
acquired in a "Control Share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority, or (iii) a majority of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "Control Share acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the Control Shares, as of the date of the
last Control Share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
Homestead's Bylaws contain a provision exempting SCG and its affiliates and
successors from the provisions of the Control Share acquisition statute.
ADVANCE NOTICE PROVISIONS
For nominations or other business to be properly brought before an annual
meeting of stockholders by a stockholder, the Homestead Bylaws require such
stockholder deliver a notice to the Secretary, absent specified circumstances,
not less than 60 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting setting forth: (i) as to each person whom
the stockholder proposes to nominate for election or reelection as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for the election of directors, pursuant to Regulation
14A of the Exchange Act; (ii) as to any other business that the stockholder
proposed to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of
A-51
<PAGE>
such stockholder and of the beneficial owner, if any, on whose behalf the
nomination or proposal is made; and (iii) as to the stockholder giving the
notice and beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such stockholder as they appear
on Homestead's books, and of such beneficial owner and (y) the number of
shares of each class of Homestead common stock which are owned beneficially
and of record by such stockholder and such beneficial owner, if any.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Mergers, Homestead will have 17,749,735 shares of
Homestead Common Stock and Homestead Warrants to purchase 10,000,000 shares of
Homestead Common Stock issued and outstanding. All of the shares to be issued
in the Distribution, other than any shares purchased by affiliates, will be
tradeable without restriction under the Securities Act. The shares of
Homestead Common Stock currently issued and outstanding or reserved for
issuance upon conversion of the convertible mortgage notes or exercise of
options will be eligible for sale, subject to the volume resale, manner of
sale and notice limitations of Rule 144 of the Securities Act.
In general, under Rule 144, a person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned his or her shares of
Homestead Common Stock for at least two years, including any such persons who
may be deemed "affiliates" of Homestead (as defined in the Securities Act),
would be entitled to sell within any three-month period a number of shares of
Homestead Common Stock that does not exceed the greater of 1% of the then
outstanding number of shares or the average weekly trading volume of the
shares during the four calendar weeks preceding each such sale. After shares
are held for three years, a person who is not deemed an "affiliate" of
Homestead is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. Sales of shares of Homestead Common Stock
by affiliates will continue to be subject to the volume limitations. As
defined in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly, through the use of one or more intermediaries, controls, is
controlled by, or is under common control with, such issuer.
Homestead has granted SCG, which will beneficially own 10,451,690 shares of
Homestead Common Stock after the Transaction, and each of PTR and ATLANTIC,
certain registration rights. See "Certain Relationships and Transactions--SCG
Investor Agreement" and "--ATLANTIC and PTR Investor Agreements."
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale will have on the market
price prevailing from time to time. Sales of substantial amounts of shares
(including shares issued upon the exercise of warrants and options), or the
perception that such sales could occur, could adversely affect the prevailing
market price of the shares.
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS
The following financial statements have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing:
(i) the combined balance sheets of the PTR-Homestead Village Group as of
December 31, 1994 and 1995, the related combined statements of
operations, owners' equity and cash flows for each of the years in the
three-year period ended December 31, 1995 and the related combined
schedule as of December 31, 1995;
(ii) the combined balance sheet of the Atlantic-Homestead Village Group as
of December 31, 1995, the related combined statements of operations,
owners' equity and cash flows for the
A-52
<PAGE>
period from April 3, 1995 (date of formation) through December 31, 1995
and the related combined schedule as of December 31, 1995;
(iii) the combined balance sheets of the SCG-Homestead Village Group as of
December 31, 1994 and 1995 and the related combined statements of
operations, shareholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1995.
The balance sheet of Homestead Village Properties Incorporated at April 30,
1996 appearing in the Prospectus of Homestead included in the Homestead
Registration Statement has been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Homestead has filed with the Commission the Homestead Registration Statement
under the Securities Act with respect to the Homestead Securities being
distributed hereby. This Appendix A omits certain information contained in the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to Homestead and the
Homestead Securities being distributed hereby, reference is made to the
Registration Statement including the exhibits thereto. Statements herein
concerning the contents of any contract or other document are not necessarily
complete and in each instance reference is made to such contract or other
documents filed with the Commission as an exhibit to the Registration
Statement, or otherwise, each such statement being qualified by and subject to
such reference in all respects.
As a result of the Mergers, Homestead will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Commission. Reports,
registration statements, proxy statements and other information filed by
Homestead with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
In addition, such material can also be obtained from the Commission's Web site
at http://www.sec.gov.
VALIDITY OF SECURITIES
The validity of the Homestead Common Stock and the Homestead Warrants
offered hereby has been passed upon for Homestead by Mayer, Brown & Platt,
Chicago, Illinois. Mayer, Brown & Platt has relied upon the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain matters of
Maryland law. Mayer, Brown & Platt has represented and is currently
representing ATLANTIC, PTR, SCG and Homestead and certain of their respective
affiliates.
A-53
<PAGE>
INDEX TO HOMESTEAD FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
PRO FORMA (UNAUDITED):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... F-4
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended
March 31, 1996........................................................... F-7
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1995 ................................................. F-8
THE PTR--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-9
Combined Balance Sheets as of December 31, 1994 and 1995 and the unaudited
Combined Balance Sheet as of March 31, 1996.............................. F-10
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Operations for the
three months ended March 31, 1995 and 1996............................... F-11
Combined Statements of Owners' Equity for the years ended December 31,
1993, 1994 and 1995 and the unaudited Combined Statement of Owners'
Equity for the three months ended March 31, 1996......................... F-12
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Cash Flows for the
three months ended March 31, 1995 and 1996............................... F-13
Notes to Combined Financial Statements.................................... F-14
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1995..................................................................... F-19
THE ATLANTIC--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-21
Combined Balance Sheet as of December 31, 1995 and the unaudited Combined
Balance Sheet as of March 31, 1996....................................... F-22
Combined Statement of Operations for the period from April 3, 1995 (date
of formation) through December 31, 1995 and the unaudited Combined
Statement of Operations for the three months ended March 31, 1996........ F-23
Combined Statement of Owners' Equity for the period from April 3, 1995
(date of formation) through December 31, 1995 and the unaudited Combined
Statement of Owners' Equity for the three months ended March 31, 1996.... F-24
Combined Statement of Cash Flows for the period from April 3, 1995 (date
of formation) through December 31, 1995 and the unaudited Combined
Statement of Cash Flows for the three months ended March 31, 1996........ F-25
Notes to Combined Financial Statements.................................... F-26
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1995..................................................................... F-29
THE SCG--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-30
Combined Balance Sheets as of December 31, 1994 and 1995 and the unaudited
Combined Balance Sheet as of March 31, 1996.............................. F-31
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Operations for the
three months ended March 31, 1995 and 1996............................... F-32
Combined Statements of Shareholder's Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995 and the unaudited Combined Statement of
Shareholder's Equity (Deficit) for the three months ended March 31, 1996. F-33
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Cash Flows for the
three months ended March 31, 1995 and 1996............................... F-34
Notes to Combined Financial Statements.................................... F-35
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
BALANCE SHEET:
Report of Independent Auditors............................................ F-38
Balance Sheet as of April 30, 1996........................................ F-39
Notes to Balance Sheet.................................................... F-40
</TABLE>
F-2
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the following transactions had occurred on March 31, 1996; (I) the PTR-
Homestead Village Group including land parcels which were under contract as of
March 31, 1996 and expected to be acquired prior to the date of the
transaction, merged with and into Homestead; (II) the acquisition of net
assets of the Atlantic-Homestead Village Group including land parcels which
were under contract as of March 31, 1996 and expected to be acquired prior to
the transaction date had been completed; (III) the acquisition of the net
assets of SCG-Homestead Village Group had occurred. Such pro forma information
is based in part on the historical Combined Balance Sheets of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group. It should be read in conjunction with the financial
statements listed in the index page F-1 of the Prospectus. In management's
opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
In accordance with the merger and distribution agreement and the funding
commitment agreement the PTR-Homestead Village Group will contribute a total
of 54 facilities either in operation, under construction or in pre-development
planning. Similarly, the Atlantic-Homestead Village Group will contribute a
total of 26 facilities either in operation, under construction or in pre-
development planning. Subsequent to the date of the transaction, PTR and
Atlantic will be obligated to provide the additional funding to complete the
development of the facilities contributed. The Pro Forma Condensed
Consolidated Balance Sheet excludes expected development costs related to the
properties under development or planned to be developed and the related
convertible mortgage notes for the period April 1, 1996 through ultimate
completion of the facilities and therefore is not reflective of the entire
transaction.
The unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming these transactions had been completed as of March 31, 1996, nor does
it purport to represent the future financial position of Homestead.
F-3
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FUNDING OF ACQUISITION
HOMESTEAD AND HOMESTEAD OF THE ACQUISITION
THE PTR- MERGER WITH VILLAGE ATLANTIC- OF THE SCG-
HOMESTEAD THE PTR- PROPERTIES HOMESTEAD HOMESTEAD OTHER PRO PRO FORMA
VILLAGE GROUP PRO FORMA HOMESTEAD INCORPORATED VILLAGE VILLAGE FORMA CONDENSED
HISTORICAL(A) ADJUSTMENTS VILLAGE GROUP PRO FORMA GROUP (G) GROUP (H) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------- ------------ ----------- ----------- ----------- ------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 2,931 $ -- $ 1 (e) $ 2,932 $27,239 $ 12 $ (1,500)(j) $ 28,683
Accounts
receivable........ 799 -- -- 799 -- 481 -- 1,280
Other current
assets............ 314 -- -- 314 -- 4 -- 318
-------- ------- ------- -------- ------- ------- -------- --------
Total current
assets.......... 4,044 -- 1 4,045 27,239 497 (1,500) 30,281
Property and
equipment, net..... 120,871 11,789 (c) -- 132,660 24,095 233 -- 156,988
Other assets....... 1,475 -- -- 1,475 1,817 72 1,500 (j) 4,864
Trademark and other
intangible assets.. -- -- -- -- -- 19,405 -- 19,405
-------- ------- ------- -------- ------- ------- -------- --------
Total assets.... $126,390 $11,789 $ 1 $138,180 $53,151 $20,207 $ -- $211,538
======== ======= ======= ======== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current
liabilities:
Development costs
payable........... $ 3,590 $ -- $ -- $ 3,590 $ 1,142 $ -- $ -- $ 4,732
Accrued real
estate taxes...... 760 -- -- 760 5 -- -- 765
Accounts payable.. 342 -- -- 342 142 6 -- 490
Other accrued
expenses.......... 867 -- -- 867 163 3 -- 1,033
Accrued interest
payable........... 1,183 -- -- 1,183 -- -- -- 1,183
Advances from
shareholders...... -- -- -- -- -- -- -- --
-------- ------- ------- -------- ------- ------- -------- --------
Total current
liabilities..... 6,742 -- -- 6,742 1,452 9 -- 8,203
Intercompany
debt.............. 11,185 (11,185)(d) -- -- -- -- -- --
Convertible
mortgage notes
payable........... 77,289 (25,726)(b) -- 51,563 -- -- -- 51,563
-------- ------- ------- -------- ------- ------- -------- --------
Total
liabilities..... 95,216 (36,911) -- 58,305 1,452 9 -- 59,766
Shareholders'
Equity: --
Common stock...... -- -- 95 (f) 95 42 16 24 (i) 177
Additional paid
in
capital/Contributed
capital........... 25,890 11,789 (c) 1 (e)
25,726 (b) 74,495 (f)
11,185 (d) (74,590)(f) 74,496 51,657 20,182 29,773 (i) 176,108
Shares in escrow.. -- -- -- -- -- -- (29,797)(i) (29,797)
Retained
earnings.......... 5,284 -- -- 5,284 -- -- -- 5,284
-------- ------- ------- -------- ------- ------- -------- --------
Total
shareholders'
equity.......... 31,174 48,700 1 79,875 51,699 20,198 -- 151,772
-------- ------- ------- -------- ------- ------- -------- --------
Total liabilities
and shareholders'
equity............. $126,390 $11,789 $ 1 $138,180 $53,151 $20,207 $ -- $211,538
======== ======= ======= ======== ======= ======= ======== ========
</TABLE>
F-4
<PAGE>
- --------
(a) Reflects the historical combined balance sheet of the PTR-Homestead
Village Group as of March 31, 1996, which is presented elsewhere in this
registration statement.
(b) Reflects the conversion of convertible mortgage notes of the PTR-Homestead
Village Group to capital contributed as a result of the transaction.
(c) Reflects the land to be acquired by the PTR-Homestead Village Group
subsequent to March 31, 1996 and prior to the date of transaction.
(d) Reflects the conversion of intercompany debt of the PTR-Homestead Village
Group to contributed capital in accordance with the merger and
distribution agreement.
(e) Reflects the funding of Homestead through the issuance of 1,000 shares of
common stock in exchange for $1.
(f) Reflects the issuance of 9,486 shares of $.01 par value common stock of
Homestead to PTR in exchange for the net assets of the PTR-Homestead
Village Group. This transaction is accounted for as a reorganization of
entities under common control and accordingly, assets and liabilities are
reflected at the PTR-Homestead Village Group's historical cost.
Additionally, PTR would receive 6,364 warrants to purchase additional
shares of Homestead common stock at the exercise price of $10 per share.
(g) Reflects the acquisition of the Atlantic-Homestead Village Group's net
assets by Homestead at fair market value in exchange for 4,201 shares of
Homestead's $.01 par value common stock. Included in the net assets of the
Atlantic-Homestead Village Group are costs estimated to be $9,582 relating
to the acquisition of land under contract, subsequent to March 31, 1996
and prior to the date of the transaction. Also included is cash of $27,167
contributed by Atlantic as partial consideration for the Homestead stock
received (the $27,167 is expected to be reduced to approximately $18,600
at the Closing Date as a result of development costs incurred between
March 31, 1996 and the Closing Date). Additionally, the fair market value
of the net assets of the Atlantic-Homestead Village Group is estimated to
be $4,076 in excess of its historical cost basis. The excess has been
allocated to property and equipment.
Additionally, Atlantic would receive 2,818 warrants to purchase additional
shares of Homestead common stock at the exercise price of $10 per share.
(h) Reflects the acquisition of the net assets of SCG-Homestead Village Group
by Homestead at fair market value. The net assets acquired by Homestead
primarily consist of trademarks and tradenames, development and property
management expertise as well as, operating systems necessary to conduct
the business of developing, owning and operating the Homestead Village
properties. The fair market value of the net assets, including trademarks
and other intangible assets is estimated by management to be $49,995. At
the transaction date, SCG would receive a pro rata portion of total
expected shares based on the ratio of actual funding provided by PTR and
Atlantic to the total expected funding to be provided. Accordingly, the
pro forma adjustment reflects that SCG would receive 1,641 shares of
Homestead $.01 par value common stock in exchange for net assets with a
total fair market value of $20,198, including trademark and other
intangible assets of $19,405. Additionally, SCG would receive 818 warrants
to purchase additional shares of Homestead common stock at the exercise
price of $10 per share.
(i) The remaining shares of Homestead common stock of 2,422 would be issued at
$10 per share to an escrow agent to be held for SCG. As the properties are
completed, the shares of Homestead common stock would be transferred to
SCG as discussed in (h) above.
For the shares of Homestead common stock issued to the escrow agent, a
corresponding reduction to shareholder's equity would be recorded.
(j) Reflects estimated expenses of consummating the merger transaction.
F-5
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and for the three months ended March 31, 1996
of Homestead Village Properties Incorporated ("Homestead") are presented as
if: I) Homestead was funded and the PTR-Homestead Village Group merged into
Homestead; II) the PTR-Homestead Village Group acquired land parcels which
were under contract as of March 31, 1996 and expected to close prior to the
date of the transaction; and III) Homestead acquired the net assets of the
Atlantic-Homestead Village Group and the SCG-Homestead Village Group through
the issuance of shares of Homestead common stock and warrants as of January 1,
1995. The financial statements and related footnotes of the PTR-Homestead
Village Group, the Atlantic-Homestead Village Group and the SCG-Homestead
Village Group are presented elsewhere in this registration statement. The
statements also include estimated incremental expenses related to operating a
publicly held company as if it were publicly held as of January 1, 1995. Such
pro forma information is based in part upon the Historical Combined Statements
of Operations of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group and the SCG-Homestead Village Group. It should be read in
conjunction with the financial statements listed in the index on page F-1 of
the Prospectus. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
The unaudited Pro Forma Condensed Consolidated Statements of Operations are
not necessarily indicative of what Homestead's actual results of operations
would have been assuming such transactions had been completed as of January 1,
1995, nor do they purport to present the results of operations for future
periods. Results of operations and the related earnings or loss per share will
be affected by a number of factors including, but not limited to, the total
number of extended-stay lodging facilities opened and operated and the related
operating results thereon, interest cost incurred on indebtedness, corporate
operating and management expenses, development and acquisition costs and the
number of shares issued. Additionally, the Pro Forma Condensed Consolidated
Statement of Operations for the three months ended March 31, 1996 is not
necessarily indicative of the results of operations for the full year.
F-6
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PTR- THE ATLANTIC- THE SCG-
HOMESTEAD HOMESTEAD HOMESTEAD PRO FORMA
VILLAGE GROUP VILLAGE GROUP VILLAGE GROUP ELIMINATION COMBINED PRO FORMA CONDENSED
HISTORICAL(A) HISTORICAL(A) HISTORICAL(A) ENTRIES HISTORICAL ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Room revenue........... $6,753 $-- $ -- $ -- $ 6,753 $ -- $6,753
Other.................. 115 6 861 (861)(b) 121 -- 121
------ ---- ------- ----- ------- ------- ------
Total Revenue........ 6,868 6 861 (861) 6,874 -- 6,874
COSTS AND EXPENSES:
Property operating
expenses.............. 3,446 -- -- (500)(b) 2,946 -- 2,946
Corporate operating
expenses.............. 563 18 3,038 (361)(b) 3,258 (1,339)(c)
81 (d) 2,000
Depreciation and
amortization.......... 859 -- 10 -- 869 243 (e) 1,112
Interest expense....... 961 -- 49 -- 1,010 (425)(f) 585
------ ---- ------- ----- ------- ------- ------
Total costs and
expenses............ 5,829 18 3,097 (861) 8,083 (1,440) 6,643
------ ---- ------- ----- ------- ------- ------
Income (loss) before
income tax expense.... 1,039 (12) (2,236) -- (1,209) 1,440 231
Income tax expense..... -- -- -- -- -- (183)(g) (183)
------ ---- ------- ----- ------- ------- ------
NET INCOME (LOSS)....... $1,039 $(12) $(2,236) $ -- $(1,209) $ 1,257 $ 48
====== ==== ======= ===== ======= ======= ======
PRO FORMA NET INCOME PER COMMON SHARE................................................................ $ .003
======
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING NOTE (H)............................................... 17,750
======
</TABLE>
- -------
(a) Reflects the historical combined statements of operations of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group, which are presented elsewhere in this
registration statement.
(b) Reflects the elimination of intercompany REIT and property management fee
income and expense which will no longer be paid since Homestead will be
self-managed.
(c) Reflects the adjustment for development overhead costs incurred by the
SCG-Homestead Village Group in conjunction with the acquisition of land
and the development of the extended-stay lodging facilities that will now
be incurred and capitalized by Homestead in accordance with generally
accepted accounting principles. Development overhead costs consisted
primarily of payroll and related benefits and are included in the
historical financial statements of the SCG-Homestead Village Group.
(d) Reflects the additional costs of operating as a public company for the
three months ended March 31, 1996 including additional salaries and
benefits, ($44) and legal, accounting and other professional fees ($37).
(e) Depreciation is computed utilizing the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and improvements
and 2 to 7 years for equipment. This treatment is consistent with the
historical financial statements and, therefore, no pro forma adjustment is
necessary. Trademark and other intangible assets are being amortized over
a period of 20 years. Amortization totaled $243 for the three months ended
March 31, 1996. Upon release of the escrowed shares to SCG additional
trademark and other intangibles of $29,797 would be recorded and quarterly
amortization would increase by $372.
(f) Reflects the adjustment to reduce interest expense as a result of the
conversion of a portion of convertible mortgage notes and intercompany
debt to contributed capital.
(g) Prior to the proposed transaction, the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group were taxed as qualified real estate
investment trust subsidiaries under the Internal Revenue Code of 1986, as
amended. The SCG-Homestead Village Group was a subsidiary of a Subchapter
C corporation, which has experienced operating losses since its inception.
Therefore, as described further in the historical combined financial
statements of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group and the SCG-Homestead Village Group, which appear elsewhere
in this registration statement, no provision was required for federal or
state income taxes.
Homestead will be taxed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes. The components of
the pro forma adjustment for income taxes consist of the following:
<TABLE>
<S> <C>
Income before income tax expenses................................. $231
Amortization of trademark and other intangible assets acquired
from the SCG-Homestead Village Group not deductible for tax
purposes......................................................... 243
----
474
Assumed federal and state income tax rate......................... 38.6%
----
Pro forma adjustment.............................................. $183
====
</TABLE>
(h) Reflects the assumed number of weighted average common shares outstanding
during the three months ended March 31, 1996 based upon the assumed
issuance of 17,750 total shares of common stock, including the shares in
escrow, at the beginning of the period.
The conversion features associated with the convertible 9% mortgage notes
are assumed to be anti-dilutive to earnings per share since the conversion
price of $11.50 per share is greater than the assumed common stock price of
$10 per share. Similarly, the warrants, which are exercisable at $10 per
share were not considered since the strike price is equal to the assumed
price per common share of $10.
F-7
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PTR- THE ATLANTIC- THE SCG-
HOMESTEAD HOMESTEAD HOMESTEAD PRO FORMA
VILLAGE GROUP VILLAGE GROUP VILLAGE GROUP ELIMINATION COMBINED PRO FORMA CONDENSED
HISTORICAL(A) HISTORICAL(A) HISTORICAL(A) ENTRIES HISTORICAL ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Room revenue........... $18,337 $ -- $ -- $ -- $18,337 $ -- $18,337
Other.................. 366 4 2,021 (2,007)(b) 384 -- 384
------- ----- ------- ------- ------- ------- -------
Total Revenue........ 18,703 4 2,021 (2,007) 18,721 -- 18,721
COSTS AND EXPENSES:
Property operating
expenses.............. 8,618 -- -- (1,018)(b) 7,600 -- 7,600
Corporate operating
expenses.............. 1,933 63 7,067 (989)(b) 8,074 (2,211)(c)
325 (d) 6,188
Depreciation and
amortization.......... 2,343 -- 39 -- 2,382 970 (e) 3,352
Interest expense....... 2,958 -- 70 -- 3,028 (530)(f) 2,498
------- ----- ------- ------- ------- ------- -------
Total costs and
expenses............ 15,852 63 7,176 (2,007) 21,084 (1,446) 19,638
------- ----- ------- ------- ------- ------- -------
Income (loss) before
income tax expense.... 2,851 (59) (5,155) -- (2,363) 1,446 (917)
Income tax expense..... -- -- -- -- -- (20)(g) (20)
------- ----- ------- ------- ------- ------- -------
NET INCOME (LOSS)....... $ 2,851 $ (59) $(5,155) $ -- $(2,363) $ 1,426 $ (937)
======= ===== ======= ======= ======= ======= =======
PRO FORMA NET LOSS PER COMMON SHARE.................................................................. $ (.053)
=======
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING NOTE (H)............................................... 17,750
=======
</TABLE>
- -------
(a) Reflects the historical combined statements of operations of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group, which are presented elsewhere in this
registration statement.
(b) Reflects the elimination of intercompany REIT and property management fee
income and expense which will no longer be paid since Homestead will be
self-managed.
(c) Reflects the adjustment for development overhead costs incurred by the
SCG-Homestead Village Group in conjunction with the acquisition of land
and the development of the extended-stay lodging facilities that will now
be incurred and capitalized by Homestead in accordance with generally
accepted accounting principles. Development overhead costs consisted
primarily of payroll and related benefits and are included in the
historical financial statements of the SCG-Homestead Village Group.
(d) Reflects the additional costs of operating as a public company for the
year ended December 31, 1995 including additional salaries and benefits,
($175) and legal, accounting and other professional fees ($150).
(e) Depreciation is computed utilizing the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and improvements
and 2 to 7 years for equipment. This treatment is consistent with the
historical financial statements and, therefore, no pro forma adjustment is
necessary. Trademark and other intangible assets are being amortized over
a period of 20 years. Amortization totaled $970 for the year ended
December 31, 1995. Upon release of the escrowed shares to SCG additional
trademark and other intangibles of $29,797 would be recorded and annual
amortization would increase by $1,490.
(f) Reflects the adjustment to reduce interest expense as a result of the
conversion of a portion of convertible mortgage notes and intercompany
debt to contributed capital.
(g) Prior to the proposed transaction, the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group were taxed as qualified real estate
investment trust subsidiaries under the Internal Revenue Code of 1986, as
amended. The SCG-Homestead Village Group was a subsidiary of a Subchapter
C corporation, which has experienced operating losses since its inception.
Therefore, as described further in the historical combined financial
statements of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group, and the SCG-Homestead Village Group which appear elsewhere
in this registration statement, no provision was required for federal or
state income taxes.
Homestead will be taxed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes. The components of
the pro forma adjustment for income taxes consist of the following:
<TABLE>
<S> <C>
Income (loss) before income tax expense......................... $(917)
Amortization of trademark and other intangible assets acquired
from the SCG-Homestead Village Group not deductible for tax
purposes....................................................... 970
-----
53
Assumed federal and state income tax rate....................... 38.6%
-----
Pro forma adjustment............................................ $ 20
=====
</TABLE>
(h) Reflects the assumed number of weighted average common shares outstanding
during the year ended December 31, 1995 based upon the assumed issuance of
17,750 total shares of common stock, including the shares in escrow, at
the beginning of the period.
The conversion features associated with the convertible 9% mortgage notes
are assumed to be anti-dilutive to earnings per share since the conversion
price of $11.50 per share is greater than the assumed common stock price of
$10 per share. Similarly, the warrants, which are exercisable at $10 per
share were not considered since the strike price is equal to the assumed
price per common share of $10.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
The PTR-Homestead Village Group:
We have audited the accompanying combined balance sheets of the PTR-
Homestead Village Group (as described in Note 1) as of December 31, 1994 and
1995 and the related combined statements of operations, owners' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. In connection with our audits, we also have audited the accompanying
Schedule III, Real Estate and Accumulated Depreciation. These combined
financial statements and combined financial statement schedule are the
responsibility of the PTR-Homestead Village Group's management. Our
responsibility is to express an opinion on these combined financial statements
and combined financial statement 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the PTR-Homestead
Village Group as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related combined financial statement
schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-9
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1994 1995 1996
------- -------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 928 $ 1,896 $ 2,931
Accounts receivable.............................. 111 436 799
Other current assets............................. 145 353 314
------- -------- --------
Total current assets........................... 1,184 2,685 4,044
Property and equipment, net........................ 59,099 105,002 120,871
Other assets....................................... 583 1,278 1,475
------- -------- --------
Total assets....................................... $60,866 $108,965 $126,390
======= ======== ========
<CAPTION>
LIABILITIES AND OWNERS' EQUITY
------------------------------
<S> <C> <C> <C>
Current liabilities:
Development costs payable........................ $ 2,564 $ 3,389 $ 3,590
Accrued real estate taxes........................ 272 1,056 760
Accounts payable................................. 349 578 342
Other accrued expenses........................... 482 827 867
Accrued interest payable......................... -- -- 1,183
------- -------- --------
Total current liabilities...................... 3,667 5,850 6,742
Intercompany debt.................................. 45,131 80,144 11,185
Convertible mortgage notes payable................. -- -- 77,289
------- -------- --------
Total liabilities.............................. 48,798 85,994 95,216
------- -------- --------
Commitments and contingencies
Owners' equity:
Contributed capital.............................. 10,674 18,726 25,890
Retained earnings................................ 1,394 4,245 5,284
------- -------- --------
Total owners' equity........................... 12,068 22,971 31,174
------- -------- --------
Total liabilities and owners' equity............... $60,866 $108,965 $126,390
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-10
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Room revenue............................. $2,554 $7,827 $18,337 $3,359 $6,753
Other revenue............................ 59 165 366 90 115
------ ------ ------- ------ ------
Total revenue.......................... 2,613 7,992 18,703 3,449 6,868
------ ------ ------- ------ ------
COSTS AND EXPENSES:
Property operating expenses.............. 1,302 3,606 8,618 1,458 3,446
Corporate operating expenses............. 413 1,158 1,933 371 563
Depreciation............................. 234 845 2,343 397 859
Interest expense......................... 255 1,409 2,958 540 961
------ ------ ------- ------ ------
Total costs and expenses............... 2,204 7,018 15,852 2,766 5,829
------ ------ ------- ------ ------
NET INCOME................................. $ 409 $ 974 $ 2,851 $ 683 $1,039
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-11
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED OWNERS'
CAPITAL EARNINGS EQUITY
----------- -------- -------
<S> <C> <C> <C>
Balance at December 31, 1992...................... $ 1,576 $ 11 $ 1,587
Contributed capital............................. 1,107 -- 1,107
Net income...................................... -- 409 409
------- ------ -------
Balance at December 31, 1993...................... 2,683 420 3,103
Contributed capital............................. 7,991 -- 7,991
Net income...................................... -- 974 974
------- ------ -------
Balance at December 31, 1994...................... 10,674 1,394 12,068
Contributed capital............................. 8,052 -- 8,052
Net income...................................... -- 2,851 2,851
------- ------ -------
Balance at December 31, 1995...................... 18,726 4,245 22,971
Contributed capital (unaudited)................. 7,164 -- 7,164
Net income (unaudited).......................... -- 1,039 1,039
------- ------ -------
Balance at March 31, 1996 (unaudited)............. $25,890 $5,284 $31,174
======= ====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-12
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................. $ 409 $ 974 $ 2,851 $ 683 $ 1,039
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............. 234 845 2,343 397 859
Change in:
Accounts receivable...... (31) (62) (325) (177) (363)
Accounts payable and
accrued expenses........ (17) 752 1,358 (712) 690
Other current assets..... 4 (128) (208) 9 39
-------- -------- -------- -------- --------
Net cash provided by
operating activities.. 599 2,381 6,019 200 2,264
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Other assets............... (769) (186) (695) (142) (197)
Investment in property and
equipment, net of
development costs payable. (14,982) (35,288) (47,421) (10,338) (16,527)
-------- -------- -------- -------- --------
Net cash used in investing
activities................ (15,751) (35,474) (48,116) (10,480) (16,724)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from intercompany
debt...................... 15,275 33,832 43,065 9,985 15,495
-------- -------- -------- -------- --------
Net cash provided by
financing activities...... 15,275 33,832 43,065 9,985 15,495
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS... 123 739 968 (295) 1,035
BEGINNING BALANCE OF CASH AND
CASH EQUIVALENTS............ 66 189 928 928 1,896
-------- -------- -------- -------- --------
ENDING BALANCE OF CASH AND
CASH EQUIVALENTS............ $ 189 $ 928 $ 1,896 $ 633 $ 2,931
======== ======== ======== ======== ========
NON-CASH TRANSACTIONS:
Conversion of intercompany
debt to owners' equity.... $ 1,107 $ 7,991 $ 8,052 $ 5,284 $ 7,164
======== ======== ======== ======== ========
Conversion of intercompany
debt to convertible
mortgage notes payable.... $ -- $ -- $ -- $ -- $ 77,289
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-13
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIODS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of PTR Homestead Village Incorporated and its
consolidated limited partnership, PTR Homestead Village Limited Partnership,
hereinafter collectively referred to as the PTR-Homestead Village Group. PTR
Homestead Village Incorporated directly owns a 99% limited partner interest in
PTR Homestead Village Limited Partnership and through a wholly-owned
subsidiary, also owns a 1% general partner interest. PTR Homestead Village
Incorporated is a wholly-owned subsidiary of Security Capital Pacific Trust, a
real estate investment trust, ("PTR"). Each of the entities comprising the
PTR-Homestead Village Group were formed in 1995. Prior to formation, the
activities of these entities were performed within PTR. Such activities have
been carved out of PTR for purposes of inclusion in the accompanying combined
financial statements.
The accompanying historical financial statements of the PTR-Homestead
Village Group are being presented on a combined basis as PTR Homestead Village
Incorporated is expected to be subject to a merger transaction with certain
affiliated groups of entities in which Homestead Village Properties
Incorporated will own and operate these properties subsequent to the merger
transaction. (See "The Transaction" included elsewhere in this Prospectus for
a description of the merger transaction.) Management of PTR believes that the
combined financial statements results in a more meaningful presentation than
presenting the separate historical financial statements of each entity.
The PTR-Homestead Village Group develops, owns and manages extended-stay
lodging facilities located primarily in the western part of the United States
designed to appeal to value-conscious guests. Rooms are generally rented on a
weekly basis to guests such as business travelers, professionals and others,
with most guests staying multiple weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Property and Equipment
Property and equipment is carried at cost, which is not in excess of
estimated fair market value. Costs directly related to the acquisition,
renovation or development of real estate are capitalized. Repairs and
maintenance costs are expensed as incurred.
Depreciation is computed utilizing a straight-line method over the estimated
economic lives of depreciable property. Properties are depreciated principally
over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements............ 20-40 years
Furniture, fixtures and equipment and
other................................ 2-7 years
</TABLE>
Interest
The PTR-Homestead Village Group capitalizes interest incurred during the
land development or construction period for qualifying projects. Interest
capitalized is included in the cost of properties in the accompanying combined
financial statements. Total interest capitalized amounted to $426,529,
$1,038,815 and $2,142,628 for the years ended December 31, 1993, 1994 and
1995, respectively, and $381,830 and $575,332 for the three months ended March
31, 1995 and 1996, respectively. Interest paid amounted to approximately
$681,500, $2,447,800 and $5,100,600 for the years ended December 31, 1993,
1994 and 1995, respectively, and $921,800 and $353,300 for the three months
ended March 31, 1995 and 1996, respectively.
F-14
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets consist primarily of costs incurred in connection with the
pursuit of land to be acquired for development including refundable earnest
money deposits of $175,000 and $795,000 at December 31, 1994 and 1995,
respectively and $840,000 at March 31, 1996. Costs incurred in connection with
the pursuit of unsuccessful acquisitions or developments are expensed at the
time the pursuit is abandoned.
Revenue Recognition
Room revenue and other income are recognized when earned, utilizing the
accrual method of accounting. A provision for possible bad debts is made when
collection of receivables is considered doubtful.
Use of Estimates
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 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.
Income Taxes
The companies comprising the PTR-Homestead Village Group are qualified
subsidiaries of PTR, which has elected to be taxed as a real estate investment
trust ("REIT").
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. PTR has met each of those
tests for each of the years and interim periods for which combined financial
statements are presented. Accordingly, no income tax provision or benefit has
been reflected in the combined financial statements of the PTR-Homestead
Village Group for the periods presented.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, other
assets, development costs payable, accounts payable and accrued expenses
approximates fair value as of December 31, 1994, 1995 and March 31, 1996
because of the short maturity of these instruments. Similarly, the carrying
value of the intercompany debt and convertible mortgage notes payable
approximates fair value as of those dates as the interest rates approximate
market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited. In the opinion of
management all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of such combined financial statements have
been included. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the PTR-Homestead Village Group future
results of operations for the full year ending December 31, 1996.
F-15
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of land held for future development,
properties under construction and income producing Homestead Village extended-
stay lodging facilities, located in the following markets:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL COST AT
---------------------------
DECEMBER 31, MARCH 31,
--------------- ---------
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
MARKET:
Dallas, TX.................................... 38% 29% 26%
Houston, TX................................... 41 29 25
San Antonio, TX............................... 13 12 10
Austin, TX.................................... 3 9 9
Phoenix, AZ................................... 2 8 10
Denver, CO.................................... 3 6 8
Albuquerque, NM............................... -- 4 4
Bay Area, CA.................................. -- 3 5
Kansas City, KA............................... -- -- 1
Seattle, WA................................... -- -- 2
------ ------ ---
100% 100% 100%
====== ====== ===
</TABLE>
The following summarizes property and equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT:
Land.................................... $ 7,044 $ 14,812 $ 17,053
Buildings and improvements.............. 29,611 52,697 61,059
Furniture, fixtures and equipment....... 4,973 10,760 11,396
------- -------- --------
Operating properties.................. 41,628 78,269 89,508
Construction in progress, excluding
land................................... 9,296 26,577 20,558
Land held for and under development..... 9,289 3,613 15,121
------- -------- --------
60,213 108,459 125,187
Less: accumulated depreciation........ (1,114) (3,457) (4,316)
------- -------- --------
Property and equipment, net............... $59,099 $105,002 $120,871
======= ======== ========
</TABLE>
The PTR-Homestead Village Group's strategy is to focus on the ownership of
extended-stay lodging facilities. Properties are periodically evaluated for
impairment and provisions for possible losses are made if required. No such
impairment losses have been recognized to date. Statement of Financial
Accounting Standards No. 121 entitled "Accounting For The Impairment Of Long-
Lived Assets And For Long-Lived Assets To Be Disposed Of" has been adopted by
the PTR-Homestead Village Group, as required by the statement effective
January 1, 1996. The adoption of the statement had no impact on the combined
financial statements at the date of adoption.
4. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The combined financial statements of the PTR-Homestead Village Group reflect
intercompany debt assumed to have been borrowed from PTR to fund the
acquisition and development of the Homestead Village properties.
F-16
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition and development costs were assumed to have been financed through
borrowings from PTR up through the completion date of each respective
property. Upon completion of a property, 30% of the intercompany debt
associated with the property was assumed to have been converted to contributed
capital. Borrowings were assumed to bear interest at the weighted average
interest rate of PTR's line of credit and unsecured long term debt which rates
ranged from 6.3% to 9.25% for the period from January 1, 1993 through March
31, 1996. Interest costs were either expensed or capitalized in accordance
with the PTR-Homestead Village Group's accounting policy for capitalization of
interest cost discussed above. Approximately $77,289,000 of intercompany debt
was converted to convertible mortgage notes payable in January 1996 (Note 5).
5. CONVERTIBLE MORTGAGE NOTES PAYABLE:
On January 24, 1996, the entities comprising the PTR-Homestead Village Group
(the "Borrower") executed convertible mortgage notes payable ($77,289,000) in
favor of PTR. These notes provide the PTR-Homestead Village Group with
borrowing capability in the aggregate amount of $148,164,832 and are secured
by currently owned Homestead Village properties. Additionally, these notes
will further be secured by land to be acquired and developed. The terms of the
notes provide for interest only payments of 9% per annum with payments
beginning six months from the date of the note. The notes are due and payable
on or before October 31, 2006.
The mortgage notes are convertible, at the option of PTR, into common shares
of the Borrower at any time beginning April 1, 1997. The conversion price is
equal to 115% of the value of the common shares at the date of the note, as
determined by the Board of Directors of the Borrower.
6. REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS:
PTR has a REIT management agreement with Security Capital Pacific
Incorporated (the "REIT Manager"), a subsidiary of Security Capital Group
Incorporated ("SCG"), which is a significant shareholder of PTR. The REIT
Manager provides both strategic and day-to-day management of PTR, including
research, investment analysis, acquisition and development, asset management,
capital markets, and legal and accounting services. All officers of PTR are
employees of the REIT Manager and PTR has no employees.
The REIT management agreement requires PTR to pay a stipulated base annual
fee plus 16% of cash flow, as defined in the agreement. The PTR-Homestead
Village Group's allocable share of the REIT management fee was based on 16% of
its properties defined cash flow. Such fees, which are included in corporate
operating expenses in the accompanying statements of operations, were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1993................. $109,032
1994................. 332,252
1995................. 989,471
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------
<S> <C>
March 31, 1995....... $205,630
March 31, 1996....... 361,558
</TABLE>
Additionally, in 1995, the PTR-Homestead Village Group entered into property
management agreements with Homestead Realty Services Incorporated ("Homestead
Realty") to manage its operating properties. Prior to 1995, such agreements
were with SCG Realty Services Incorporated ("SCG Realty"). Both Homestead
Realty and SCG Realty are wholly-owned subsidiaries of SCG. Fees for such
services are computed as a percentage (5.0%-7.0%) of gross revenues, as
defined. Such fees, which are included in property operating expenses in the
accompanying statements of operations, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1993............... $ 144,942
1994............... 459,513
1995............... 1,018,223
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------
<S> <C>
March 31, 1995....... $196,704
March 31, 1996....... 499,661
</TABLE>
F-17
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
Accrued expenses include $55,000 and $470,000 at December 31, 1994 and 1995,
respectively and $481,000 at March 31, 1996 payable to these affiliates for
the REIT and property management services including amounts owed for
reimbursement of out-of-pocket expenses incurred by the REIT Manager.
7. COMMITMENTS AND CONTINGENCIES:
Finder's Agreements
Pursuant to a series of agreements between PTR and an unaffiliated person
("Finder") who developed the Homestead Village concept, Finder has performed
certain services. The agreements which expire February 5, 2043, provide for
the payment of fees to Finder as follows: (i) $535,000 annually with respect
to the four properties for which Finder assisted in the location, development
and initial operations; (ii) an annual amount of $7,500 per property (subject
to certain conditions as defined in the agreements) for assistance in site
location with respect to the first 35 properties constructed (other than the
four properties referred to in (i) above); (iii) 20% of the net proceeds as
defined per the agreements, upon the sale of the four properties to an
unaffiliated third party; and (iv) 10% of the net proceeds as defined per the
agreement, upon the sale of the additional 35 properties to an unaffiliated
third party. No such sales have occurred to date. Fees paid under this
agreement and reflected in the accompanying combined statements of operations
for the years ended December 31, 1993, 1994 and 1995 aggregated approximately
$120,000, $646,000 and $611,000, respectively, and $145,000 and $158,000 for
the three months ended March 31, 1995 and 1996, respectively. Effective
December 1994, the agreement to assist in the site location of any additional
properties beyond the 39 properties was terminated. Additionally, Finder has
agreed not to compete, directly or indirectly, with the Homestead Village
properties in certain states in which PTR does business through December 31,
1996.
Other
At April 23, 1996, the PTR-Homestead Village Group had unfunded development
commitments for developments under construction of approximately $21.1
million.
The PTR-Homestead Village Group is subject to environmental regulations
related to the ownership, operation, development and acquisition of real
estate. As part of its due diligence procedures, the PTR-Homestead Village
Group has conducted Phase I environmental assessments on each property prior
to acquisition. The cost of complying with environmental regulations was not
material to PTR-Homestead Village Group's results of operations for any of the
periods presented. The PTR-Homestead Village Group is not aware of any
environmental condition on any of its properties which is likely to have a
material adverse effect on its financial condition or results of operations.
F-18
<PAGE>
SCHEDULE III
THE PTR-HOMESTEAD VILLAGE GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
COST TO GROSS AMOUNT AT WHICH
THE PTR- COSTS CARRIED AT DECEMBER 31, 1995
HOMESTEAD CAPITALIZED -----------------------------
VILLAGE SUBSE- BUILDINGS ACCUMU- CON-
GROUP: QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES LAND ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- --------- ----------- ---- ------------ -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New Mexico:
Osuna.................. $ 832 $ 3,039 $ 840 $ 3,031 $ 3,871 (a) (a) 1995
Austin, Texas:
Burnet Road............ 525 3,543 723 3,345 4,068 66 1995 1994
Mid Town............... 600 3,135 645 3,090 3,735 (a) (a) 1995
Pavilion (c)........... 693 120 693 120 813 (a) (a) 1995
Dallas, Texas:
Skillman............... 400 2,683 400 2,683 3,083 278 1993 1992
Stemmons Freeway....... 356 4,136 424 4,068 4,492 296 (b) (b)
Tollway................ 275 2,443 353 2,365 2,718 340 1993 1993
North Richland Hills... 470 3,020 544 2,946 3,490 300 1994 1993
Coit Road.............. 425 2,961 496 2,890 3,386 300 1994 1993
West Arlington......... 585 3,400 652 3,333 3,985 118 1995 1993
South Arlington........ 550 3,274 642 3,182 3,824 120 1995 1994
Fort Worth............. 350 2,296 372 2,274 2,646 (a) (a) 1994
Las Colinas............ 800 3,562 805 3,557 4,362 (a) (a) 1994
Denver, Colorado:
Denver Tech Center..... 876 2,622 921 2,577 3,498 (a) (a) 1994
Iliff.................. 615 2,910 624 2,901 3,525 (a) (a) 1994
Houston, Texas:
West by Northwest...... 519 2,913 568 2,864 3,432 283 1994 1993
Fuqua.................. 416 2,929 491 2,854 3,345 250 1994 1993
Westheimer............. 796 3,205 897 3,104 4,001 208 1994 1993
Park Ten............... 791 3,102 860 3,033 3,893 172 1994 1993
Stafford............... 575 3,092 665 3,002 3,667 168 1994 1993
Bammel-Westfield....... 516 2,959 595 2,880 3,475 162 1994 1993
Medical Center......... 1,530 3,765 1,669 3,626 5,295 18 1995 1994
Willowbrook............ 575 3,350 669 3,256 3,925 51 1995 1994
Phoenix, Arizona
Baseline (c)........... 808 1,692 830 1,670 2,500 (a) (a) 1995
Dunlap (c)............. 915 1,153 933 1,135 2,068 (a) (a) 1995
Scottsdale............. 883 3,376 975 3,284 4,259 37 1995 1994
San Antonio:
Fredricksburg.......... 800 3,239 892 3,147 4,039 170 1994 1993
I-10/De Zavala......... 844 3,587 983 3,448 4,431 55 1995 1994
281/Bitters............ 1,000 3,729 1,198 3,531 4,729 65 1995 1994
San Francisco (Bay Area),
California:
San Mateo.............. 1,510 142 1,510 142 1,652 (a) (a) 1995
Sunnyvale.............. 1,274 87 1,277 84 1,361 (a) (a) 1995
Austin, Texas:
Round Rock (d)......... 808 83 828 63 891 -- -- 1995
------- ------- ------- ------- -------- ------
Total.................. $22,912 $85,547 $24,974 $83,485 $108,459 $3,457
======= ======= ======= ======= ======== ======
</TABLE>
- --------
(a) As of December 31, 1995, the property was undergoing development.
(b) Phase I (132 units) was developed in 1992 and Phase II (57 units) was
developed in 1995.
F-19
<PAGE>
(c) Represents properties owned by third party developers that are subject to
presale agreements with PTR to acquire such properties. The investment as
of December 31, 1995 represents development loans made by PTR to such
developers.
(d) 53.1 acres of undeveloped land.
The following is a reconciliation of the carrying amount and related
accumulated depreciation of the PTR-Homestead Village Group's investment in
property and equipment, at cost (in thousands):
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
----------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Balance at January 1,........................... $ 7,007 $24,168 $ 60,213
Development expenditures including land
acquisition.................................. 17,161 36,045 48,246
------- ------- --------
Balance at December 31,......................... $24,168 $60,213 $108,459
======= ======= ========
<CAPTION>
ACCUMULATED DEPRECIATION
------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Balance at January 1,........................... $ 35 $ 269 $ 1,114
Depreciation for the year..................... 234 845 2,343
------- ------- --------
Balance at December 31,......................... $ 269 $ 1,114 $ 3,457
======= ======= ========
</TABLE>
As of December 31, 1995 the aggregate cost and net investment cost for
federal income tax purposes of PTR-Homestead Village Group's investment in
property and equipment amounted to $107,623 and $104,972, respectively.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
The Atlantic-Homestead Village Group:
We have audited the accompanying combined balance sheet of the Atlantic-
Homestead Village Group (as described in Note 1) as of December 31, 1995 and
the related combined statements of operations, owners' equity and cash flows
for the period from April 3, 1995 (date of formation) through December 31,
1995. In connection with our audit, we also have audited the accompanying
Schedule III, Real Estate and Accumulated Depreciation. These combined
financial statements and combined financial statement schedule are the
responsibility of the Atlantic-Homestead Village Group's management. Our
responsibility is to express an opinion on these combined financial statements
and combined financial statement 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Atlantic-
Homestead Village Group as of December 31, 1995, and the results of their
operations and their cash flows for the period from April 3, 1995 (date of
formation) through December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related combined financial
statement schedule, when considered in relation to the basic combined
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-21
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 184 $ 72
------ -------
Total current assets............................... 184 72
Properties under development........................... 2,627 10,437
Other assets........................................... 1,506 1,817
------ -------
Total assets....................................... $4,317 $12,326
====== =======
<CAPTION>
LIABILITIES AND OWNERS' EQUITY
------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $ 93 $ 142
Development costs payable............................ 15 1,142
Accrued real estate taxes............................ 3 5
Accrued expenses..................................... 44 163
------ -------
Total current liabilities.......................... 155 1,452
Intercompany debt...................................... 2,627 9,295
------ -------
Total liabilities.................................. 2,782 10,747
------ -------
Commitments and Contingencies
Owners' Equity:
Contributed capital.................................. 1,594 1,650
Retained earnings (deficit).......................... (59) (71)
------ -------
Total owners' equity............................... 1,535 1,579
------ -------
Total liabilities and owners' equity................... $4,317 $12,326
====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995
(DATE OF FORMATION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1995 MARCH 31, 1996
------------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Miscellaneous.............................. $ 4 $ 6
---- ----
Total revenue............................ 4 6
---- ----
COSTS AND EXPENSES:
Corporate operating expenses............... 63 18
---- ----
Total costs and expenses................. 63 18
---- ----
NET LOSS..................................... $(59) $(12)
==== ====
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-23
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
CONTRIBUTED EARNINGS OWNERS'
CAPITAL (DEFICIT) EQUITY
----------- --------- -------
<S> <C> <C> <C>
Balance at April 3, 1995 (date of formation)..... $ -- $-- $ --
Contributed capital............................ 1,594 -- 1,594
Net loss....................................... -- (59) (59)
------ ---- ------
Balance at December 31, 1995..................... $1,594 $(59) $1,535
Contributed capital (unaudited)................ 56 -- 56
Net loss (unaudited)........................... -- (12) (12)
------ ---- ------
Balance at March 31, 1996 (unaudited)............ $1,650 $(71) $1,579
====== ==== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-24
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995 THREE MONTHS
(DATE OF FORMATION) ENDED
THROUGH MARCH 31,
DECEMBER 31, 1995 1996
------------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (59) $ (12)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Change in accounts payable and accrued
expenses................................. 140 170
------- -------
Net cash provided by operating
activities............................. 81 158
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets................................ (1,506) (311)
Investment in properties, net of development
costs payable.............................. (2,612) (6,683)
------- -------
Net cash used in investing activities... (4,118) (6,994)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from intercompany debt............. 2,627 6,668
Capital contributions....................... 1,594 56
------- -------
Net cash provided by financing
activities............................. 4,221 6,724
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 184 (112)
BEGINNING BALANCE OF CASH AND CASH
EQUIVALENTS.................................. -- 184
------- -------
ENDING BALANCE OF CASH AND CASH EQUIVALENTS... $ 184 $ 72
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-25
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIOD)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of Alabama Homestead Incorporated, Atlantic Homestead
Village Incorporated and its consolidated limited partnership, Atlantic
Homestead Village Limited Partnership, hereinafter collectively referred to as
the Atlantic-Homestead Village Group. Through various wholly-owned
subsidiaries, Atlantic Homestead Village Incorporated owns a 99% limited
partner and a 1% general partner interest in Atlantic Homestead Village
Limited Partnership. Alabama Homestead Incorporated and Atlantic Homestead
Village Incorporated are wholly-owned subsidiaries of Security Capital
Atlantic Incorporated, a real estate investment trust ("Atlantic"). The
entities comprising the Atlantic-Homestead Village Group were formed
commencing April 3, 1995.
The accompanying historical financial statements of the Atlantic-Homestead
Village Group are being presented on a combined basis as Alabama Homestead
Incorporated and Atlantic Homestead Village Incorporated are expected to be
subject to a merger transaction with certain affiliated groups of entities in
which Homestead Village Properties Incorporated will own and operate the
properties subsequent to the merger transaction (See "The Transaction,"
included elsewhere in the Prospectus for a description of the merger
transaction). Management of Atlantic believes that the combined financial
statements result in a more meaningful presentation than presenting the
separate historical financial statements of each entity.
The Atlantic-Homestead Village Group develops, owns and manages extended-
stay lodging facilities located in the Southeastern region of the United
States designed to appeal to value-conscious guests. Rooms are generally
rented on a weekly basis to guests such as business travelers, professionals
and others, with most guests staying multiple weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Properties Under Development
As of December 31, 1995 and March 31, 1996, the Atlantic-Homestead Village
Group had three properties and seven properties under development,
respectively. Costs directly related to the acquisition, development or
improvement of real estate are capitalized. Property under development is
carried at cost, which is not in excess of estimated fair market value.
Interest
The Atlantic-Homestead Village Group capitalizes interest incurred during
the land development or construction period for qualifying projects. Interest
capitalized is included in the cost of properties in the accompanying combined
financial statements. All interest incurred was capitalized and amounted to
$35,528 for the period ended December 31, 1995 and $117,409 for the three
months ended March 31, 1996. No interest was paid through March 31, 1996. All
interest was added to the intercompany debt balance as incurred.
Other Assets
Other assets consist primarily of costs incurred in connection with the
pursuit of land to be acquired for development including refundable earnest
money deposits of $950,000 and $1,090,000 at December 31, 1995 and March 31,
1996, respectively. Costs incurred in connection with the pursuit of
unsuccessful acquisitions or developments are expensed at the time the pursuit
is abandoned.
F-26
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIOD)
Use of Estimates
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 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.
Income Taxes
The companies comprising the Atlantic-Homestead Village Group are qualified
subsidiaries of Atlantic, a corporation which has elected to be taxed as a
real estate investment trust ("REIT").
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. Atlantic has met each of
those tests for each of the periods for which combined financial statements
are presented. Accordingly, no income tax provision or benefit has been
reflected in the combined financial statements of the Atlantic-Homestead
Village Group for the periods presented.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, development costs payable and accrued expenses approximates
fair value as of December 31, 1995 and March 31, 1996 because of the short
maturity of these instruments. Similarly, the carrying value of the
intercompany debt approximates fair value as of those dates as the weighted
average interest rates approximate market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1996 are unaudited. In the opinion of management all
adjustments (consisting solely of normal recurring adjustments) necessary for
a fair presentation of such combined financial statements have been included.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the Atlantic-Homestead Village Group future results
of operations for the full year ending December 31, 1996.
3. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The combined financial statements of the Atlantic-Homestead Village Group
reflect intercompany debt assumed to have been borrowed from Atlantic to fund
the acquisition and development of the Homestead Village properties.
Borrowings were assumed to bear interest at the weighted average interest rate
of Atlantic's debt, which was approximately 8.00% and 7.6% at December 31,
1995 and March 31, 1996, respectively. Interest costs were capitalized in
accordance with the Atlantic-Homestead Village Group's accounting policy for
capitalization of interest cost discussed above. All net operating costs and
expenses incurred were assumed to have been financed through capital
contributed by Atlantic.
4. CONVERTIBLE MORTGAGE NOTES PAYABLE:
On January 24, 1996, the Atlantic-Homestead Village Group (the "Borrower")
executed convertible mortgage notes payable in favor of Atlantic. These notes
give the Atlantic-Homestead Village Group borrowing capability in the
aggregate amount of $81,244,906 and are secured by the currently owned
Homestead Village properties. Additionally, these notes will further be
secured by land to be acquired and developed. The terms of the notes provide
for interest only payments of 9% per annum with payments beginning six months
from the issue date of each note. The notes are due and payable on or before
October 31, 2006. There were no borrowings under these notes during the period
ended March 31, 1996.
F-27
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIOD)
The mortgage notes are convertible, at the option of Atlantic, into common
shares of the Borrower at any time beginning April 1, 1997. The conversion
price is equal to 115% of the value of the common shares at the date of the
note, as determined by the Board of Directors of the Borrower.
5. REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Atlantic has a REIT management agreement with Security Capital (Atlantic)
Incorporated (the "REIT Manager"), a subsidiary of Security Capital Group
Incorporated ("SCG"), which is a majority shareholder of Atlantic. The REIT
Manager provides both strategic and day-to-day management of Atlantic,
including research, investment analysis, acquisition and development, asset
management, capital markets, and legal and accounting services. All officers
of Atlantic are employees of the REIT Manager and Atlantic has no employees.
The REIT management agreement requires Atlantic to pay an annual fee of 16%
of cash flow, as defined in the agreement. The Atlantic-Homestead Village
Group's allocable share of the REIT management fee is based on 16% of its
properties defined cash flow. No fees were payable for the periods ended
December 31, 1995 or March 31, 1996 as no properties were operating during
such periods.
6. COMMITMENTS AND CONTINGENCIES:
At March 31, 1996, the Atlantic-Homestead Village Group had unfunded
development commitments for developments under construction of approximately
$2.4 million.
The Atlantic-Homestead Village Group is subject to environmental regulations
related to the ownership, operation, development and acquisition of real
estate. As part of its due diligence procedures, the Atlantic-Homestead
Village Group has conducted Phase I environmental assessments on each property
prior to acquisition. The cost of complying with environmental regulations was
not material to the Atlantic-Homestead Village Group's results of operations
for the periods presented. The Atlantic-Homestead Village Group is not aware
of any environmental condition on any of its properties which is likely to
have a material adverse effect on its financial condition or results of
operations.
F-28
<PAGE>
SCHEDULE III
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL CARRIED AT DECEMBER 31,
COST TO 1995
ATLANTIC- COSTS
HOMESTEAD CAPITALIZED --------------------------
VILLAGE SUBSE- BUILDINGS ACCUMU- CON-
GROUP: QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES LAND ACQUISITION LAND TOTALS IMPROVEMENTS PRECIATION YEAR ACQUIRED
---------- --------- ----------- ------ ------ ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, Georgia:
Peachtree Corners...... 889 310 889 310 1,199 -- (a) 1995
Raleigh, North Carolina:
Research Triangle Park. 805 38 805 38 843 -- (b) 1995
Tampa/St. Petersburg,
Florida:
North Airport.......... 511 74 511 74 585 -- (b) 1995
------ ---- ------ ---- ------ ----
Total.................. $2,205 $422 $2,205 $422 $2,627 $ 0
====== ==== ====== ==== ====== ====
</TABLE>
(a) As of December 31, 1995, the property was undergoing development.
(b) As of December 31, 1995, the property was undergoing planning.
As of December 31, 1995 the aggregate cost and net investment cost for
federal income tax purposes of Atlantic-Homestead Village Group's investment
in property under development approximates its book value.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of
The SCG-Homestead Village Group:
We have audited the accompanying combined balance sheets of the SCG-
Homestead Village Group (as described in Note 1) as of December 31, 1994 and
1995 and the related combined statements of operations, shareholder's equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1995. These combined financial statements are the responsibility
of the SCG-Homestead Village Group's management. Our responsibility is to
express an opinion on these combined 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the SCG-Homestead
Village Group as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-30
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash........................................... $ -- $ -- $ 12
REIT and property management fees receivable... 55 470 481
Other current assets........................... -- 67 4
------- ------- -------
Total current assets......................... 55 537 497
Furniture and equipment, net................... 47 228 233
Other assets................................... -- 14 72
------- ------- -------
Total assets................................. $ 102 $ 779 $ 802
======= ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................... $ 13 $ 92 $ 6
Accrued expenses............................... 238 807 494
Intercompany debt.............................. -- 1,147 2,043
------- ------- -------
Total current liabilities.................... 251 2,046 2,543
------- ------- -------
Commitments and contingencies
Shareholder's equity (deficit):
Contributed capital............................ 2,371 6,408 8,170
Retained earnings (deficit).................... (2,520) (7,675) (9,911)
------- ------- -------
Total shareholder's equity (deficit)......... (149) (1,267) (1,741)
------- ------- -------
Total liabilities and shareholder's equity
(deficit)....................................... $ 102 $ 779 $ 802
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-31
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- ------------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
REIT and property management
fees............................ $ 254 $ 792 $ 2,007 $ 402 $ 861
Other revenue.................... -- -- 14 -- --
----- ------- ------- ----- -------
Total revenue.................. 254 792 2,021 402 861
----- ------- ------- ----- -------
COSTS AND EXPENSES:
Payroll and related expenses..... 707 1,713 4,276 665 1,909
Office expenses.................. 22 67 273 31 147
Travel and entertainment......... 14 60 232 27 105
Recruiting and relocation........ 53 85 822 71 223
Other expenses................... 57 187 601 58 300
Allocation of SCG overhead....... 69 342 972 68 413
----- ------- ------- ----- -------
Total costs and expenses....... 922 2,454 7,176 920 3,097
----- ------- ------- ----- -------
NET LOSS........................... $(668) $(1,662) $(5,155) $(518) $(2,236)
===== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-32
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDER'S
CONTRIBUTED EARNINGS EQUITY
CAPITAL (DEFICIT) (DEFICIT)
----------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1992................ $ 206 $ (190) $ 16
Contributed capital....................... 565 -- 565
Net loss.................................. -- (668) (668)
------ ------- -------
Balance at December 31, 1993................ 771 (858) (87)
Contributed capital....................... 1,600 -- 1,600
Net loss.................................. -- (1,662) (1,662)
------ ------- -------
Balance at December 31, 1994................ 2,371 (2,520) (149)
Contributed capital....................... 4,037 -- 4,037
Net loss.................................. -- (5,155) (5,155)
------ ------- -------
Balance at December 31, 1995................ 6,408 (7,675) (1,267)
Contributed capital (unaudited)........... 1,762 -- 1,762
Net loss (unaudited)...................... -- (2,236) (2,236)
------ ------- -------
Balance at March 31, 1996 (unaudited)....... $8,170 $(9,911) $(1,741)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-33
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
----------------------- ------------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $(668) $(1,662) $(5,155) $(518) $(2,236)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization.. -- 8 39 3 10
Change in:
REIT and property management
fees receivable............... 6 (45) (416) (112) (11)
Accounts payable and accrued
expenses...................... 97 154 648 (106) (399)
Other current assets........... -- -- (67) (4) 63
----- ------- ------- ----- -------
Net cash used by operating
activities.................. (565) (1,545) (4,951) (737) (2,573)
----- ------- ------- ----- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Other assets..................... -- -- (14) -- (58)
Investment in furniture and
equipment....................... -- (55) (220) (55) (15)
----- ------- ------- ----- -------
Net cash used in investing
activities.................. -- (55) (234) (55) (73)
----- ------- ------- ----- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Intercompany debt................ -- -- 1,148 788 896
Capital contributions............ 565 1,600 4,037 4 1,762
----- ------- ------- ----- -------
Net cash provided by
financing activities........ 565 1,600 5,185 792 2,658
----- ------- ------- ----- -------
NET INCREASE IN CASH............... -- -- -- -- 12
CASH AT BEGINNING OF PERIOD........ -- -- -- -- --
----- ------- ------- ----- -------
CASH AT END OF PERIOD.............. $ -- $ -- $ -- $ -- $ 12
===== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-34
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIODS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of Homestead Village Incorporated and Homestead Realty
Services Incorporated, each incorporated in June, 1995 and SCG-Homestead
Village Incorporated, incorporated in February, 1996. These entities are
wholly-owned subsidiaries of Security Capital Group Incorporated ("SCG") and
are hereinafter collectively referred to as the SCG-Homestead Village Group.
Prior to incorporation, the activities of these entities were performed within
other subsidiaries of SCG. Such activities have been carved out of those
subsidiaries for purposes of inclusion in the accompanying combined financial
statements.
The accompanying historical financial statements of the SCG-Homestead
Village Group are presented on a combined basis as these entities are expected
to be subject to a merger transaction with certain affiliated groups of
entities in which Homestead Village Properties Incorporated will operate and
manage properties subsequent to the merger transaction. (See "The
Transaction," included elsewhere in this Prospectus for a description of the
merger transaction.) Management of SCG believes that the combined financial
statements result in a more meaningful presentation than presenting the
separate historical financial statements of each subsidiary.
The SCG-Homestead Village Group provides fee-based strategic and day-to-day
advisory services to affiliated real estate investment trusts (REITs) which
develop, own and operate extended-stay lodging facilities (Homestead Village
Properties) designed to appeal to value-conscious guests. The services
provided include research, investment analysis, acquisition and development,
asset management, capital markets, property management and legal and
accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Furniture and Equipment
Furniture and equipment is carried at cost, which is not in excess of
estimated fair market value. Depreciation is computed utilizing a straight-
line method over the estimated economic lives of depreciable property,
generally five to seven years.
The following summarizes furniture and equipment as of December 31, 1994,
1995 and March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment............................. $ 54 $ 274 $289
Less: accumulated depreciation.................... (7) (46) (56)
----- ------ ----
Furniture and equipment, net........................ $ 47 $ 228 $233
===== ====== ====
</TABLE>
Use of Estimates
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 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.
F-35
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIODS)
Income Taxes
None of the entities within the SCG-Homestead Village Group have generated
taxable income since incorporation. The total net operating loss carryforward
of these entities is approximately $856,000 and $1,308,000 as of December 31,
1995 and March 31, 1996, respectively, and expire in varying amounts through
2016. The deferred tax asset resulting from these net operating loss
carryforwards has been fully reserved due to its uncertain realizability.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates their fair value as of
December 31, 1994, 1995 and March 31, 1996 because of the short maturity of
these instruments. Similarly, the carrying value of the intercompany debt
approximates fair value as of those dates as the interest rates approximate
market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such combined
financial statements have been included. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the SCG-
Homestead Village Group's future results of operations for the full year
ending December 31, 1996.
3. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The operating expenses incurred by the SCG-Homestead Village Group were
assumed to have been financed through capital contributed by SCG through 1994.
Commencing in 1995, such costs were financed in part through unsecured
borrowings from SCG. The advances include interest at prime plus 1/4%, (8.75%
and 8.5% at December 31, 1995 and March 31, 1996, respectively). No interest
was paid, all interest was added to the intercompany debt balance as incurred.
4. REIT MANAGEMENT AND PROPERTY MANAGEMENT FEES
SCG, the parent of the entities comprising the SCG-Homestead Village Group
has entered into agreements with affiliated real estate investment trusts,
Security Capital Pacific Trust ("PTR") and Security Capital Atlantic,
Incorporated ("Atlantic") to provide REIT management services. The services
with respect to the Homestead Village Properties are provided by the employees
of the SCG-Homestead Village Group and, therefore, the fees earned from
providing such services have been included in the accompanying combined
financial statements.
The REIT management fees are generally based on 16% of cash flow, as defined
in the agreements. The fees earned by the SCG-Homestead Village Group which
were based on the cash flow (as defined) of the Homestead Village Properties
operated by PTR (no Atlantic properties were operational as of March 31, 1996)
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
<S> <C>
March 31, 1995...... $205,630
March 31, 1996...... $361,558
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1993................ $109,032
1994................ $332,252
1995................ $989,471
</TABLE>
F-36
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIODS)
Additionally, in 1995 Homestead Realty Services Incorporated ("Homestead
Realty") entered into property management agreements with PTR's Homestead
Village subsidiaries to manage their operating properties. Prior to 1995 such
agreements were with SCG Realty Services Incorporated ("SCG Realty"), a
subsidiary of SCG and a predecessor of Homestead Realty. Fees for such
services are computed as a percentage (5.0%-7.0%) of gross revenues, as
defined. Property management fees earned for each period were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
<S> <C>
March 31, 1995...... $196,704
March 31, 1996...... $499,661
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1993.............. $ 144,942
1994.............. $ 459,513
1995.............. $1,018,223
</TABLE>
5. TRANSACTIONS WITH SCG
SCG serves as cash manager for the entities in the SCG-Homestead Village
Group. In this capacity SCG collects all cash attributable to the SCG-
Homestead Village Group business activities and makes all cash disbursements
on behalf of the SCG-Homestead Village Group. Additionally, the SCG-Homestead
Village Group is allocated overhead expenses and certain other costs from SCG
related to occupancy and other services provided to the SCG-Homestead Village
Group by SCG. In the opinion of management, the allocation of costs and
expenses have been made on a basis which is believed to be reasonable however,
the allocation is not necessarily indicative of the costs and expenses the
SCG-Homestead Village Group may have incurred on its own account.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Homestead Village Properties Incorporated
We have audited the accompanying balance sheet of Homestead Village
Properties Incorporated as of April 30, 1996. This balance sheet is the
responsibility of the company's management. Our responsibility is to express
an opinion on this balance sheet 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 balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of Homestead Village Properties
Incorporated as of April 30, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Dallas, Texas
May 21, 1996
F-38
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
BALANCE SHEET
APRIL 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................... $1,000
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Commitments and contingencies
Shareholder's Equity:
Common Stock, $.01 par value, 250,000,000 shares authorized, 1,000
shares issued and outstanding........................................ $ 10
Additional paid in capital............................................ 990
------
Total shareholder's equity.......................................... 1,000
------
Total liabilities and shareholder's equity.............................. $1,000
======
</TABLE>
See accompanying notes.
F-39
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET
APRIL 30, 1996
1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Homestead Village Properties Incorporated, a Maryland corporation
("Homestead") was formed on January 26, 1996 to develop, own and manage
extended-stay lodging facilities under the Homestead Village tradename.
Homestead's extended-stay lodging rooms are designed to appeal to value-
conscious guests such as business travelers, professionals and others on a
weekly basis, with most guests staying multiple weeks. The issuance of the
initial shares was funded on April 18, 1996.
Homestead was formed to acquire, through a series of merger transactions,
all of the extended-stay lodging assets operating or to be operated under the
Homestead Village tradename. The net assets related to the Homestead Village
properties are to be acquired through the merger of various wholly-owned
subsidiaries of Security Capital Group Incorporated (SCG), Security Capital
Pacific Trust (PTR) and Security Capital Atlantic Incorporated (Atlantic), all
affiliates of Homestead, in exchange for common stock of Homestead. PTR has 27
operating Homestead Village properties, 5 properties under construction and 22
in pre-development planning (as defined) as of May 20, 1996. Atlantic has 1
Homestead Village property under construction and 25 in pre-development
planning as of May 20, 1996. SCG will provide the trademark and development
and property management expertise as well as operating systems necessary to
develop, own and operate the properties.
The Company was initially capitalized through the issuance of 1,000 shares
of $.01 par value common stock for $1,000 to SCG. As of April 30, 1996, the
Company has 250,000,000 shares of common stock, $.01 par value authorized.
Income Taxes
Homestead was formed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes.
2. TRANSACTIONS WITH AFFILIATES
Homestead has entered into various agreements with affiliated companies in
order to complete the transaction discussed above and to conduct the business
of developing, owning and operating Homestead Village properties.
Merger and Distribution Agreement
On May 21, 1996, Homestead entered into a Merger and Distribution Agreement
with PTR, Atlantic and SCG (collectively, the "Affiliated Companies") which
provides for certain subsidiaries of the Affiliated Companies to be merged
with and into Homestead in exchange for common stock. The subsidiaries of the
Affiliated Companies develop, own and manage the Homestead Village properties.
Pursuant to the agreement, PTR will merge with and into Homestead the net
assets related to Homestead Village properties in exchange for 9,485,727
shares of Homestead common stock. Atlantic will contribute net assets in
exchange for 4,201,220 shares of Homestead common stock. Homestead will issue
4,062,788 shares of Homestead common stock in exchange for certain net assets
of SCG which consist primarily of the Homestead Village trademark, and
development and management expertise, as well as operating systems utilized in
the ongoing development and operations of the extended-stay lodging
facilities. Homestead will not assume any obligations related to the employees
of the SCG subsidiaries including unpaid salaries, wages, benefits and any
expense reimbursements.
F-40
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET--(CONTINUED)
PTR and Atlantic will receive all of their shares of Homestead common stock
at the date of the transaction. SCG is to receive 1,819,750 shares of
Homestead common stock based on the ratio of actual funding provided by PTR
and Atlantic to the total expected funding to be provided at the date of the
transaction. The remaining 2,243,038 shares of Homestead common stock will be
issued to and held in escrow by an appointed escrow agent. The escrowed shares
will be transferred to SCG pro rata based on the completion of PTR's and
Atlantic's remaining funding commitments. In the event not all of the funding
commitments are provided to Homestead by PTR or Atlantic, the remaining shares
of common stock not transferred to SCG will be returned to Homestead along
with any dividends paid. All voting rights will be assigned to SCG with
respect to shares of Homestead common stock issued to the escrow agent.
In conjunction with the Merger and Distribution Agreement, described above,
Homestead, SCG, PTR and Atlantic entered into a Warrant Agreement dated May
21, 1996 whereby SCG, PTR and Atlantic are to receive warrants based on the
relative fair value of the assets each is to contribute in the transaction. A
total of 10,000,000 warrants are to be issued. The warrants may be used to
purchase common stock of Homestead for $10 per share, may be exercised at any
time and will expire twelve months from the date of the transaction. As
consideration for the warrants issued, PTR and Atlantic have agreed to provide
additional funding to Homestead for the development of properties and SCG will
provide financing for the purchase of properties to be used as extended-stay
facilities for the period from the date of the Merger and Distribution
Agreement through the date of the transaction.
All shares of Homestead common stock and warrants issued by Homestead to PTR
and Atlantic in connection with the transaction will be issued directly to a
distribution agent for the benefit of the holders of PTR and Atlantic common
stock on such date of record of distribution. The remaining shares of
Homestead common stock and warrants will be issued directly to SCG and the
escrow agent.
The costs associated with the transaction are to be paid by each party
incurring the expense, except for those costs related to filing, printing and
distributing proxy and prospectus materials will be paid 63.64%, 28.18%, and
8.18% by PTR, Atlantic and SCG, respectively.
In conjunction with the agreement, Homestead will assume contractual
obligations including development contracts. At April 23, 1996, the PTR
subsidiary had approximately $21.1 million and at March 31, 1996 the Atlantic
subsidiary had approximately $2.4 million of unfunded development commitments
for developments under construction.
3. COMMITMENTS AND CONTINGENCIES
Finder's Agreements
In conjunction with the Merger and Distribution Agreement, PTR will assign
its rights and obligations pursuant to a series of agreements with an
unaffiliated person ("Finder") who developed the Homestead Village concept,
and has performed certain services. The agreements which expire February 5,
2043, provide for the payment of fees to Finder as follows: (i) $535,000
annually with respect to the four properties for which Finder assisted in the
location, development and initial operations; (ii) an annual amount of $7,500
per property (subject to certain conditions as defined in the agreements) for
assistance in site location with respect to the first 35 properties
constructed (other than the four properties referred to in (i) above; (iii)
20% of the net proceeds as defined per the agreements, upon the sale of the
four properties noted in (i) above to an unaffiliated third party; and (iv)
10% of the net proceeds as defined per the agreement, upon the sale of the
additional 35 properties to an unaffiliated third party. No such sales have
occurred to date. Effective December 1994, the agreement to assist in the site
location of any additional properties beyond the 35 properties was terminated.
Additionally, Finder has agreed not to compete, directly or indirectly, with
the Homestead Village properties in certain states in which PTR and Atlantic
do business through December 31, 1996.
F-41
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET--(CONTINUED)
Rights Agreement
On May 16, 1996 the Homestead Board of Directors declared and paid a
dividend of one purchase right as defined per the Rights Agreement for each
share of Homestead Common Stock outstanding to the holders of Homestead common
stock of record on this date. The shares of Homestead common stock issued
after May 16, 1996 and before the expiration of the purchase rights (May 16,
2006), will also be entitled to one purchase right for each share issued. Each
purchase right entitles the holder to purchase one-hundredth of a
participating preferred share of Homestead at $50, subject to adjustment as
defined in the agreement. The Board of Directors of Homestead through its
Articles of Incorporation is authorized to issue one or more series and to
determine the number of preferred shares of each series and the rights of each
series. The purchase rights will be exercisable only after a person or group
of affiliated persons acquires 20% or more of the outstanding shares of common
stock or offers to acquire 25% or more.
F-42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF ATLANTIC SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 16
Security Capital Atlantic Incorporated.................................... 24
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Distributions............................................................. 26
Dilution.................................................................. 28
Homestead Transaction..................................................... 28
Business.................................................................. 32
REIT Management........................................................... 40
Properties................................................................ 51
Selected Financial Information............................................ 59
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 60
Policies With Respect to Certain Activities............................... 68
Certain Relationships and Transactions.................................... 71
Principal Shareholders.................................................... 75
Description of Capital Stock.............................................. 76
Certain Provisions of Maryland Law and of ATLANTIC's Articles of
Incorporation and Bylaws................................................. 81
Shares Available for Future Sale.......................................... 83
Federal Income Tax Considerations......................................... 83
Underwriting.............................................................. 95
Experts................................................................... 96
Validity of Shares........................................................ 96
Additional Information.................................................... 96
Glossary.................................................................. 98
Index to Financial Statements............................................. F-1
Appendix A--Prospectus of Homestead....................................... A-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------
PROSPECTUS
--------------
GOLDMAN, SACHS & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the offering of the shares being registered. All the amounts
shown are estimates (other than the SEC registration fee and the NASD fee).
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee............................................. $39,656
NASD fee......................................................... 12,000
New York Stock Exchange listing fee.............................. *
Printing and engraving fees...................................... *
Legal fees and expenses (other than Blue Sky).................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses (including fees of counsel)........... *
Miscellaneous expenses........................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
*To be included in amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
From October 26, 1993 (the date of the Registrant's inception) through June
28, 1994, Security Capital Group Incorporated purchased an aggregate of
26,133,150 shares of the Registrant's common stock at a price of $10.00 per
share. Such purchases were exempt from registration pursuant to Section 4(2)
of the Securities Act. On May 12, 1994, Laing Properties, Inc. received
10,000,000 shares of the Registrant's common stock in partial consideration
for ATLANTIC's acquisition of a portfolio of properties. Of the 10,000,000
shares issued to Laing Properties, Inc., 7,500,000 shares have been
repurchased by the Registrant under a put obligation. In August 1994, the
Registrant sold 1,000,000 shares of common stock in a private offering at a
price of $10.00 per share (including 663,425 shares which were sold to
Security Capital Group Incorporated). From March 1995 through June 1995, the
Registrant sold 14,545,455 shares of common stock in a private offering at a
price of $11.00 per share (including 8,621,409 shares which were sold to
Security Capital Group Incorporated). From November 1995 through May 1996, the
Registrant sold 21,724,556 shares of common stock in a private offering at a
price of $11.50 per share (including 1,839,423 shares which were sold to
Security Capital Group Incorporated at a price of $11.50 per share and
2,500,000 shares which were sold to Security Capital Group Incorporated at a
price of $11.568 per share). All such transactions were effected pursuant to
the exemption from registration contained in Section 4(2) of the Securities
Act and Rule 506 thereunder.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article EIGHTH of the Registrant's Articles of Incorporation provides as
follows with respect to the indemnification of Directors and officers of the
Registrant:
"The Corporation shall, to the maximum extent permitted by Maryland law
in effect from time to time, indemnify and pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any
individual who is a present or former director or officer of the
Corporation or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership,
II-1
<PAGE>
joint venture, employee benefit plan or other enterprise. The Corporation
shall have the power, with the approval of its Board, to provide such
indemnification and advancement of expenses to a person who served a
predecessor of the Corporation in any of the capacities described in (a) or
(b) above and to any employee or agent of the Corporation or a predecessor
of the Corporation".
The Registrant has entered into indemnity agreements with each of its
officers and Directors which provide for reimbursement of all expenses and
liabilities of such officer or Director, arising out of any lawsuit or claim
against such officer or Director due to the fact that he or she was or is
serving as an officer or Director, except for such liabilities and expenses
(a) the payment of which is judicially determined to be unlawful, (b) relating
to claims under Section 16(b) of the Securities Exchange Act of 1934 or (c)
relating to judicially determined criminal violations.
The form of Underwriting Agreement filed as an exhibit to this registration
statement provides for the reciprocal indemnifications by the Underwriters of
the Registrant, and its Directors, officers and controlling persons, and by
the Registrant of the Underwriters, and their respective directors, officers
and controlling persons, against certain liabilities under the Securities Act.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
The consideration to be received by the Registrant for the shares registered
will be credited to the appropriate capital account.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
See Index to Financial Statements and Index to Exhibits.
ITEM 36. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that: (1) for purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and (2) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Security Capital Atlantic
Incorporated, a Maryland corporation, and each of the undersigned directors
and officers of Security Capital Atlantic Incorporated, hereby constitutes and
appoints James C. Potts, Constance B. Moore, William Kell, Jeffrey A. Klopf,
Ariel Amir, Edward J. Schneidman and Michael T. Blair its, his or her true and
lawful attorneys-in-fact and agents, for it, him or her and in its, his or her
name, place and stead, in any and all capacities, with full power to act
alone, to sign any and all amendments to this registration statement, and to
file each such amendment to this registration statement 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 and to all intents and purposes as it, he or she 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.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON THE 27TH DAY OF JUNE,
1996.
Security Capital Atlantic
Incorporated
/s/ James C. Potts
By: _________________________________
James C. Potts
Co-Chairman and Chief Investment
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ James C. Potts Co-Chairman, Chief June 27, 1996
- ------------------------------------- Investment Officer
JAMES C. POTTS and Director
/s/ Constance B. Moore Co-Chairman, Chief June 27, 1996
- ------------------------------------- Operating Officer
CONSTANCE B. MOORE and Director
/s/ William Kell Vice President and June 27, 1996
- ------------------------------------- Controller
WILLIAM KELL (Principal
Financial and
Accounting Officer)
/s/ C. Ronald Blankenship Director June 27, 1996
- -------------------------------------
C. RONALD BLANKENSHIP
/s/ M. A. Garcia III Director June 27, 1996
- -------------------------------------
M. A. GARCIA III
/s/ Ned S. Holmes Director June 27, 1996
- -------------------------------------
NED S. HOLMES
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DOCUMENT DESCRIPTION PAGE NO.
----------- -------------------- ----------
<C> <S> <C>
1* Form of Underwriting Agreement among Security Capital
Atlantic Incorporated ("ATLANTIC") and Goldman,
Sachs & Co., as representatives of the several
underwriters named therein..........................
2.1 Merger and Distribution Agreement, dated as of May
21, 1996, among Security Capital Pacific Trust
("PTR"), ATLANTIC, Security Capital Group
Incorporated ("SCG") and Homestead Village
Properties Incorporated ("Homestead") (incorporated
by reference to Exhibit 2 to Homestead's Form S-4
Registration Statement (File No. 333-4455; the
"Homestead S-4"))
2.2 Form of Articles of Merger (incorporated by reference
to Exhibit 2.1 to the Homestead S-4)
4.1 Second Amended and Restated Articles of Incorporation
of ATLANTIC.........................................
4.2 Articles of Amendment to Second Amended and Restated
Articles of Incorporation of ATLANTIC...............
4.3 Second Amended and Restated Bylaws of ATLANTIC.......
4.4 Rights Agreement, dated as of March 12, 1996, between
ATLANTIC and The First National Bank of Boston, as
Rights Agent, including form of Rights Certificate..
4.5* Form of stock certificate for shares of common stock
of ATLANTIC
4.6* Form of Amended and Restated Promissory Note by
Homestead in favor of ATLANTIC
4.7* Form of Amended and Restated Promissory Note by
Homestead in favor of ATLANTIC
5* Opinion of Mayer, Brown & Platt as to the legality of
the shares being registered
8* Opinion of Mayer, Brown & Platt as to certain tax
matters
10.1 Transfer and Registration Rights Agreement, dated as
of December 15, 1995, among ATLANTIC and the
investors listed on the signature pages thereto.....
10.2 Supplemental Registration Rights Agreement, dated as
of December 15, 1995, among ATLANTIC and the
investors listed on the signature pages thereto.....
10.3* Second Amended and Restated REIT Management
Agreement, dated as of June 30, 1996, between
ATLANTIC and the REIT Manager
10.4 Investor Agreement, dated as of October 28, 1993,
between ATLANTIC and SCG............................
10.5* Amended and Restated Credit Agreement, dated as of
June 27, 1996, between ATLANTIC and Morgan Guaranty
Trust Company of New York, as agent bank, including
form of Revolving Credit Note
10.6* Form of Indemnification Agreement entered into
between ATLANTIC and each of its Directors
10.7* Security Capital Atlantic Incorporated Share Option
Plan for Outside Directors
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DOCUMENT DESCRIPTION PAGE NO.
----------- -------------------- ----------
<C> <S> <C>
10.8 Warrant Purchase Agreement, dated as of May 21, 1996,
among Homestead, ATLANTIC, PTR and SCG (incorporated
by reference to Exhibit 10.6 to the Homestead S-4)
10.9 Form of Protection of Business Agreement among
ATLANTIC, PTR, SCG and Homestead (incorporated by
reference to Exhibit 10.1 to the Homestead S-4)
10.10 Form of Investor and Registration Rights Agreement
between Homestead and ATLANTIC (incorporated by
reference to Exhibit 10.7 to the Homestead S-4)
10.11 Form of Funding Commitment Agreement between
Homestead and ATLANTIC (incorporated by reference to
Exhibit 10.4 to the Homestead S-4)
21 Subsidiaries of ATLANTIC.............................
23.1* Consent of Mayer, Brown & Platt
23.2 Consent of Ernst & Young LLP, Dallas, Texas..........
23.3 Consent of Ernst & Young LLP, West Palm Beach,
Florida.............................................
23.4 Consent of KPMG Peat Marwick LLP.....................
24 Power of Attorney pursuant to which amendments to
this Registration Statement may be filed (included
in this Registration Statement at page II-3).
27 Financial Data Schedule..............................
</TABLE>
- --------
*To be filed by amendment.
II-6
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
SECURITY CAPITAL ATLANTIC INCORPORATED
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
THIS IS TO CERTIFY THAT:
1. The Corporation was formed under the general laws of the State of
Maryland on April 14, 1994 under the name "SCA Acquisition Incorporated" and,
pursuant to the filing of the First Amended and Restated Articles of
Incorporation on May 10, 1994, changed its name to "Security Capital Atlantic
Incorporated."
2. The Corporation desires to amend and restate its Articles of
Incorporation as currently in effect and such Articles of Incorporation are
hereby amended and restated in their entirety as follows:
FIRST: The name of the corporation (the "Corporation") is:
Security Capital Atlantic Incorporated
SECOND: The current address of the principal office of the Corporation is
Six Piedmont Center, Atlanta, Georgia 30305. The post office address of the
principal office of the Corporation in the State of Maryland is c/o The
Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Baltimore,
Maryland 21202. The name and address of the resident agent of the Corporation
in the State of Maryland is The Prentice-Hall Corporation System, Maryland, 11
East Chase Street, Baltimore, Maryland 21202. The resident agent is a
corporation located in the State of Maryland.
THIRD: The purposes for which the Corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under the
General Corporation Law of the State of Maryland.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is two hundred fifty million (250,000,000), consisting
of two hundred fifty million (250,000,000) shares of Common Stock, one cent
($.01) par value. The aggregate par value of all authorized shares of stock
having par value is $2,500,000. The Board of Directors of the Corporation may
classify or reclassify any unissued shares of stock from time to time by setting
or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of stock.
FIFTH: The Corporation is to have perpetual existence.
<PAGE>
SIXTH: The number of Directors of the Corporation shall initially be
three, which number may be increased or decreased from time to time by the vote
of a majority of the entire Board of Directors, but such number shall in no case
be less than three. Any such determination shall be by the Board of Directors
and shall continue in effect unless and until changed by the Board of Directors,
but no such changes shall affect the term of any Director then serving. A
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business.
The Directors shall be divided into three classes, designated Class I,
Class II and Class III. Each class shall consist, as nearly as may be possible,
of one-third of the total number of Directors constituting the entire Board of
Directors. At the 1994 annual meeting of stockholders, Class I Directors shall
be elected for a one-year term, Class II Directors for a two-year term and Class
III Directors for a three-year term. At each succeeding annual meeting of
stockholders, beginning in 1995, successors to the class of Directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
authorized number of Directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of Directors in each
class as nearly equal as possible but in no case will a decrease in the number
of Directors shorten the term of any incumbent Director. A Director shall serve
until the annual meeting for the year in which his or her term expires and until
his or her successor shall be elected and shall qualify, subject, however, to
prior death, resignation or removal. Any vacancy on the Board of Directors
shall be filled by a majority of the Directors then serving, even if less than a
quorum, or by a sole remaining Director. Any Director elected to fill a vacancy
shall serve until the next annual meeting of stockholders and until his or her
successor shall be elected and shall qualify, subject, however, to prior death,
resignation or removal. The name and class of each director who is currently
serving are:
Name Class
---- -----
Ned S. Homes I
Anthony R. Manno II
James C. Potts III
SEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the By-laws of the Corporation.
EIGHTH: The Corporation shall, to the maximum extent permitted by Maryland
law in effect from time to time, indemnify and pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any individual
who is a present or former director or officer of the Corporation or (b) any
individual who, while a director or officer of the Corporation and at the
request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust,
-2-
<PAGE>
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise. The Corporation shall have the power, with the
approval of its Board of Directors, to provide such indemnification and
advancement of expenses to a person who served a predecessor of the Corporation
in any of the capacities described in (a) or (b) above and to any employee or
agent of the Corporation or a predecessor of the Corporation.
NINTH:
Section 1. Definitions. For the purposes of this Article NINTH, the
following terms shall have the following meanings:
"Adoption Date" shall mean the date of the adoption of the ownership
restrictions contained in this Article NINTH.
"Beneficial Ownership" shall mean, except as provided below in the
following sentence, ownership of Shares by a Person who would be treated as an
owner of such Shares either directly or constructively through the application
of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
However, Section 544 will be modified such that no corporate shareholder of an
Excluded Holder owning directly or indirectly less than 10% of the stock of such
Excluded Holder will be treated as owning any of the stock of the Corporation
owned by such Excluded Holder so long as no individual directly or indirectly
owns 50 percent or more in value of the stock of such corporate shareholder.
The terms "Beneficial Owner," "Beneficially Owns," "Beneficially Own" and
"Beneficially Owned" shall have the correlative meanings.
"Charitable Beneficiary" shall mean an organization or organizations
described in Sections 170(b)(1)(A) and 170(c) of the Code and identified by the
Board of Directors as the beneficiary or beneficiaries of the Excess Share
Trust.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Excess Shares" shall mean Shares resulting from an exchange described
in Section 3 of this Article NINTH.
"Excess Share Trust" shall mean the trust created pursuant to Section
3 and Section 15 of this Article NINTH.
"Excess Share Trustee" shall mean a person, who shall be unaffiliated
with the Corporation, any Purported Beneficial Transferee and any Purported
Record Transferee, identified by the Board of Directors as the trustee of the
Excess Share Trust.
"Excluded Holder" shall mean Security Capital Group Incorporated, a
Maryland corporation, and its affiliates, successors, or assigns. However, an
affiliate, successor, or assignee
-3-
<PAGE>
will be treated as an Excluded Holder only if Security Capital Group
Incorporated obtains an opinion of counsel that any ownership of Shares by such
affiliate, successor, or assignee will not jeopardize the status of the
Corporation as a "real estate investment trust" under the Code.
"Existing Holder" shall mean any Person (other than an Excluded
Holder) who is, or would be upon the exchange of Units, debt, or any security of
the Corporation, the Beneficial Owner of Shares in excess of the Ownership Limit
both upon and immediately after the Adoption Date, so long as, but only so long
as, such Person Beneficially Owns or would, upon exchange of Units, debt, or any
security of the Corporation, Beneficially Own Shares in excess of the Ownership
Limit.
"Existing Holder Limit" for any Existing Holder shall mean the
percentage of the outstanding Shares Beneficially Owned, or which would be
Beneficially Owned upon the exchange of Units, debt or any security of the
Corporation, by such Existing Holder upon and immediately after the Adoption
Date, and, after any adjustment pursuant to Section 9 of this Article NINTH,
shall mean such percentage of the outstanding Shares as so adjusted. Any
Existing Holder Limit shall not be modified except as provided in Section 9 of
this Article NINTH. From the Adoption Date until the Restriction Termination
Date, the Corporation shall maintain and, upon request, make available to each
Existing Holder, a schedule which sets forth the then current Existing Holder
Limit for each Existing Holder.
"Market Price" shall mean the last reported sales price reported on
the New York Stock Exchange for Shares on the trading day immediately preceding
the relevant date, or if not then traded on the New York Stock Exchange, the
last reported sales price for Shares on the trading day immediately preceding
the relevant date as reported on any exchange or quotation system over or
through which such Shares may be traded, or if not then traded over or through
any exchange or quotation system, then the market price of such Shares on the
relevant date as determined in good faith by the Board of Directors.
"Ownership Limit" shall initially mean 9.8%, in number of Shares or
value, of the outstanding Shares, after any adjustment as set forth in Section 9
of this Article NINTH, shall mean such greater percentage of the outstanding
Shares as so adjusted. The number and value of the outstanding Shares of the
Corporation shall be determined by the Board of Directors in good faith, which
determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, as defined below in Section 3
of this Article NINTH, the beneficial holder of the Shares, if such Transfer had
been valid under Section 2 of this Article NINTH.
-4-
<PAGE>
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, as defined below in Section 3
of this Article NINTH, the record holder of the Shares, if such Transfer had
been valid under Section 2 of this Article NINTH.
"REIT" shall mean a real estate investment trust under Section 856 of
the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code and any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Restriction Termination Date" shall mean the first day after the
Adoption Date on which the Board of Directors determines that it is no longer in
the best interests of the Corporation to attempt to, or continue to, qualify as
a REIT.
"Shares" shall mean the shares of the Corporation's Common Stock as
may be authorized and issued from time to time pursuant to Article FOURTH.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Shares (including (a) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Shares, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Shares, but excluding
the exchange of Units, debt or any security of the Corporation for Shares and
(c) any transfer or other disposition of any interest in Shares as a result of a
change in the marital status of the holder thereof), whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. The terms "Transfers" and "Transferred" shall
have the correlative meanings.
"Units" shall mean units of any partnership that are convertible into
Shares.
Section 2. Ownership Limitation.
(A) Except as provided in Section 12 and Section 20 of this Article
NINTH and subject to clause (F) of this Section 2, from the Adoption Date until
the Restriction Termination Date, no Person or Persons acting as a group (other
than an Excluded Holder or an Existing Holder) shall Beneficially Own Shares in
excess of the Ownership Limit.
(B) Except as provided in Section 12 and Section 20 of this Article
NINTH and subject to clause (F) of this Section 2, from the Adoption Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in any Person (other than an Excluded Holder or an Existing Holder) Beneficially
Owning Shares in excess of the Ownership Limit shall be void ab initio as to the
Transfer of such Shares which would be otherwise Beneficially Owned by such
Person in excess of the Ownership Limit; and the intended transferee shall
acquire no rights in such Shares.
-5-
<PAGE>
(C) Except as provided in Section 12 and Section 20 of this Article
NINTH and subject to clause (F) of this Section 2, from the Adoption Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in any Existing Holder Beneficially Owning Shares in excess of the applicable
Existing Holder Limit shall be void ab initio as to the Transfer of such Shares
which would be otherwise Beneficially Owned by such Existing Holder in excess of
the applicable Existing Holder Limit; and such Existing Holder shall acquire no
rights in such Shares.
(D) Except as provided in Section 12 and Section 20 of this Article
NINTH and subject to clause (F) of this Section 2, from the Adoption Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in the Shares being beneficially owned (as provided in Section 856(a) of the
Code) by less than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of such Shares which
would be otherwise beneficially owned (as provided in Section 856(a) of the
Code) by the transferee; and the intended transferee shall acquire no rights in
such Shares.
(E) Subject to Section 12 of this Article NINTH from the Adoption
Date until the Restriction Termination Date, any Transfer that, if effective,
would result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer of the
Shares which would cause the Corporation to be "closely held" within the meaning
of Section 856(h) of the Code; and the intended transferee shall acquire no
rights in such Shares.
(F) Nothing contained in this Article NINTH shall preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange. The fact that the settlement of any transaction is
permitted shall not negate the effect of any other provision of this Article
NINTH and any transferee in such a transaction shall be subject to all of the
provisions and limitations set forth in this Article NINTH.
Section 3. Excess Shares.
(A) If, notwithstanding the other provisions contained in this
Article NINTH, at any time after the Adoption Date until the Restriction
Termination Date, there is a purported Transfer such that (i) any Person (other
than an Excluded Holder or an Existing Holder) would Beneficially Own Shares in
excess of the applicable Ownership Limit or (ii) any Existing Holder would
Beneficially Own Shares in excess of the applicable Existing Holder Limit, then,
except as otherwise provided in Section 12 of this Article NINTH, Shares
directly owned by such Person or Existing Holder, as the case may be, shall be
automatically exchanged for an equal number of Excess Shares until such Person
or Existing Holder, as the case may be, does not own Shares in excess of the
applicable Ownership Limit or Existing Holder Limit. Such exchange shall be
effective as of the close of business on the business day prior to the date of
the purported Transfer. If, after exchanging all of the Shares owned directly by
a Person or Existing Holder such Person or Existing Holder still owns Shares in
excess of the applicable Ownership Limit or Existing Holder Limit, Shares owned
by such Person or Existing Holder constructively through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code, shall
be exchanged for an equal number of Excess
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<PAGE>
Shares until such Person or Existing Holder, as the case may be, does not own
Shares in excess of the applicable Ownership Limit or Existing Holder Limit.
Where such Person or Existing Holder owns Shares constructively through one or
more Persons and the Shares held by such other Persons must be exchanged for an
equal number of Excess Shares, the exchange of Shares by such other Persons
shall be pro rata. However, if such Person or Existing Holder owns Shares
constructively through an Excluded Holder, the Excluded Holder shall not have to
exchange its Shares for Excess Shares and the exchange shall be pro rata among
the other Persons.
(B) If, notwithstanding the other provisions contained in this
Article NINTH, at any time after the Adoption Date until the Restriction
Termination Date, there is a purported Transfer of Shares or any sale, transfer,
gift, assignment, devise or other disposition of shares or other interests of a
direct or indirect shareholder of the Corporation which, if effective, would
cause the Corporation to become "closely held" within the meaning of Section
856(h) of the Code, then any Shares being Transferred which would cause the
Corporation to be "closely held" within the meaning of Section 856(h) of the
Code (rounded up to the nearest whole Share) shall be automatically exchanged
for an equal number of Excess Shares and be treated as provided in this Article
NINTH. Such designation and treatment shall be effective as of the close of
business on the business day prior to the date of the purported Transfer. If,
after the exchange of any such Shares, the Corporation is still "closely held"
within the meaning of Section 856(h) of the Code, any individual whose
Beneficial Ownership of Shares in the Corporation increased as a result of the
sale, transfer, gift, assignment, devise or other disposition of shares or other
interests of a direct or indirect shareholder of the Corporation and is one of
the five individuals who caused the Corporation to be "closely held" within the
meaning of Section 856(h) of the Code, shall exchange Shares owned directly for
an equal number of Excess Shares until the Corporation is not "closely held"
within the meaning of Section 856(h) of the Code. Where several similarly
situated individuals exist, the exchange shall be pro rata. If, after applying
the foregoing provisions the Corporation is still "closely held" within the
meaning of Section 856(h) of the Code, any Shares constructively owned by such
individuals shall be exchanged for Excess Shares (other than Shares held by an
Excluded Holder), on a pro rata basis among similarly situated individuals,
until the Corporation is not "closely held" within the meaning of Section 856(h)
of the Code.
(C) If, at any time after the Adoption Date until the Restriction
Termination Date, an event other than a purported Transfer (an "Event") occurs
which would (i) cause any Person (other than an Excluded Holder or an Existing
Holder) to Beneficially Own Shares in excess of the Ownership Limit or (ii)
cause an Existing Holder to Beneficially Own Shares in excess of the Existing
Holder Limit, then, except as otherwise provided in Section 12 of this Article
NINTH, Shares Beneficially Owned by such Person or Existing Holder, as the case
may be, shall be automatically exchanged for an equal number of Excess Shares to
the extent necessary to eliminate such excess ownership. Such exchange shall be
effective as of the close of business on the business day prior to the date of
the Event. In determining which Shares are exchanged, Shares Beneficially Owned
by any Person who caused the Event to occur shall be exchanged before any Shares
not so held are exchanged. Where several similarly situated Persons exist, the
exchange shall be pro rata. If any Person is required to exchange Shares
pursuant to this Clause (C) of this Section 3 of this
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<PAGE>
Article NINTH, such Person shall first exchange Shares directly held by such
Person before exchanging Shares held constructively through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. Where
such Person or Existing Holder owns Shares constructively through one or more
Persons and the Shares held by such other Persons must be exchanged for an equal
number of Excess Shares, the exchange of Shares by such other Persons shall be
pro rata. However, if such Person or Existing Holder owns Shares constructively
through an Excluded Holder, the Excluded Holder shall not have to exchange its
Shares for Excess Shares and the exchange shall be pro rata among the other
Persons.
Section 4. Prevention of Transfer. If the Board of Directors or its
designee shall at any time determine in good faith that a Transfer has taken
place in violation of Section 2 of this Article NINTH or that a Person intends
to acquire or has attempted to acquire Beneficial Ownership (determined without
reference to any rules of attribution) of any Shares in violation of Section 2
of this Article NINTH, the Board of Directors or its designee shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer, including, but not limited to, refusing to give effect to such
Transfer on the books of the Corporation or instituting proceedings to enjoin
such Transfer; provided, however, that any Transfers or attempted Transfers in
violation of Section 2 of this Article NINTH shall automatically result in the
designation and treatment described in Section 3 of this Article NINTH,
irrespective of any action (or non-action) by the Board of Directors.
Section 5. Notice to Corporation. Any Person who acquires or attempts to
acquire Shares in violation of Section 2 of this Article NINTH, or any Person
who is a transferee such that Excess Shares result under Section 3 of this
Article NINTH, shall immediately give written notice or, in the event of a
proposed or attempted Transfer, give at least 30 days prior written notice to
the Corporation of such event and shall provide to the Corporation such other
information as the Corporation may request in order to determine the effect, if
any, of such Transfer or attempted Transfer on the Corporation's status as a
REIT.
Section 6. Information for Corporation. From the Adoption Date until the
Restriction Termination Date:
(A) every Beneficial Owner of more than 5% (or such other percentage,
between 1/2 of 1% and 5%, as provided in the income tax regulations promulgated
under the Code) of the number or value of outstanding Shares of the Corporation
shall, within 30 days after January 1 of each year, give written notice to the
Corporation stating the name and address of such Beneficial Owner, the number of
Shares Beneficially Owned, and a description of how such Shares are held. Each
such Beneficial Owner shall provide to the Corporation such additional
information as the Corporation may reasonably request in order to determine the
effect, if any, of such Beneficial Ownership on the Corporation's status as a
REIT.
(B) each Person who is a Beneficial Owner of Shares and each Person
(including the stockholder of record) who is holding Shares for a Beneficial
Owner shall provide to the Corporation in writing such information with respect
to direct, indirect and constructive ownership
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<PAGE>
of Shares as the Board of Directors deems reasonably necessary to comply with
the provisions of the Code applicable to a REIT, to determine the Corporation's
status as a REIT, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
Section 7. Other Action by Board. Subject to Section 2 of this Article
NINTH, nothing contained in this Article NINTH shall limit the authority of the
Board of Directors to take such other action as it deems necessary or advisable
to protect the Corporation and the interests of its stockholders by preservation
of the Corporation's status as a REIT, provided, however, that no provision of
this Section 7 shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange.
Section 8. Ambiguities. In the case of an ambiguity in the application of
any of the provisions of this Article NINTH, including any definition contained
in Section 1, the Board of Directors shall have the power to determine the
application of the provisions of this Article NINTH with respect to any
situation based on the facts known to it.
Section 9. Modification of Existing Holder Limits. The Existing Holder
Limits may be modified as follows:
(A) Subject to the limitations provided in Section 11 of this Article
NINTH, the Board of Directors may grant options which result in Beneficial
Ownership of Shares by an Excluded or Existing Holder pursuant to an option plan
approved by the Board of Directors and/or the stockholders. Any such grant shall
increase the Existing Holder Limit for the affected Existing Holder to the
maximum extent possible under Section 11 to permit the Beneficial Ownership of
the Shares issuable upon the exercise of such option.
(B) Subject to the limitations provided in Section 11 of this Article
NINTH, an Excluded Holder and an Existing Holder may elect to participate in a
dividend reinvestment plan approved by the Board of Directors which results in
Beneficial Ownership of Shares by such participating Excluded Holder or Existing
Holder and any comparable reinvestment plan of any partnership, wherein those
Existing Holders holding Units are entitled to purchase additional Units. Any
such participation shall increase the Existing Holder Limit for the affected
Existing Holder to the maximum extent possible under Section 11 of this Article
NINTH to permit Beneficial Ownership of the Shares acquired as a result of such
participation.
(C) The Board of Directors will reduce the Existing Holder Limit for
any Existing Holder after any Transfer permitted in this Article NINTH by such
Existing Holder by the percentage of the outstanding Shares so Transferred or
after the lapse (without exercise) of an option described in Clause (A) of this
Section 9 of this Article NINTH by the percentage of the Shares that the option,
if exercised, would have represented, but in either case no Existing Holder
Limit shall be reduced to a percentage which is less than the Ownership Limit.
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<PAGE>
Section 10. Increase or Decrease in Ownership Limit. Subject to the
limitations provided in Section 11 of this Article NINTH, the Board of Directors
may from time to time increase or decrease the Ownership Limit; provided,
however, that any decrease may only be made prospectively as to subsequent
holders (other than a decrease as a result of a retroactive change in existing
law that would require a decrease to retain REIT status, in which case such
decrease shall be effective immediately).
Section 11. Limitations on Changes in Existing Holder and Ownership
Limits.
(A) Neither the Ownership Limit nor any Existing Holder Limit may be
increased (nor may any additional Existing Holder Limit be created) if, after
giving effect to such increase (or creation), five individual Beneficial Owners
of Shares (including all of the then Existing Holders) could Beneficially Own,
in the aggregate, more than 49.9% in number or value of the outstanding Shares.
(B) Prior to the modification of any Existing Holder Limit or
Ownership Limit pursuant to Sections 9 or 10 of this Article NINTH, the Board of
Directors may require such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary or advisable in order to determine or ensure
the Corporation's status as a REIT.
(C) No Ownership Limit may be increased to a percentage which is
greater than 9.9%.
Section 12. Waivers by the Board. The Board of Directors with a ruling
from the Internal Revenue Service, an opinion of counsel to the effect that such
exemption will not result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or such other evidence as the Board of
Directors deems necessary in its sole discretion may exempt, on such conditions
and terms as the Board of Directors deems necessary in its sole discretion, a
Person from the Ownership Limit or the Existing Holder Limit, as the case may
be, if the Board of Directors obtains such representations and undertakings from
such Person as the Board of Directors may deem appropriate and such Person
agrees that any violation or attempted violation will result in, to the extent
necessary, the exchange of Shares held by such Person for Excess Shares in
accordance with Section 3 of this Article NINTH.
Section 13. Legend. Each certificate for Shares shall bear substantially
the following legend:
The securities represented by this certificate are subject to restrictions
on ownership and transfer for the purpose of the Corporation's maintenance
of its status as a real estate investment trust under the Internal Revenue
Code of 1986, as amended. Except as otherwise provided pursuant to the
Articles of Incorporation of the Corporation, no Person may Beneficially
Own Shares in excess of 9.8% (or such greater percentage as may be
determined by the Board of Directors of the Corporation) of the number or
value of the outstanding Shares of the Corporation
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<PAGE>
(unless such Person is an Existing Holder or an Excluded Holder). Any
Person who attempts or proposes to Beneficially Own Shares in excess of the
above limitations must notify the Corporation in writing at least 30 days
prior to such proposed or attempted Transfer. All capitalized terms in this
legend have the meanings defined in the Articles of Incorporation of the
Corporation, a copy of which, including the restrictions on transfer, will
be furnished to each stockholder on request and without charge. If the
restrictions on transfer are violated, the securities represented hereby
will be designated and treated as Excess Shares which will be held in trust
by the Excess Share Trustee for the benefit of the Charitable Beneficiary.
Section 14. Severability. If any provision of this Article NINTH or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
Section 15. Transfer of Excess Shares. Upon any purported Transfer that
results in Excess Shares pursuant to Section 3 of this Article NINTH, such
Excess Shares shall be deemed to have been transferred to the Excess Share
Trustee, as trustee of a special trust for the exclusive benefit of the
Charitable Beneficiary or Charitable Beneficiaries to whom an interest in such
Excess Shares may later be transferred pursuant to Section 3 of this Article
NINTH. Excess Shares so held in trust shall be issued and outstanding Shares of
the Corporation. The Purported Record Transferee or Purported Record Holder
shall have no rights in such Excess Shares except as provided in Section 18 of
this Article NINTH.
Section 16. Distributions on Excess Shares. Any dividends (whether
taxable as a dividend, return of capital or otherwise) on Excess Shares shall be
paid to the Excess Share Trust for the benefit of the Charitable Beneficiary.
Upon liquidation, dissolution or winding up, the Purported Record Transferee
shall receive the lesser of (1) the amount of any distribution made upon
liquidation, dissolution or winding up or (2) the price paid by the Purported
Record Transferee for the Shares, or if the Purported Record Transferee did not
give value for the Shares, the Market Price of the Shares on the day of the
event causing the Shares to be held in trust. Any such dividend paid or
distribution paid to the Purported Record Transferee in excess of the amount
provided in the preceding sentence prior to the discovery by the Corporation
that the Shares with respect to which the dividend or distribution was made had
been exchanged for Excess Shares shall be repaid to the Excess Share Trust for
the benefit of the Charitable Beneficiary.
Section 17. Voting of Excess Shares. The Excess Share Trustee shall be
entitled to vote the Excess Shares for the benefit of the Charitable Beneficiary
on any matter. Any vote taken by a Purported Record Transferee prior to the
discovery by the Corporation that the Excess Shares were held in trust will be
rescinded ab initio. The owner of the Excess Shares will be deemed to have given
an irrevocable proxy to the Excess Share Trustee to vote the Excess Shares for
the benefit of the Charitable Beneficiary.
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<PAGE>
Section 18. Non-Transferability of Excess Shares. Excess Shares shall be
transferable only as provided in this Section 18. At the direction of the
Corporation, the Excess Share Trustee shall transfer the Shares held in the
Excess Share Trust to a Person whose ownership of the Shares will not violate
the Ownership Limit or Existing Holder Limit. If such a transfer is made to a
Person, the interest of the Charitable Beneficiary shall terminate and proceeds
of the sale shall be payable to the Purported Record Transferee and to the
Charitable Beneficiary. The Purported Record Transferee shall receive the lesser
of (1) the price paid by the Purported Record Transferee for the Shares or, if
the Purported Record Transferee did not give value for the Shares, the Market
Price of the Shares on the day of the event causing the Shares to be held in
trust, and (2) the price received by the Excess Share Trust from the sale or
other disposition of the Shares. Any proceeds in excess of the amount payable to
the Purported Record Transferee will be paid to the Charitable Beneficiary.
Prior to any transfer of any Excess Shares by the Excess Share Trustee, the
Corporation must have waived in writing its purchase rights under Section 19. It
is expressly understood that the Purported Record Transferee may enforce the
provisions of this Section against the Charitable Beneficiary.
If any of the foregoing restrictions on transfer of Excess Shares is
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Corporation, to have acted as an agent of the Corporation in acquiring
such Excess Shares and to hold such Excess Shares on behalf of the Corporation.
Section 19. Call by Corporation on Excess Shares. Excess Shares shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per Share equal to the lesser of (a) the price per Share in the
transaction that created such Excess Shares (or, in the case of a devise, gift
or other transaction in which no value was given for such Excess Shares, the
Market Price at the time of such devise, gift or other transaction) and (b) the
Market Price of the Shares to which such Excess Shares relates on the date the
Corporation, or its designee, accepts such offer (the "Redemption Price"). The
Corporation shall have the right to accept such offer for a period of ninety
days after the later of (x) the date of the Transfer which resulted in such
Excess Shares and (y) the date the Board of Directors determines in good faith
that a Transfer resulting in Excess Shares has occurred, if the Corporation does
not receive a notice of such Transfer pursuant to Section 5 of this Article
NINTH but in no event later than a permitted Transfer pursuant to and in
compliance with the terms of Section 18 of this Article NINTH. Unless the Board
of Directors determines that it is in the interests of the Corporation to make
earlier payments of all of the amount determined as the Redemption Price per
Share in accordance with the preceding sentence, the Redemption Price may be
payable at the option of the Board of Directors at any time up to but not later
than the five years after the date the Corporation accepts the offer to purchase
the Excess Shares. In no event shall the Corporation have an obligation to pay
interest to the Purported Record Transferee.
Section 20. Underwritten Offerings. The Ownership Limit shall not apply
to the acquisition of Shares or rights, options or warrants for, or securities
convertible into, Shares by an underwriter in a public offering; provided that
the underwriter makes a timely distribution of such Shares or rights, options or
warrants for, or securities convertible into, Shares.
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<PAGE>
TENTH: Meetings of the stockholders may be held within or without the
State of Maryland, as the By-laws may provide. The books of the Corporation may
be kept (subject to applicable law) outside the State of Maryland at such place
or places as may be designated from time to time by the Board of Directors or in
the By-laws of the Corporation. Elections of Directors need not be by written
ballot unless the By-laws of the Corporation so provide.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation in the manner
now or hereafter prescribed by statute. All rights at any time conferred upon
the stockholders of the Corporation by these Articles of Incorporation are
granted subject to the reservations in this Article ELEVENTH.
TWELFTH: Except as otherwise provided herein, these Articles of
Incorporation may be amended by the affirmative vote of a majority of the issued
and outstanding shares of Common Stock entitled to vote. To the fullest extent
permitted under Maryland law, any transaction requiring stockholder vote under
Maryland law may be approved by the affirmative vote of a majority of the issued
and outstanding shares of Common Stock entitled to vote.
THIRTEENTH: The provisions of Title 3, Subtitle 6 of the Corporations and
Associations Article of the Annotated Code of Maryland entitled "Special Voting
Requirements" (Section 3-601 through and including Section 3-604), shall not
apply to any business combination between the Corporation and Security Capital
Group Incorporated, a Maryland corporation, and its affiliates and successors.
FOURTEENTH: Except as may be provided to the contrary in any agreement
with any stockholder, no holder of shares of stock of the Corporation shall, as
such holder, have any preemptive right to purchase or subscribe for any
additional shares of the stock of the Corporation or any other security of the
Corporation which it may issue or sell.
FIFTEENTH: To the maximum extent that Maryland law in effect from time to
time permits limitation of the liability of directors and officers, no director
or officer of the Corporation shall be liable to the Corporation or its
stockholders. Neither the amendment nor repeal of this Article FIFTEENTH, nor
the adoption or amendment of any other provision of the Articles of
Incorporation or By-laws of the Corporation inconsistent with this Article
FIFTEENTH, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
3. These Articles of Amendment and Restatement have been advised by the
Board of Directors of the Corporation and have been approved by the stockholders
of the Corporation.
4. The undersigned Chairman acknowledges these Articles of Amendment and
Restatement to be the corporate act of the Corporation and as to all matters or
facts required to be verified under oath, the undersigned Chairman acknowledges
that to the best of his knowledge,
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<PAGE>
information and belief, these matters and facts are true in all material
respects and that this statement is made under the penalties for perjury.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its Chairman and
attested to by its Secretary on this 10th day of July, 1995.
SECURITY CAPITAL ATLANTIC INCORPORATED
By: /s/ James C. Potts
-----------------------------------
James C. Potts
Chairman
ATTEST:
/s/ Paul E. Szurek
- ----------------------------
Paul E. Szurek
Secretary
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<PAGE>
ARTICLES OF AMENDMENT
TO
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
SECURITY CAPITAL ATLANTIC INCORPORATED
THIS IS TO CERTIFY THAT:
1. The Corporation was formed under the general laws of the State of Maryland
on April 14, 1994 under the name "SCA Acquisition Incorporated" and, pursuant to
the filing of Articles of Amendment on May 10, 1994, its name was changed to
"Security Capital Atlantic Incorporated".
2. The following sentences are added to the end of the first paragraph of
Article SIXTH of the Corporation's Second Amended and Restated Articles of
Incorporation:
"Immediately following the date on which the Corporation has a class of
securities registered pursuant to Section 12(b) or 12(g) of the Securities
and Exchange Act of 1934, as amended, the Board of Directors shall include
a majority of directors ("Independent Directors") who are not affiliated
with Security Capital Group Incorporated ("SCG") or any of its affiliates,
directly or indirectly, whether by ownership of, ownership interest in,
employment by, any material business or professional relationship with, or
service as an officer of SCG or any of its affiliates, and is not serving
as a trustee or director for more than three real estate investment trusts
organized by a sponsor of the Corporation. In the event that a majority of
the Board of Directors are not comprised of Independent Directors by reason
of the resignation or removal of one or more Independent Directors, the
remaining members of the Board of Directors shall promptly appoint that
number of Independent Directors necessary to cause the Board of Directors
to include a majority of Independent Directors. Any director so appointed
shall serve until the next annual meeting or until his or her successor is
duly elected and qualified."
3. The amendment contained in these Articles of Amendment has been advised by
the Board of Directors of the Corporation and has been approved by the
stockholders of the Corporation.
4. The undersigned Co-Chairman acknowledges these Articles of Amendment to be
the corporate act of the Corporation, and as to all matters or facts required to
be verified under oath, the undersigned Co-Chairman acknowledges that to the
best of his or her knowledge, information and belief, these matters and facts
are true in all material respects and that this statement is made under the
penalties for perjury.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed in its name and on its behalf by its Co-Chairman and attested to by
its Secretary on this 12th day of June 1996.
SECURITY CAPITAL ATLANTIC INCORPORATED
By: /s/ Constance B. Moore
---------------------------------------
Constance B. Moore, Co-Chairman
ATTEST:
/s/ Jeffrey A. Klopf
- ----------------------------------
Jeffrey A. Klopf, Secretary
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<PAGE>
SECOND
AMENDED AND RESTATED
BY-LAWS
OF
SECURITY CAPITAL ATLANTIC INCORPORATED
ARTICLE I
OFFICES
Section 1. The registered office of the Corporation shall be in the City of
Baltimore, State of Maryland. The Corporation may also have offices at such
other places both within and without the State of Maryland as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of the stockholders for
the election of Directors or for any other purpose shall be held at such time
and place, within or without the State of Maryland, as shall be designated by
the Board of Directors. In the absence of any such designation by the Board of
Directors, each such meeting shall be held at the principal office of the
Corporation.
Section 2. Annual Meetings. The annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the Corporation shall be held annually on a day selected by the Board of
Directors during May of each fiscal year.
Section 3. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by law, may be called by the
Chairman of the Board (or any Co-Chairman if more than one) and shall be called
by the Secretary at the direction of a majority of the Board of Directors, or at
the request in writing of the stockholders owning twenty-five percent of the
entire capital stock of the Corporation issued and entitled to vote.
Section 4. Notice of Meetings. Written notice of each meeting of the
stockholders stating the place, date and time of the meeting shall be given not
less than ten nor more than ninety days
<PAGE>
before the date of the meeting, to each stockholder entitled to vote at such
meeting. The notice of any special meeting of stockholders shall state the
purpose or purposes for which the meeting is called. Unless requested by the
stockholders entitled to cast a majority of all the votes entitled to be cast at
such meeting, a special meeting need not be called to consider any matter which
is substantially the same as a matter voted on at any special meeting of the
stockholders held during the preceding twelve months.
Section 5. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by law or by the Articles
of Incorporation or these By-Laws. If a quorum is not present or represented,
the holders of the stock present in person or represented by proxy at the
meeting and entitled to vote thereat shall have power, by the affirmative vote
of the holders of a majority of such stock, to adjourn the meeting from time to
time to another time and/or place, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting, at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 6. Voting. At all meetings of the stockholders, each stockholder
entitled to vote thereat shall be entitled to vote, in person or by proxy, the
shares of voting stock owned by such stockholder of record on the record date
for the meeting, which may be set by the Board of Directors. When a quorum is
present or represented at any meeting, the vote of the holders of a majority of
the stock having voting power present in person or represented by proxy shall
decide any question brought before such meeting, unless the question is one upon
which, by express provision of law or of the Articles of Incorporation, a
different vote is required, in which case, such express provision shall govern
and control the decision of such question.
Section 7. Informal Action By Stockholder. Any action required to be taken
at a meeting of the stockholders, or any other action which may be taken at a
meeting of the stockholders, may be taken without a meeting, without prior
notice and without a vote, if (i) a consent or consents in writing, setting
forth the action so taken, shall be signed by all of the holders of stock
entitled to vote on such matter or matters and (ii) a written waiver of any
right to dissent is signed by each stockholder entitled to notice of a meeting
but not entitled to vote and shall be delivered to the Corporation by delivery
to its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty days of the
earliest dated consent delivered in the manner required by this Section 7 to the
Corporation, written consents signed by a sufficient number of stockholders to
take action are delivered to the Corporation by delivery to its principal place
of business, or an officer or agent of
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<PAGE>
the Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded.
Section 8. Nominations and Stockholder Business.
(a) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of notice provided for in this
Section 8(a), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 8(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph
(a)(1) of this Section 8, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and
not later than the close of business on the later of the 60th day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes
to nominate for election or reelection as a Director all information
relating to such person that is required to be disclosed in solicitations
of proxies for election of Directors, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a
Director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the
proposal is made; and (iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (y) the number of
shares of each class of stock of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 8 to the contrary, in the event that the number of
Directors to be elected to the Board of Directors is increased and there is
no public announcement naming all of the nominees for Director or
specifying the size of the increased Board of Directors made by the
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Corporation at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this
Section 8(a) shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following
the day on which such public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which Directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
Directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 8(b), who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 8(b). In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more Directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be) for election to such
position as specified in the Corporation's notice meeting, if the stockholder's
notice containing the information required by paragraph (a)(2) of this Section 8
shall be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 8 shall be eligible to serve as Directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 8. The presiding officer of the meeting shall have the power and
duty to determine whether a nomination or any business proposed to be brought
before the meeting was made in accordance with the procedures set forth in this
Section 8 and, if any proposed nomination or business is not in compliance with
this Section 8, to declare that such defective nomination or proposal be
disregarded.
(2) For purposes of this Section 8, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed
by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 8, a
stockholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 8. Nothing in this Section
8 shall be deemed to affect any rights of stockholders to request
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inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed and controlled by or under the direction of a Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law or by the Articles of Incorporation or
by these By-Laws directed or required to be exercised or done by the
stockholders.
Section 2. Number, Qualification and Tenure. The number of Directors of the
Corporation, the tenure of such Directors, the manner in which such Directors
shall be elected and the manner of filling vacancies on the Board of Directors
shall be as set forth in the Articles of Incorporation.
Section 3. Vacancies. Vacancies and newly created Directorships resulting
from any increase in the number of Directors may be filed by the majority of the
Directors then in office, though less than a quorum. Any Director elected to
fill a vacancy resulting from an increase in the number of Directors in any
class shall hold office for a term that shall coincide with the remaining term
of such class. Any Director elected to fill a vacancy not resulting from an
increase in the number of Directors in any class shall have the same remaining
term as that of his or her predecessor. In no case will a decrease in the number
of Directors shorten the term of any incumbent Directors. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by law.
Section 4. Place of Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Maryland.
Section 5. Regular Meetings. The Board of Directors shall hold a regular
meeting, to be known as the annual meeting, immediately following each annual
meeting of the stockholders. Other regular meetings of the Board of Directors
shall be held at such time and at such place as shall from time to time be
determined by the Board of Directors. No notice of regular meetings need be
given.
Section 6. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board (or any Co-Chairman if more than one).
Special meetings shall be called by the Secretary on the written request of any
Director. No notice of special meetings need be given.
Section 7. Quorum. At all meetings of the Board of Directors a majority of
the total number of Directors shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law. If a quorum shall not be present
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at any meeting of the Board of Directors, the Directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 8. Organization. If a Chairman of the Board (or any Co-Chairman) is
not elected or, if elected is not present, a Managing Director (who is also a
member of the Board of Directors, and, if more than one, in the order designated
by the Board of Directors or, in the absence of such designations, in the order
of their election), if any, or if no such Managing Director is present, a
Director chosen by a majority of the Directors present, shall act as chairman at
meetings of the Board of Directors.
Section 9. Executive Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board of Directors, may designate one or more
Directors to constitute an Executive Committee, to serve as such, unless the
resolution designating the Executive Committee is sooner amended or rescinded by
the Board of Directors, until the next annual meeting of the Board of Directors
or until their respective successors are designated. The Board of Directors, by
resolution adopted by a majority of the whole Board of Directors, may also
designate additional Directors as alternate members of the Executive Committee
to serve as members of the Executive Committee in the place and stead of any
regular member or members thereof who may be unable to attend a meeting or
otherwise unavailable to act as a member of the Executive Committee. In the
absence or disqualification of a member and all alternate members who may serve
in the place and stead of such member, the member or members thereof present at
any meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another Director to act at
the meeting in the place of any such absent or disqualified member.
Except as expressly limited by the General Corporation Law of the State of
Maryland or the Articles of Incorporation, the Executive Committee shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation between the meetings
of the Board of Directors. The Executive Committee shall keep a record of its
acts and proceedings, which shall form a part of the records of the Corporation
in the custody of the Secretary, and all actions of the Executive Committee
shall be reported to the Board of Directors at the next meeting of the Board of
Directors.
Meetings of the Executive Committee may be called at any time by the
Chairman of the Board (or any Co-Chairman if more than one) or any two of its
members. No notice of meetings need be given. A majority of the members of the
Executive Committee shall constitute a quorum for the transaction of business
and, except as expressly limited by this Section, the act of a majority of the
members present at any meeting at which there is a quorum shall be the act of
the Executive Committee. Except as expressly provided in this Section, the
Executive Committee shall fix its own rules of procedure.
Section 10. Other Committees. The Board of Directors, by resolution adopted
by a majority of the whole Board of Directors, may designate one or more other
committees, each such committee to consist of one or more Directors. Except as
expressly limited by the General Corporation Law
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of the State of Maryland or the Articles of Incorporation, any such committee
shall have and may exercise such powers as the Board of Directors may determine
and specify in the resolution designating such committee. The Board of
Directors, by resolution adopted by a majority of the whole Board of Directors,
also may designate one or more additional Directors as alternate members of any
such committee to replace any absent or disqualified member at any meeting of
the committee, and at any time may change the membership of any committee or
amend or rescind the resolution designating such committee. In the absence or
disqualification of a member or alternate member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another Director to act at the meeting in the place of any such absent or
disqualified member, provided that the Director so appointed meets any
qualifications stated in the resolution designating the committee. Each
committee shall keep a record of proceedings and report the same to the Board of
Directors to such extent and in such form as the Board of Directors may require.
Unless otherwise provided in the resolution designating a committee, a majority
of all of the members of any such committee may select its Chairman, fix its
rules or procedure, fix the time and place of its meetings and specify what
notice of meetings, if any, shall be given.
Section 11. Action Without Meeting. Unless otherwise restricted by the
Articles of Incorporation or these By-Laws, any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 12. Attendance by Telephone. Members of the Board of Directors, or
of any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 13. Compensation. The Board of Directors shall have the authority
to fix the compensation of Directors, which may include their expenses, if any,
of attendance at each meeting of the Board of Directors or of a committee.
ARTICLE IV
OFFICERS
Section 1. Enumeration. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board (or one or more Co-
Chairmen of the Board), a President, a Treasurer and a Secretary. The Board of
Directors may also elect one or more Managing Directors, one or more Vice
Presidents, one or more Assistant Secretaries and such other officers and agents
as it shall deem appropriate. Any number of offices may be held by the same
person.
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Section 2. Term of Office. The officers of the Corporation shall be elected
at the annual meeting of the Board of Directors and shall hold office until
their successors are elected and qualified. Any officer elected or appointed by
the Board of Directors may be removed at any time by the Board of Directors. Any
vacancy occurring in any office of the Corporation required by this Article
shall be filled by the Board of Directors, and any vacancy in any other office
may be filled by the Board of Directors.
Section 3. Chairman of the Board. The Chairman of the Board (or, if there
be one or more Co-Chairmen, in the order of their election), when elected, shall
be the President and Chief Executive Officer of the Corporation and, as such,
shall have general supervision, direction and control of the business and
affairs of the Corporation, subject to the control of the Board of Directors,
shall preside at meetings of stockholders and shall have such other functions,
authority and duties as customarily appertain to the office of the chief
executive of a business corporation or as may be prescribed by the Board of
Directors.
Section 4. President. The President shall be the Chief Executive Officer of
the Corporation and, as such shall have general supervision, direction and
control of the business and affairs of the Corporation, subject to the control
of the Board of Directors shall preside at meetings of stockholders and shall
have such other functions, authority and duties as customarily appertain to the
office of the chief executive of a business corporation or as may be prescribed
by the Board of Directors.
Section 5. Managing Director. The Managing Director, or if there be more
than one, the Managing Directors, shall have such functions, authority and
duties as may be prescribed by the Board of Directors or the Chairman of the
Board (or any Co-Chairman if more than one).
Section 6. Secretary. The Secretary shall keep a record of all proceedings
of the stockholders of the Corporation and of the Board of Directors, and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice, if any, of all meetings of the
stockholders and shall perform such other duties as may be prescribed by the
Board of Directors or the Chairman of the Board (or any Co-Chairman if more than
one). The Secretary shall have custody of the corporate seal of the Corporation
and the Secretary or, in the absence of the Secretary any Assistant Secretary,
shall have authority to affix the same to any instrument requiring it, and when
so affixed it may be attested by the signature of the Secretary or an Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest such affixing of the
seal.
Section 7. Assistant Secretary. The Assistant Secretary, or if there be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as may from time to
time be prescribed by the Board of Directors, the Chairman of the Board (or any
Co-Chairman if more than one), or the Secretary.
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Section 8. Treasurer. The Treasurer shall have the custody of the funds and
securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors and shall perform such other duties as may be prescribed by the Board
of Directors or the Chairman of the Board (or any Co-Chairman if more than one).
Section 9. Other Officers. Any officer who is elected or appointed from
time to time by the Board of Directors and whose duties are not specified in
these By-Laws shall perform such duties and have such powers as may be
prescribed from time to time by the Board of Directors or the Chairman of the
Board (or any Co-Chairman if more than one).
ARTICLE V
CERTIFICATES OF STOCK
Section 1. Form. The shares of the Corporation shall be represented by
certificates; provided, however, that the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
the Corporation's stock shall be uncertificated shares. Certificates of stock in
the Corporation, if any, shall be signed, by manual or facsimile signature by or
in the name of the Corporation by the Chairman of the Board (or any Co-Chairman
if more than one) or a Vice President and countersigned by the Secretary or an
Assistant Secretary of the Corporation. Where a certificate is countersigned by
a transfer agent, other than the Corporation or an employee of the Corporation,
or by a registrar, the signatures of the Chairman of the Board (or any Co-
Chairman if more than one), a Vice President or the Secretary or an Assistant
Secretary may be facsimiles. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the Corporation with the
same effect as if such officer, transfer agent or registrar were such officer,
transfer agent or registrar at the date of its issue.
Section 2. Legend.
(a) Unless the shares represented by the certificate shall be registered
under the Securities Act of 1933, as amended, each certificate representing
shares of the Corporation shall bear substantially the following legend:
The shares represented hereby have not been registered under the Securities
Act of 1933, as amended, or the securities laws of any state and may not be
sold or transferred absent registration thereunder or exemption therefrom.
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(b) In addition to the legend required by Section 2(a), if the Corporation
elects to be treated as a real estate investment trust under the Internal
Revenue Code of 1986, as amended, each certificate for shares of the Corporation
shall bear substantially the following legend:
If necessary to effect compliance by the Corporation with certain
requirements of the Internal Revenue Code, the shares represented by this
certificate are subject to redemption by the Corporation at the direction
of the Board of Directors of the Corporation and the transfer thereof may
be prohibited upon the terms and conditions set forth in the Articles of
Incorporation. The Corporation will furnish a copy of such terms and
conditions to the registered holder of this certificate upon request and
without charge.
Section 3. Transfer. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed and
accompanied by proper evidence of succession, assignment, authority to transfer,
it shall be the duty of the Corporation to issue a new certificate of stock or
uncertificated shares in place of any certificate therefor issued by the
Corporation to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
Section 4. Replacement. In case of the loss, destruction or theft of a
certificate for any stock of the Corporation, a new certificate of stock or
uncertificated shares in place of any certificate therefor issued by the
Corporation may be issued upon satisfactory proof of such loss, destruction or
theft and upon such terms as the Board of Directors may prescribe. The Board of
Directors may in its discretion require the owner of the lost, destroyed or
stolen certificate, or his legal representative, to give the Corporation a bond,
in such sum and in such form and with such surety or sureties as it may direct,
to indemnify the Corporation against any claim that may be made against it with
respect to a certificate alleged to have been lost, destroyed or stolen.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. To the maximum extent permitted by Maryland law in effect from
time to time, the Corporation shall indemnify (a) any individual who is a
present or former Director, officer, employee or agent of the Corporation or (b)
any individual who, while a Director of the Corporation and at the request of
the Corporation, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. The Corporation, without
requiring a preliminary determination of the ultimate entitlement to
indemnification, shall pay or reimburse reasonable expenses incurred by any such
individual in connection with any threatened, pending or completed action, suit
or proceeding to which such individual is, was or at any time becomes a party,
or is threatened to be made a party, as a result, directly or indirectly, of
serving at any time in any capacity described in (a) or (b) above in advance of
final disposition of such action, suit or proceeding. The Corporation may, with
the approval of
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its Board of Directors, provide such indemnification and advancement of expenses
to a person who served as a predecessor of the Corporation in any of the
capacities described in (a) or (b) above and to any employee or agent of the
Corporation or a predecessor of the Corporation. Neither the amendment nor
repeal of this Article, nor the adoption or amendment of any other provision of
the By-Laws or Articles of Incorporation inconsistent with this Article, shall
apply to or affect in any respect the applicability of this Section 1 with
respect to any act or failure to act which occurred prior to such amendment,
repeal or adoption.
Section 2. Expenses (including, without limitation, attorneys' fees and
expenses) incurred in defending a civil or criminal action, suit or proceeding
shall be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding, without requiring a preliminary entitlement to
indemnification, upon receipt of an undertaking by or on behalf of the Director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that such Director, officer, employee or agent is not entitled to be
indemnified by the Corporation under this Article or under any other contract or
agreement between such Director, officer, employee or agent and the Corporation.
Section 3. The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any law, by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in such person. official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 4. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not such person would be entitled to
indemnity against such liability under the provisions of this Article.
Section 5. The Corporation may enter into an indemnity agreement with any
Director, officer, employee or agent of the Corporation, upon terms and
conditions that the Board of Directors deems appropriate, as long as the
provisions of the agreement are not inconsistent with this Article.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
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Section 2. Corporate Seal. The corporate seal shall be in such form as
may be approved from time to time by the Board of Directors. The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or in any
other manner reproduced.
Section 3. Waiver of Notice. Whenever any notice is required to be given
under law or the provisions of the Articles of Incorporation or these By-Laws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice.
Section 4. Books; Reports.
--------------
(a) The Corporation will maintain or cause to be maintained separate, full
and accurate books and records of the Corporation.
(b) As soon as available, but in any event within ninety (90) days after
the end of each fiscal year of the Corporation, the Corporation shall deliver to
each stockholder of record at the close of the preceding fiscal year copies of
the audited consolidated balance sheet of the Corporation and its subsidiaries
together with the related consolidated statements of income and changes in
financial position for such fiscal year. In addition, the Corporation shall
deliver to each stockholder of record at the close of the preceding fiscal year
an overview of the business and investments of the Corporation, Security Capital
Group Incorporated and their respective affiliates (collectively, the "Security
Capital Group") as a whole.
(c) As soon as available, but in any event within forty-five (45) days
after the end of each fiscal quarter of the Corporation, the Corporation shall
deliver to each stockholder of record at the close of the preceding fiscal
quarter copies of the unaudited consolidated balance sheet of the Corporation
and its subsidiaries as at the end of such fiscal quarter and the related
unaudited consolidated statements of income and changes in financial position
for such fiscal quarter and the portion of the fiscal year through such fiscal
quarter.
(d) In addition to the financial statements delivered pursuant to
subsections (b) and (c), upon the written request of a stockholder, the
Corporation shall deliver to such stockholder all reports which relate to the
historical financial performance of any member of the Security Capital Group,
including, without limitation, supporting data relating to such reports which
are available to the Directors of the Corporation.
(e) As soon as available after the Corporation begins reporting under the
Securities Exchange Act of 1934 or any successor thereto, the Corporation shall
deliver (i) a copy of the annual report to stockholders for the relevant fiscal
year and Form 10-K filed by the Corporation with the Securities and Exchange
Commission for the relevant fiscal year and (ii) a copy of the Form 10-Q filed
by the Corporation with the Securities and Exchange Commission for the relevant
quarter. If the Corporation delivers the reports described in this Section 4(e)
in a timely manner, it shall be deemed to have complied with Section 4(b) and
Section 4(c) hereof.
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(f) In addition to other rights afforded to stockholders under Maryland
law, upon the written request of any stockholder, the Corporation shall furnish
to such stockholder, at the Corporation's own cost and expense, a list of
stockholders as of the date of such request within five (5) business days of
receipt by the Corporation of such request; provided that the Corporation shall
not be required to comply with any such request unless such request contains a
representation that the request is for proper corporate purposes. The
Corporation acknowledges that organization of two or more stockholders to
propose, consent to or oppose any corporate action upon which the stockholder
requesting such list is entitled to vote shall constitute proper corporate
purposes.
Section 5. Voting of Certain Shares. Title 3, Subtitle 7 of the
Corporations and Associations Article of the Annotated Code of Maryland entitled
"Voting Rights of Certain Control Shares" shall not apply to the shares of
common stock of the Corporation acquired by Security Capital Realty
Incorporated, a Maryland corporation, and its affiliates and successors.
Subtitle 7 of Title 3 of the Corporations and Associations Article of the
Annotated Code of Maryland (Section 3-701 through and including 3-709) shall not
apply to the voting rights of shares of stock held by Laing Properties, Inc. or
any Laing Transferee (as defined in the Shareholders' Agreement dated as of May
12, 1994, by and among Security Capital Realty Incorporated, Laing Properties,
Inc. and the Corporation), or any such shares of Common Stock held by the
immediate non-affiliated transferee of Laing Properties, Inc. or any Laing
Transferee.
ARTICLE VIII
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended or repealed or
new By-Laws may be adopted by the Board of Directors. That certain powers to
amend, alter, repeal or adopt the By-Laws have been conferred upon the Board of
Directors shall not divest the stockholders of the same powers.
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===============================================================================
RIGHTS AGREEMENT
between
SECURITY CAPITAL ATLANTIC INCORPORATED
and
THE FIRST NATIONAL BANK OF BOSTON
Rights Agent
Dated as of March 12, 1996
===============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
page
----
<S> <C> <C>
Section 1. Certain Definitions................................................. 1
Section 2. Appointment of Rights Agent......................................... 4
Section 3. Issuance of Right Certificates...................................... 5
Section 4. Form of Right Certificates.......................................... 7
Section 5. Countersignature and Registration................................... 7
Section 6. Transfer, Division, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost
or Stolen Right Certificates........................................ 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights....... 9
Section 8. Cancellation and Destruction of Right Certificates.................. 11
Section 9. Availability of Preferred Shares.................................... 11
Section 10. Preferred Shares Record Date........................................ 12
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.. 12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.......... 19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power 19
Section 14. Fractional Rights and Fractional Shares............................. 21
Section 15. Rights of Action.................................................... 22
Section 16 Agreement of Right Holders.......................................... 23
Section 17. Right Certificate Holder Not Deemed a Shareholder................... 23
Section 18. Concerning the Rights Agent......................................... 24
Section 19. Merger or Consolidation or Change of Name of Rights Agent........... 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Section 20. Duties of Rights Agent.............................................. 25
Section 21. Change of Rights Agent.............................................. 27
Section 22. Issuance of New Right Certificates.................................. 28
Section 23. Redemption.......................................................... 28
Section 24. Exchange............................................................ 29
Section 25. Notice of Certain Events............................................ 30
Section 26. Notices............................................................. 31
Section 27. Supplements and Amendments.......................................... 31
Section 28. Successors.......................................................... 32
Section 29. Benefits of this Agreement.......................................... 32
Section 30. Severability........................................................ 32
Section 31. Governing Law....................................................... 32
Section 32. Counterparts........................................................ 32
Section 33. Descriptive Headings................................................ 32
Section 34. Notice as to Liability of Directors and Shareholders................ 33
Exhibit A - Form of Articles Supplementary of Security Capital Atlantic
Incorporated
Exhibit B - Form of Right Certificate
</TABLE>
<PAGE>
RIGHTS AGREEMENT
----------------
Agreement, dated as of March 12, 1996 between Security Capital Atlantic
Incorporated, a Maryland corporation (the "Corporation"), and The First National
Bank of Boston, a national banking association (the "Rights Agent").
The Board of Directors of the Corporation has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Corporation outstanding as of the close of
business on March 12, 1996 (the "Record Date"), each Right representing the
right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions herein set forth, and has
further agreed to authorize and direct the issuance of one Right with respect to
each Common Share that shall become outstanding between the Record Date and the
first to occur of the Redemption Date and the Final Expiration Date (as such
terms are hereinafter defined).
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person (as hereinafter defined) who
or which, together with all Affiliates and Associates (as such terms are
hereinafter defined) of such Person, shall be the Beneficial Owner (as
hereinafter defined) of 20% or more of the Common Shares of the Corporation
then outstanding, but shall not include the SCG Group, the Corporation, any
Affiliate or Subsidiary (as hereinafter defined) of the Corporation, any
employee benefit plan of the Corporation or of any Affiliate or Subsidiary
of the Corporation or any entity holding Common Shares for or pursuant to
the terms of any such plan. Notwithstanding the foregoing, no Person shall
become an "Acquiring Person" as the result of (i) an acquisition of Common
Shares by the Corporation which, by reducing the number of Common Shares
outstanding, increases the proportionate number of Common Shares
beneficially owned by such Person to 20% or more of the Common Shares of
the Corporation then outstanding, or (ii) the acquisition by such Person of
newly issued Common Shares directly from the Corporation (it being
understood that a purchase from an underwriter or other intermediary is not
directly from the Corporation); provided, however, that if a Person shall
become the Beneficial Owner of 20% or more of the Common Shares of the
Corporation then outstanding, by reason of Common Share purchases by the
Corporation or the receipt of newly issued Common Shares directly from the
Corporation and shall, after such Common Share purchases or direct issuance
by the Corporation, become
<PAGE>
the Beneficial Owner of any additional Common Shares of the Corporation,
then such Person shall be deemed to be an "Acquiring Person"; provided
further, however, that any transferee from such Person who becomes the
Beneficial Owner of 20% or more of the Common Shares of the Corporation
then outstanding shall nevertheless be deemed to be an "Acquiring Person."
Notwithstanding the foregoing, if the Board of Directors of the Corporation
determines in good faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph,
has become such inadvertently, and such Person divests as promptly as
practicable (and in any event within ten Business Days after notification
by the Corporation) a sufficient number of Common Shares so that such
Person would no longer be an Acquiring Person, as defined pursuant to the
foregoing provisions of this paragraph, then such Person shall not be
deemed to be an "Acquiring Person" for any purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, as in effect on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding, whether written or oral (other than customary
agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon
the exercise of conversion rights, exchange rights, rights (other than
the Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; (B) the sole or shared right to vote or
dispose (including any such right pursuant to any agreement,
arrangement or understanding, whether written or oral); provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act
and (2) is not also then reportable on Schedule 13D under the Exchange
Act (or any comparable or successor
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<PAGE>
report); or (C) "beneficial ownership" (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which
such Person or any of such Person's Affiliates or Associates has any
agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to clause (B) of subparagraph (ii) of this
definition) or disposing of any securities of the Corporation.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to
the Beneficial Ownership of securities of the Corporation by any Person,
shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued and
outstanding which such Person would be deemed to own beneficially
hereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in New York are authorized or obligated
by law or executive order to close.
"Close of business" on any given date shall mean 5:00 P.M., Eastern
time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Eastern time, on the next succeeding Business
Day.
"Common Shares" when used with reference to the Corporation shall mean
the shares of common stock, par value $0.01 per share, of the Corporation.
"Common Shares" when used with reference to any Person other than the
Corporation shall mean the capital stock (or equity interest) with the
greatest voting power of such other Person or the equity securities or
other equity interest having power to control or direct the management of
such other Person.
"Distribution Date" shall have the meaning set forth in Section 3
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
3
<PAGE>
"Preferred Shares" shall mean the shares of Series A Junior
Participating Preferred Stock, par value $0.01 per share, of the
Corporation having the rights and preferences set forth in the form of
Articles Supplementary attached to this Agreement as Exhibit A.
"Purchase Price" shall have the meaning set forth in Section 4 hereof.
"Redemption Date" shall have the meaning set forth in Section 7
hereof.
"Right Certificate" shall have the meaning set forth in Section 3
hereof.
"SCG" shall mean Security Capital Group Incorporated, a Maryland
corporation.
"SCG Group" shall mean SCG, together with its wholly owned
subsidiaries, Affiliates and Associates.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) promulgated
under the Exchange Act) by the Corporation or an Acquiring Person that an
Acquiring Person has become such.
"Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
"Triggering Event" shall mean any event described in Section 11(a)(ii)
or Section 13(a).
Any determination or interpretation required in connection with any of the
definitions contained in this Section 1 shall be made by the Board of Directors
of the Corporation in their good faith judgment, which determination shall be
final and binding on the Rights Agent.
Section 2. Appointment of Rights Agent. The Corporation hereby appoints the
Rights Agent to act as agent for the Corporation and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Corporation may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
4
<PAGE>
Section 3. Issuance of Right Certificates.
(a) Until the earlier of (i) the close of business on the tenth day after
the Shares Acquisition Date, (ii) the close of business on the fifteenth
Business Day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than SCG Group, the
Corporation, any Affiliate or Subsidiary of the Corporation, any employee
benefit plan of the Corporation or of any Affiliate or Subsidiary of the
Corporation or any entity holding Common Shares for or pursuant to the terms of
any such plan) of, or of the first public announcement of the intention of any
Person (other than SCG Group, the Corporation, any Affiliate or Subsidiary of
the Corporation, any employee benefit plan of the Corporation or of any
Affiliate or Subsidiary of the Corporation or any entity holding Common Shares
for or pursuant to the terms of any such plan) to commence, a tender or exchange
offer the consummation of which would result in any Person becoming the
Beneficial Owner of Common Shares aggregating 25% or more of the then
outstanding Common Shares, or (iii) the close of business on the tenth Business
Day (or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date of
filing by any Person of, or the first public announcement of the intention of
any Person to file, any application, request, submission or other document with
any federal or state regulatory authority seeking approval of, attempting to
rebut any presumption of control upon, or otherwise indicating an intention to
enter into, any transaction or series of transactions the consummation of which
would result in any Person (other than the SCG Group) becoming the Beneficial
Owner of Common Shares aggregating 25% or more of the then outstanding Common
Shares, other than a transaction in which newly issued Common Shares are issued
directly by the Corporation to such Person (including any such date which is
after the date of this Agreement and prior to the issuance of the Rights; the
earlier of such dates being herein referred to as the "Distribution Date"), (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be certificates for Rights)
and not by separate certificates, and (y) the Rights will be transferable only
in connection with the transfer of the underlying Common Shares (including a
transfer to the Corporation). As soon as practicable after the Distribution
Date, the Corporation will prepare and execute, the Rights Agent will
countersign, and the Corporation will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of Common Shares as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Corporation, a Right Certificate, in substantially the form of Exhibit B hereto
(a "Right Certificate"), evidencing one Right for each Common Share so held. As
of the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) With respect to certificates for Common Shares outstanding as of the
Record Date, until the Distribution Date, the Rights will be evidenced by such
certificates registered in the names of the holders thereof, and registered
holders of Common Shares shall also be the registered holders of the associated
Rights (regardless of whether such ownership is indicated on the Common Share
certificates). Until the Distribution Date (or the earlier of the Redemption
Date or the Final
5
<PAGE>
Expiration Date), the transfer of any certificate for Common Shares shall also
constitute the transfer of the Rights associated with the Common Shares
represented thereby.
(c) Rights shall be issued in respect of all Common Shares which are issued
(whether originally issued or delivered from the Corporation's treasury) after
the Record Date but prior to the earliest of the Distribution Date, the
Redemption Date or the Final Expiration Date. Certificates representing such
Common Shares shall also be deemed to be certificates for Rights. Certificates
representing both Common Shares and Rights in accordance with this Section 3
which are executed and delivered (whether the Common Shares represented thereby
are originally issued, delivered from the Corporation's treasury or are
presented for transfer) by the Corporation (including, without limitation,
certificates representing reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them a legend
that by itself or together with prior legends is substantially to the following
effect:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in the Rights Agreement between Security
Capital Atlantic Incorporated (the "Corporation") and The First
National Bank of Boston, dated as of March 12, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of
the Corporation. Under certain circumstances, as set forth in the
Rights Agreement, the Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The
Corporation will mail to the holder of this certificate a copy of the
Rights Agreement, as in effect on the date of mailing, without charge
promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or
held by, any Person who is, was or becomes an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the
Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, shall become null and void.
Until the Distribution Date, the Rights associated with the Common Shares shall
be evidenced by the certificates representing the associated Common Shares alone
(regardless of whether any such certificate contains the above legend), and the
transfer of any such certificate shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby. In the event that
the Corporation purchases or acquires any Common Shares after the Record Date
but prior to the Distribution Date, any Rights associated with such Common
Shares shall be deemed cancelled and retired so that the Corporation shall not
be entitled to exercise any Rights associated with the Common Shares which are
no longer outstanding.
6
<PAGE>
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of election to purchase
Preferred Shares and of assignment to be printed on the reverse thereof) shall
be substantially the same as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Corporation may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Right Certificates shall
entitle the holders thereof to purchase such number of one one-hundredths of a
Preferred Share as shall be set forth therein at the price per one one-hundredth
of a Preferred Share set forth therein (the "Purchase Price"), but the amount
and type of securities purchasable upon the exercise of each Right and the
Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or any Associate or Affiliate) who becomes a transferee after
the Acquiring Person becomes an Acquiring Person, or (iii) a transferee of an
Acquiring Person (or any Associate or Affiliate) who becomes a transferee prior
to or concurrently with the Acquiring Person becoming such and receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from
the Acquiring Person to holders of equity interests in such Acquiring Person or
to any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding, whether written or oral, regarding the transferred
Rights or (B) a transfer which is part of a plan, arrangement or understanding,
whether written or oral, which has as a primary purpose or effect the avoidance
of Section 7(e) hereof, and any Right Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Right Certificate referred to in this sentence, shall contain (to the
extent feasible and otherwise reasonably identifiable as such) the following
legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Right Certificate
and the Rights represented hereby may become void in the circumstances
specified in Section 7(e) of such Agreement.
The provisions of Section 7(e) shall apply whether or not any Right Certificate
actually contains the foregoing legend.
Section 5. Countersignature and Registration. The Right Certificates shall
be executed on behalf of the Corporation by any Co-Chairman of the Board, any
Managing Director, any of its Vice Presidents, or its Secretary, either manually
or by facsimile signature, shall have affixed thereto the
7
<PAGE>
Corporation's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Corporation, either manually or by
facsimile signature. The Right Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Corporation who shall have signed any of the Right
Certificates shall cease to be such officer of the Corporation before
countersignature by the Rights Agent and issuance and delivery by the
Corporation, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Corporation with the same force and
effect as though the person who signed such Right Certificates had not ceased to
be such officer of the Corporation; and any Right Certificate may be signed on
behalf of the Corporation by any person who, at the actual date of the execution
of such Right Certificate, shall be a proper officer of the Corporation to sign
such Right Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its office designated for such purpose, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and the
date of each of the Right Certificates.
Section 6. Transfer, Division, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Sections 4(b), 7(e), 14 and 24 hereof, at any time after
the close of business on the Distribution Date, and at or prior to the close of
business on the earlier of the Redemption Date or the Final Expiration Date, any
Right Certificate or Right Certificates may be transferred, divided, combined or
exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase a like number of Preferred Shares (or, following a
Triggering Event, Common Shares or other securities or property, as the case may
be) as the Right Certificate or Right Certificates surrendered then entitled
such holder to purchase. Any registered holder desiring to transfer, divide,
combine or exchange any Right Certificate or Right Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the Right
Certificate or Right Certificates to be transferred, divided, combined or
exchanged at the office of the Rights Agent designated for such purpose. Neither
the Rights Agent nor the Corporation shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Right
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Right Certificate and the Corporation shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Corporation shall
reasonably request. Thereupon the Rights Agent shall, subject to Sections 4 and
7 hereof, countersign and deliver to the person entitled thereto a Right
Certificate or Right Certificates, as the case may be, as so requested. The
Corporation may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer,
division, combination or exchange of Right Certificates.
8
<PAGE>
Upon receipt by the Corporation and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Corporation's request,
reimbursement to the Corporation and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Corporation will make and deliver a new
Right Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at the office of
the Rights Agent designated for such purpose, together with payment of the
Purchase Price with respect to each surrendered Right for the total number of
Preferred Shares (or Common Shares or other securities or property, as the case
may be) as to which the Rights are exercised, at or prior to the earliest of (i)
the close of business on March 12, 2006 (the "Final Expiration Date"), (ii) the
time at which the Rights are redeemed as provided in Section 23 hereof (the
"Redemption Date") or (iii) the time at which such Rights are exchanged as
provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
pursuant to the exercise of a Right shall initially be $40.00, shall be subject
to adjustment from time to time as provided in Sections 11 and 13 hereof and
shall be payable in lawful money of the United States of America in accordance
with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase and the certificate on the reverse side of
the Right Certificate duly executed, accompanied by payment of the Purchase
Price for the Preferred Shares (or Common Shares or other securities or
property, as the case may be) to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Corporation, the Rights Agent
shall thereupon promptly (i) (A) requisition from any transfer agent of the
Preferred Shares (or make available, if the Rights Agent is the transfer agent
of the Preferred Shares) certificates for the number of Preferred Shares to be
purchased and the Corporation hereby irrevocably authorizes its transfer agent
to comply with all such requests, or (B) if the Corporation shall have elected
to deposit the Preferred Shares issuable upon exercise of the Rights with a
depositary agent, requisition from the depositary agent depositary receipts
representing such number of one one-hundredths of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Corporation will direct the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Corporation the amount of
cash to be paid in lieu of
9
<PAGE>
issuance of fractional shares in accordance with Section 14 hereof, (iii) after
receipt of such certificates or depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Right
Certificate, registered in such name or names as may be designated by such
holder and (iv) when appropriate, after receipt, deliver such cash to or upon
the order of the registered holder of such Right Certificate. In the event that
the Corporation is obligated to issue other securities (including Common Shares)
of the Corporation, pay cash and/or distribute other property pursuant to
Section 11(a) hereof, the Corporation will make all arrangements necessary so
that such other securities, cash and/or property are available for distribution
by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to the registered holder of such Right Certificate or
to his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the occurrence of a Triggering Event, any Rights beneficially owned by (i)
an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes an Acquiring Person or
(iii) a transferee of an Acquiring Person (or any Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
an Acquiring Person and receives such Rights pursuant to either (x) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding,
whether written or oral, regarding the transferred Rights or (y) a transfer
which the Board of Directors otherwise concludes in good faith is part of a
plan, arrangement or understanding, whether written or oral, which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action, and any holder of such Rights shall
thereupon have no rights whatsoever with respect to such Rights, whether under
any provision of this Agreement or otherwise, from and after the occurrence of a
Triggering Event. The Corporation shall use all reasonable efforts to insure
that the provisions of this Section 7(e) hereof are complied with, but shall
have no liability to any holder of Rights for the inability to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Corporation shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless the certificate contained in the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise shall have been completed and signed by the
registered holder thereof and the Corporation shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Corporation shall
reasonably request.
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(g) The Corporation covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares and/or other
securities) or any Preferred Shares (and, following the occurrence of a
Triggering Event, Common Shares and/or other securities) held in its treasury,
the number of Preferred Shares (and, following the occurrence of a Triggering
Event, Common Shares and/or other securities) that will be sufficient to permit
the exercise in full of all outstanding Rights.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, division,
combination or exchange shall, if surrendered to the Corporation or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Corporation shall deliver
to the Rights Agent for cancellation and retirement, and the Rights Agent shall
so cancel and retire, any other Right Certificate purchased or acquired by the
Corporation otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Right Certificates to the Corporation, or shall, at the
written request of the Corporation, destroy such cancelled Right Certificates,
and in such case shall deliver a certificate of destruction thereof to the
Corporation.
Section 9. Availability of Preferred Shares. The Corporation covenants and
agrees that it will take all such action as may be necessary to ensure that all
Preferred Shares (and, following the occurrence of a Triggering Event, Common
Shares and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such Preferred Shares (and, following
the occurrence of a Triggering Event, Common Shares and/or other securities),
subject to payment of the Purchase Price, be duly and validly authorized and
issued and fully paid and nonassessable.
The Corporation further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Corporation shall not, however, be required
to pay any transfer tax which may be payable in respect of any transfer or
delivery of Right Certificates to a person other than, or the issuance or
delivery of certificates or depositary receipts for the Preferred Shares (or
Common Shares and/or other securities, as the case may be) in a name other than
that of, the registered holder of the Right Certificate evidencing Rights
surrendered for exercise or to issue or to deliver any certificates or
depositary receipts for Preferred Shares (or Common Shares and/or other
securities, as the case may be) upon the exercise of any Rights until any such
tax shall have been paid (any such tax being payable by the holder of such Right
Certificate at the time of surrender) or until it has been established to the
Corporation's reasonable satisfaction that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares (or Common Shares and/or other securities, as
the case may be) is issued upon the
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exercise of Rights shall for all purposes be deemed to have become the holder of
record of the shares or securities represented thereby on, and such certificate
shall be dated, the date upon which the Right Certificate evidencing such Rights
was duly surrendered and payment of the Purchase Price (and any applicable
transfer taxes) was made; provided, however, that if the date of such surrender
and payment is a date upon which the Preferred Shares (or Common Shares and/or
other securities, as the case may be) transfer books of the Corporation are
closed, such person shall be deemed to have become the record holder of such
shares or securities on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares (or Common Shares and/or
other securities, as the case may be) transfer books of the Corporation are
open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Right Certificate shall not be entitled to any rights of a holder of Preferred
Shares (or Common Shares and/or other securities, as the case may be) for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Corporation, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Corporation shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any of its shares in a reclassification of the
Preferred Shares (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing or
surviving entity), except as otherwise provided in this Section 11(a) and
Section 7(e) hereof, the Purchase Price in effect at the time of the record
date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares issuable
on such date, shall be proportionately adjusted so that the holder of any
Right exercised after such time shall be entitled to receive the aggregate
number and kind of shares which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares
transfer books of the Corporation were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of the Corporation issuable
upon exercise of one Right. If an event occurs which would require an
adjustment under both Section 11(a)(i) and Section 11(a)(ii), the
adjustment provided for in this Section 11(a)(i) shall be in addition to,
and shall be made prior to, any adjustment required pursuant to Section
11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right, except as provided
below and in Section 7(e) hereof, shall thereafter have a right to receive,
upon exercise thereof at a price equal to the
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then current Purchase Price multiplied by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable, in accordance
with the terms of this Agreement and in lieu of Preferred Shares, such
number of Common Shares of the Corporation as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number
of one one-hundredths of a Preferred Share for which a Right is then
exercisable and dividing that product by (B) 50% of the then current per
share market price of the Corporation's Common Shares (determined pursuant
to Section 11(d) hereof) on the date of the occurrence of such event. In
the event that any Person shall become an Acquiring Person and the Rights
shall then be outstanding, the Corporation shall not take any action which
would eliminate or diminish the benefits intended to be afforded by the
Rights.
(iii) In lieu of issuing Common Shares of the Corporation in
accordance with Section 11(a)(ii) hereof, the Corporation may, in the sole
discretion of the Board of Directors, elect to (and, in the event that the
Board of Directors has not exercised the exchange right contained in
Section 24 hereof and there are not sufficient issued but not outstanding
and authorized but unissued Common Shares to permit the exercise in full of
the Rights in accordance with the foregoing subparagraph (ii), the
Corporation shall) take all such action as may be necessary to authorize,
issue or pay, upon the exercise of the Rights, cash (including by way of a
reduction of the Purchase Price), property, other securities or any
combination thereof having an aggregate value equal to the value of the
Common Shares of the Corporation which otherwise would have been issuable
pursuant to Section 11(a)(ii), which aggregate value shall be determined by
a majority of the Board of Directors. For purposes of the preceding
sentence, the value of the Common Shares shall be determined pursuant to
Section 11(d) hereof and the value of any equity securities which a
majority of the Board of Directors determines to be equivalent to a Common
Share (including the Preferred Shares, in such ratio as the Board of
Directors shall determine) shall be deemed to have the same value as the
Common Shares. Any such election by the Board of Directors must be made and
publicly announced within 60 days following the date on which the event
described in Section 11(a)(ii) shall have occurred. Following the
occurrence of the event described in Section 11(a)(ii), a majority of the
Board of Directors then in office may suspend the exercisability of the
Rights for a period of up to 60 days following the date on which the event
described in Section 11(a)(ii) shall have occurred to the extent that the
Board of Directors has not determined whether to exercise the Corporation's
right of election under this Section 11(a)(iii). In the event of any such
suspension, the Corporation shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended.
(b) In case the Corporation shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible
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into Preferred Shares or equivalent preferred shares) less than the then current
per share market price of the Preferred Shares (as defined in Section 11(d)) on
such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
Preferred Shares which the aggregate offering price of the total number of
Preferred Shares and/or equivalent preferred shares so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of the Corporation issuable upon
exercise of one Right. In case such subscription price is paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Corporation, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent.
Preferred Shares owned by or held for the account of the Corporation shall not
be deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in the
event that such rights, options or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.
(c) In case the Corporation shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Corporation is the continuing or surviving entity) of evidences of indebtedness
or assets (other than a regular periodic cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Corporation, whose determination shall be described in
a statement filed with the Rights Agent) of the portion of the assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants attributable to one Preferred Share and the denominator of which shall
be such current per share market price of the Preferred Shares; provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of the
Corporation to be issued upon exercise of one Right. Such adjustments shall be
made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Purchase Price shall again be adjusted to
be the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, other than under
Section 11(a)(iii) hereof, the "current per share market price" of any
security (a "Security" for the purpose
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of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date, and
for the purpose of any computation under Section 11(a)(iii) hereof, the "current
per share market price" of a Security on any date shall be deemed to be the
average of the daily closing prices per share of such Security for thirty (30)
consecutive Trading Days immediately following such date; provided, however,
that in the event that the current per share market price of the Security is
determined during a period following the announcement by the issuer of such
Security of (A) a dividend or distribution on such Security payable in shares of
such Security or securities convertible into such shares (other than the
Rights), or (B) any subdivision, combination or reclassification of such
Security and prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the "current per
share market price" shall be appropriately adjusted to reflect the current
market price per share equivalent (ex-dividend) of such Security. The closing
price for each day shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") or such other system then in use, or, if on any such
date the Security is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Security selected by the Board of Directors of the Corporation.
If on any such date no market maker is making a market in the Security, the fair
value of such Security on such date (as determined in good faith by the Board of
Directors of the Corporation) shall be used. The term "Trading Day" shall mean a
day on which the principal national securities exchange on which the Security is
listed or admitted to trading is open for the transaction of business or, if the
Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in accordance
with the method set forth in Section 11(d)(i). If the Preferred Shares are not
publicly traded, the "current per share market price" of the Preferred Shares
shall be conclusively deemed to be the current per share market price of the
Common Shares of the Corporation as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any share split, share dividend or similar
transaction occurring after the date hereof), multiplied by one hundred. If
neither the Common Shares of the Corporation nor the Preferred Shares are
publicly held or so listed or traded, "current per share market price" shall
mean the fair value per share as determined in good faith by the Board of
Directors of the Corporation, whose determination shall be described in a
statement filed with the Rights Agent.
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(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-millionth of a Preferred Share or one ten-
thousandth of any other share or security, as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three years from the
date of the transaction which requires such adjustment or (ii) the date of the
expiration of the right to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of the Corporation other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in this Section 11, and the provisions of Sections 7,
9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms
to any such other shares.
(g) All Rights originally issued by the Corporation subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Corporation shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (A) the number of one one-hundredths of a
Preferred Share covered by a Right immediately prior to such adjustment by (B)
the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
(i) The Corporation may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Corporation shall make a
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public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Right Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Corporation shall, as
promptly as practicable, cause to be distributed to holders of record of Right
Certificates on such record date Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Corporation, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Corporation, new
Right Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed shall be
issued, executed and countersigned in the manner provided for herein and shall
be registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Corporation shall
take any action which may, in the opinion of its counsel, be necessary in order
that the Corporation may validly and legally issue fully paid and nonassessable
Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Corporation may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date of the
Preferred Shares and other securities of the Corporation, if any, issuable upon
such exercise over and above the Preferred Shares and other securities of the
Corporation, if any, issuable upon such exercise on the basis of the Purchase
Price in effect prior to such adjustment; provided, however, that the
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares upon
the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Corporation shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of
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Preferred Shares or securities which by their terms are convertible into or
exchangeable for Preferred Shares, dividends on Preferred Shares payable in
Preferred Shares or issuance of rights, options or warrants referred to
hereinabove in Section 11(b), hereafter made by the Corporation to holders of
its Preferred Shares shall not be taxable to such shareholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Corporation shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (x) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (y) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
(o) So long as the shares issuable upon the exercise of the Rights may be
listed on any national securities exchange, the Corporation shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(p) The Corporation shall use its best efforts to (i) file, as soon as
practicable following the first occurrence of a Triggering Event, a registration
statement under the Securities Act with respect to the securities purchasable
upon exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with a prospectus
at all times meeting the requirements of the Securities Act) until the date of
the expiration of the Rights. The Corporation will also take such action as may
be appropriate under the blue sky laws of the various states. The Corporation
may temporarily suspend, for a period of time not to exceed 90 days, the
exercisability of the Rights in order to prepare and file such registration
statement or in order to comply with such blue sky laws. Upon any such
suspension, the Corporation shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Corporation shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the Common
Shares or the Preferred Shares a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate in accordance with Section
25 hereof. The Rights Agent shall be fully
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protected in relying on any such certificate and on any adjustment therein
contained and may assume that no adjustment has been made unless and until it
shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) If after the Shares Acquisition Date, directly or indirectly, (x) the
Corporation shall consolidate with, or merge with and into, any other Person,
(y) any Person shall consolidate with the Corporation, or merge with and into
the Corporation and the Corporation shall be the continuing or surviving entity
of such merger and, in connection with such merger, all or part of the Common
Shares shall be changed into or exchanged for stock or other securities of any
other Person (or the Corporation) or cash or any other property, or (z) the
Corporation shall sell or otherwise transfer (or one or more of its Subsidiaries
shall sell or otherwise transfer), in one or more transactions, assets or
earning power aggregating 50% or more of the assets or earning power of the
Corporation and its Subsidiaries (taken as a whole) to any Person or Persons
other than the Corporation or one or more of its wholly-owned Subsidiaries,
then, and in each such case, proper provision shall be made so that (i) each
holder of a Right (except as otherwise provided herein) shall thereafter have
the right to receive, upon the exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable, in accordance with the
terms of this Agreement and in lieu of Preferred Shares, such number of validly
authorized and issued, fully paid, non-assessable and freely tradeable common
shares of the Principal Party (as hereinafter defined), free and clear of all
liens, rights of call or first refusal, encumbrances or other adverse claims, as
shall equal the result obtained by (A) multiplying the then current Purchase
Price by the number of one one-hundredths of a Preferred Share for which a Right
is then exercisable (or, if such Right is not then exercisable for a number of
one one-hundredths of a Preferred Share, the number of such fractional shares
for which it was exercisable immediately prior to an event described under
Section 11(a)(ii) hereof) and dividing that product by (B) 50% of the then
current per share market price of the common shares of such Principal Party
(determined pursuant to Section 11(d) hereof) on the date of consummation of
such consolidation, merger, sale or transfer; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such consolidation,
merger, sale or transfer, or otherwise, all the obligations and duties of the
Corporation pursuant to this Agreement; (iii) the term "Corporation" shall
thereafter be deemed to refer to such Principal Party and (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation of a
sufficient number of its common shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its common shares thereafter deliverable upon the exercise of
the Rights.
(b) "Principal Party" shall mean:
(i) In the case of any transaction described in (x) or (y) of the
first sentence of Section 13(a), the Person that is the issuer of any
securities into which Common Shares of the Corporation are converted in
such merger or consolidation, and if no securities are so
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issued, the Person that is the surviving entity of such merger or
consolidation (including the Corporation if applicable); and
(ii) in the case of any transaction described in (z) of the first
sentence in Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions;
provided, however, that in any such case described in clauses (b)(i) and
(b)(ii): (1) if the common shares of such Person are not at such time and have
not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the common shares of which are and have been so
registered, "Principal Party" shall refer to such other Person; (2) in case such
Person is a Subsidiary, directly or indirectly, of more than one Person, the
common shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
common shares having the greatest aggregate market value; and (3) in case such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a
"Subsidiary" of both or all of such joint venturers and the Principal Parties in
each such chain shall bear the obligations set forth in this Section 13 in the
same ratio as their direct or indirect interests in such Person bear to the
total of such interests.
(c) The Corporation shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have sufficient common shares
authorized to permit the full exercise of the Rights and prior thereto the
Corporation and such Principal Party shall have executed and delivered to the
Rights Agent a supplemental agreement providing for the terms set forth in
paragraphs (a) and (b) of this Section 13 and further providing that, as soon as
practicable after the date of any consolidation, merger or sale of assets
mentioned in paragraph (a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Securities
Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Securities Act)
until the Expiration Date;
(ii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all
respects with the requirements for registration on Form 10 under the
Exchange Act; and
(iii) take such actions as may be necessary or appropriate under the
blue sky laws of the various states.
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The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that one of the
transactions described in this Section 13(a) shall occur at any time after the
occurrence of a transaction described in Section 11(a)(ii) hereof, the Rights
which have not theretofore been exercised shall thereafter become exercisable in
the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares.
(a) The Corporation shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there may be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Corporation. If on any such date no such market maker is making
a market in the Rights, the fair value of the Rights on such date as determined
in good faith by the Board of Directors of the Corporation shall be used.
(b) The Corporation shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Corporation, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Corporation and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-hundredth of a Preferred Share, the
Corporation may, to the extent necessary to reduce such fraction to an integral
multiple of one one-hundredth, pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the
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current market value of one one-hundredth of a Preferred Share. For the purposes
of this Section 14(b), the current market value of one one-hundredth of a
Preferred Share shall be one one-hundredth of the closing price of a Preferred
Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof)
for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Corporation shall
not be required to issue fractions of Common Shares upon exercise of the Rights
or to distribute certificates which evidence fractional Common Shares. In lieu
of fractional Common Shares, the Corporation may pay to the registered holders
of Right Certificates at the time such Rights are exercised as herein provided
an amount in cash equal to the same fraction of the current market value of one
Common Share. For purposes of this Section 14(c), the current market value of
one Common Share shall be the closing price of one Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Corporation to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Corporation and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered
at the principal office of the Rights Agent, duly endorsed or accompanied
by a proper instrument of transfer;
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(c) the Corporation and the Rights Agent may deem and treat the person
in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute
owner thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Right Certificates or the
associated Common Shares certificate made by anyone other than the
Corporation or the Rights Agent) for all purposes whatsoever, and neither
the Corporation nor the Rights Agent shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Corporation nor the Rights Agent shall have any liability to
any holder of a Right or any other Person as a result of its inability to
perform any of its obligations under this Agreement by reason of any
preliminary or permanent injunction or other order, decree or ruling issued
by a court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority
prohibiting or otherwise restraining performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a Shareholder. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Corporation which may at any time be issuable on the exercise
of the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Corporation or
any right to vote for the election of trustees or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any trust
action, or to receive notice of meetings or other actions affecting shareholders
(except as provided in Section 25 hereof), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. Concerning the Rights Agent. The Corporation agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Corporation also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for, or in
respect of any action taken, suffered or omitted by it in connection with, its
administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Corporation, instrument of assignment or transfer, power of attorney,
endorsement,
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affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper person or persons, or
otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered; any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Corporation and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Corporation), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Corporation prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established
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by a certificate signed by any one of any Co-Chairman of the Board, any Managing
Director, any Vice President, or the Secretary of the Corporation and delivered
to the Rights Agent; and such certificate shall be full authorization to the
Rights Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Corporation and any
other Person only for any and all losses, liabilities, costs, damages and
expenses (including attorneys' fees) arising out of or in connection with the
Rights Agent's negligence, bad faith or willful misconduct. Anything in this
Agreement to the contrary notwithstanding, in no event shall the Rights Agent be
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Rights Agent
has been advised of the likelihood of such loss or damage and regardless of the
form of the action.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Corporation only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Corporation of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(e) hereof) or any adjustment in the
terms of the Rights (including the manner, method or amount thereof) provided
for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of
facts that would require any such change or adjustment (except with respect to
the exercise of Rights evidenced by Right Certificates after receipt of a
certificate furnished pursuant to Section 12 describing a change or adjustment);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares or
Common Shares to be issued pursuant to this Agreement or any Right Certificate
or as to whether any Preferred Shares or Common Shares will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Corporation agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of any Co-Chairman of the Board, any Managing Director, any Vice President,
the Secretary or the Treasurer of the Corporation, and to apply to such officers
for advice or instructions in connection with its duties, and it shall not be
liable
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for any action taken or suffered by it in good faith in accordance with
instructions of any such officer or for any delay in acting while waiting for
those instructions. Any application by the Rights Agent for written instructions
from the Corporation may, at the option of the Rights Agent, set forth in
writing any action proposed to be taken or omitted by the Rights Agent under
this Agreement and the date on and/or after which such action shall be taken or
such omission shall be effective. The Rights Agent shall not be liable for any
action taken by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the date
any officer of the Corporation actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written instructions in response to such
application specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Corporation or its Subsidiaries or become pecuniarily interested in any
transaction in which the Corporation or its Subsidiaries may be interested, or
contract with or lend money to the Corporation or its Subsidiaries or otherwise
act as fully and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other capacity
for the Corporation or its Subsidiaries or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Corporation resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Corporation.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Corporation and to each transfer
agent of the Common Shares or Preferred Shares by registered or certified mail,
and to the holders of the Right Certificates by first-class mail. The
Corporation may remove the Rights Agent or any successor Rights Agent upon 30
days' notice in writing, mailed to the Rights Agent or successor Rights Agent,
as the case may be, and to each transfer agent of the Common Shares or Preferred
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Corporation shall appoint a
successor to the
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Rights Agent. If the Corporation shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the
Corporation), then the registered holder of any Right Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Corporation or by such a
court, shall be a corporation or bank organized and doing business under the
laws of the United States or of any other state of the United States, which is
authorized under such laws to exercise corporate trust or stock transfer powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $100 million. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment the Corporation shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Shares or Preferred Shares, and mail a notice thereof in
writing to the registered holders of the Right Certificates. Failure to give any
notice provided for in this Section 21, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Corporation
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption.
(a) The Board of Directors of the Corporation may, at its option, at any
time prior to such time as any Person becomes an Acquiring Person, redeem all
but not less than all the then outstanding Rights at a redemption price of $.01
per Right, appropriately adjusted to reflect any share split, share dividend or
similar transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the Rights
by the Board of Directors may be made effective at such time on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish. The Corporation may, at its option, pay the Redemption Price in cash,
Common Shares (based on the current per share market price of the Common Shares
at the time of redemption) or any other form of consideration deemed appropriate
by the Board of Directors.
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(b) Immediately upon the action of the Board of Directors of the
Corporation ordering the redemption of the Rights (or at the effective time of
such redemption established by the Board of Directors of the Corporation
pursuant to the last sentence of paragraph (a) of this Section 23), and without
any further action and without any notice, the right to exercise the Rights will
terminate and the only right thereafter of the holders of Rights shall be to
receive the Redemption Price. The Corporation shall promptly give public notice
of any such redemption; provided, however, that the failure to give, or any
defect in, any such notice shall not affect the validity of such redemption.
Within 10 days after such action of the Board of Directors ordering the
redemption of the Rights or, if later, the effectiveness of the redemption of
the Rights pursuant to the last sentence of paragraph (a), the Corporation shall
mail a notice of redemption to all the holders of the then outstanding Rights at
their last addresses as they appear upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the transfer agent
for the Common Shares. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made. The Corporation may, at its option, discharge all
of its obligations with respect to the Rights by (i) issuing a press release
announcing the manner of redemption of the Rights, (ii) depositing with a bank
or trust company having a capital and surplus of at least $100,000,000, funds
necessary for such redemption, in trust, to be applied to the redemption of the
Rights so called for redemption and (iii) arranging for the mailing of the
Redemption Price to the registered holders of the Rights; then, and upon such
action, all outstanding Rights Certificates shall be null and void without
further action by the Corporation. Neither the Corporation nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights at
any time in any manner other than that specifically set forth in this Section
23, in Section 24 hereof, or in connection with the purchase of Common Shares
prior to the Distribution Date.
Section 24. Exchange.
(a) The Board of Directors of the Corporation may, at its option, at any
time after a Triggering Event, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 7(e) hereof) for Common Shares at an
exchange ratio of one Common Share per Right, appropriately adjusted to reflect
any share split, share dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as the "Exchange
Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be
empowered to effect such exchange at any time after any Person (other than the
SCG Group, the Corporation, any Affiliate or Subsidiary of the Corporation, any
employee benefit plan of the Corporation or of any Affiliate or Subsidiary of
the Corporation or any entity holding Common Shares for or pursuant to the terms
of any such plan), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors of the
Corporation ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter
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of a holder of such Rights shall be to receive that number of Common Shares
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Corporation shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Corporation promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the Common Shares for Rights will be
effected and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become void pursuant to the
provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Corporation, at its
option, may substitute Preferred Shares (or equivalent preferred shares, as such
term is defined in Section 11(b) hereof) for Common Shares exchangeable for
Rights, at the initial rate of one one-hundredth of a Preferred Share (or
equivalent preferred share) for each Common Share, as appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of
each Common Share shall have the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares or
Preferred Shares issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 24, the
Corporation shall take all such action as may be necessary to authorize
additional Common Shares or Preferred Shares for issuance upon exchange of the
Rights.
(e) The Corporation shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Corporation shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (e), the current market value of a whole Common Share
shall be the closing price of a Common Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Corporation shall propose at any time after the
Distribution Date (i) to pay any dividend payable in shares of any class to the
holders of its Preferred Shares or to make any other distribution to the holders
of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to
offer to the holders of its Preferred Shares rights or warrants to subscribe for
or to purchase any additional Preferred Shares or shares of any class or any
other securities, rights or options, (iii) to
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effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Corporation and its Subsidiaries (taken as
a whole) to, any other Person, (v) to effect the liquidation, dissolution or
winding up of the Corporation, or (vi) to declare or pay any dividend on the
Common Shares payable in Common Shares or to effect a subdivision, combination
or consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Corporation
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such share dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) above at least 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof shall
occur, then the Corporation shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Corporation shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Security Capital Atlantic Incorporated
Six Piedmont Center, Sixth Floor
Atlanta, Georgia 30305
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Corporation or by the
holder of any Right Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Corporation) as follows:
The First National Bank of Boston
150 Royal Street
Mail Stop 45-02-62
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Canton, Massachusetts 02021
Attention: Shareholders Services Division
Notices or demands authorized by this Agreement to be given or made by the
Corporation or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Corporation.
Section 27. Supplements and Amendments. The Corporation may from time to
time supplement or amend this Agreement without the approval of any holders of
Right Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
(including, without limitation, changes to the Purchase Price) which the
Corporation may deem necessary or desirable, any such supplement or amendment to
be evidenced by a writing signed by the Corporation and the Rights Agent;
provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Corporation or the Rights Agent shall bind and
inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Corporation, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; and this Agreement shall be for the sole and exclusive benefit
of the Corporation, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Maryland and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State, except that those provisions of this Agreement
affecting the rights, duties and responsibilities of the Rights Agent shall be
governed by and construed in accordance with the law of the State of New York.
31
<PAGE>
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Determinations and Actions by the Board of Directors. The Board
of Directors of the Corporation shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Directors or the Corporation or as may be necessary or advisable
in the administration of this Agreement, including, without limitation, the
right and power to (a) interpret the provisions of this Agreement, and (b) make
all determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend this Agreement). All such actions, interpretations and determinations
(including, for purpose of clause (b) above, all omissions with respect to the
foregoing) which are done or made by the Directors in good faith, shall (x) be
final, conclusive and binding on the Corporation, the Rights Agent, the holders
of the Right Certificates and all other parties, and (y) not subject the
Directors to any liability to the holders of the Right Certificates.
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
SECURITY CAPITAL ATLANTIC INCORPORATED
By /s/ Jeffrey A. Klopf
------------------------------
Jeffrey A. Klopf
Secretary
Attest:
By /s/ Leanne L. Gallagher
------------------------------
Leanne L. Gallagher
Assistant Secretary
THE FIRST NATIONAL BANK OF BOSTON
By
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Attest:
By
------------------------
Name:
-------------------
Title:
------------------
33
<PAGE>
Exhibit A
FORM OF
ARTICLES SUPPLEMENTARY
RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
of
SECURITY CAPITAL ATLANTIC INCORPORATED
The undersigned, being a duly authorized officer of Security Capital
Atlantic Incorporated, a Maryland corporation (the "Corporation"), do hereby
certify to the State Department of Assessments and Taxation of Maryland pursuant
to Section 8-203(b) of the Annotated Code of Maryland that:
FIRST: The Board of Directors has classified _________ unissued shares of
the Corporation as shares of Series A Junior Participating Preferred Stock.
SECOND: The following is a description of the Series A Preferred Shares
(as defined below), including the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption thereof:
Section 1. Designation and Amount. There shall be a series of preferred
stock of the Corporation, $0.01 par value per share, which shall be designated
"Series A Junior Participating Preferred Stock," $0.01 par value per share (the
"Series A Preferred Shares"), and the number of shares constituting that series
shall be __________. Such number of shares may be increased or decreased by
resolution of the Board of Directors and by the filing of articles supplementary
in accordance with the provisions of the General Corporation Law of the State of
Maryland stating that such increase or reduction has been so authorized;
provided, however, that no decrease shall reduce the number of Series A
Preferred Shares to a number less than the number of Series A Preferred Shares
then outstanding plus the number of Series A Preferred Shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any class or series of preferred shares of the Corporation ranking prior and
superior to the Series A Preferred Shares with respect to dividends, the holders
of Series A Preferred Shares shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash to holders of record on the last
Business Day of January, April, July and October in each year (each such date
being referred to herein as a "Quarterly Dividend
<PAGE>
Payment Date"), (commencing on the first Quarterly Dividend Payment Date after
the first issuance of a Series A Preferred Share or fraction thereof) in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00
or (b) subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in Common Shares (hereinafter
defined) or a subdivision of the outstanding Common Shares (by a
reclassification or otherwise), declared on the shares of common stock, par
value $0.01 per share, of the Corporation (the "Common Shares") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any Series A
Preferred Share or fraction thereof. In the event the Corporation shall at any
time following March 12, 1996 (i) declare any dividend on Common Shares payable
in Common Shares, (ii) subdivide the outstanding Common Shares or (iii) combine
the outstanding Common Shares into a smaller number of shares, then in each such
case the amount to which holders of Series A Preferred Shares were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying each such amount by a fraction the numerator of which
is the number of Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Shares as provided in paragraph (A) above at the time it declares a
dividend or distribution on the Common Shares (other than a dividend payable in
Common Shares).
(C) No dividend or distribution (other than a dividend or distribution
payable in Common Shares) shall be paid or payable to the holders of Common
Shares unless, prior thereto, all accrued but unpaid dividends to the date of
that dividend or distribution shall have been paid to the holders of Series A
Preferred Shares.
(D) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issuance of such Series A Preferred Shares, unless the
date of issuance of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue and be cumulative from the date of issuance of such shares, or
unless the date of issuance is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of Series A Preferred
Shares entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the Series A
Preferred Shares in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of Series A
Preferred Shares entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
2
<PAGE>
Section 3. Voting Rights. The holders of Series A Preferred Shares shall
have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
one one-hundredth of a Series A Preferred Share shall entitle the holder thereof
to one vote on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time following March 12,
1996 (i) declare any dividend on Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares or (iii) combine the outstanding Common
Shares into a smaller number of shares, then in each such case the number of
votes per share to which holders of Series A Preferred Shares were entitled
immediately prior to such event shall be adjusted by multiplying such number by
a fraction the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or required by law, the holders of
Series A Preferred Shares and the holders of Common Shares and any other capital
shares of the Corporation having general voting rights shall vote together as
one class on all matters submitted to a vote of shareholders of the Corporation.
(C) (i) Whenever, at any time or times, dividends payable on any Series A
Preferred Shares shall be in arrears in an amount equal to at least six
full quarterly dividends (whether or not declared and whether or not
consecutive), the holders of record of the outstanding Series A Preferred
Shares shall have the exclusive right, voting separately as a single class,
to elect two directors of the Corporation at a special meeting of
shareholders of the Corporation or at the Corporation's next annual meeting
of shareholders, and at each subsequent annual meeting of shareholders, as
provided below. At elections for such directors, the holders of Series A
Preferred Shares shall be entitled to cast one vote for each one one-
hundredth of a Series A Preferred Share held, subject to adjustment.
(ii) Upon the vesting of such right of the holders of the Series A
Preferred Shares, the maximum authorized number of members of the Board of
Directors shall automatically be increased by two and the two vacancies so
created shall be filled by vote of the holders of the outstanding Series A
Preferred Shares as hereinafter set forth. A special meeting of the
shareholders of the Corporation then entitled to vote shall be called by
any Co-Chairman, Managing Director, Senior Vice President or the Secretary
of the Corporation, if requested in writing by the holders of record of not
less than 10% of the Series A Preferred Shares then outstanding. At such
special meeting, or, if no such special meeting shall have been called,
then at the next annual meeting of shareholders of the Corporation, the
holders of the Series A Preferred Shares shall elect, voting as above
provided, two directors of the Corporation to fill the aforesaid vacancies
created by the automatic increase in the number of members of the Board of
Directors. At any and all such meetings for such election, the holders of a
majority of the outstanding Series A Preferred Shares shall be necessary to
constitute a quorum for such election, whether present in person or by
proxy, and such two directors shall
3
<PAGE>
be elected by the vote of at least a plurality of shares held by such
shareholders present or represented at the meeting. Any director elected by
holders of Series A Preferred Shares pursuant to this Section may be
removed at any annual or special meeting, by vote of a majority of the
shareholders voting as a class who elected such director, with or without
cause. In case any vacancy shall occur among the directors elected by the
holders of the Series A Preferred Shares pursuant to this Section, such
vacancy may be filled by the remaining director so elected, or his
successor then in office, and the director so elected to fill such vacancy
shall serve until the next meeting of shareholders for the election of
directors. After the holders of the Series A Preferred Shares shall have
exercised their right to elect directors in any default period and during
the continuance of such period, the number of directors shall not be
further increased or decreased except by vote of the holders of Series A
Preferred Shares as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Preferred
Shares.
(iii) The right of the holders of the Series A Preferred Shares,
voting separately as a class, to elect two members of the Board of
Directors of the Corporation as aforesaid shall continue until, and only
until, such time as all arrears in dividends (whether or not declared) on
the Series A Preferred Shares shall have been paid or declared and set
apart for payment, at which time such right shall terminate, except as
herein or by law expressly provided, subject to revesting in the event of
each and every subsequent default of the character above-mentioned. Upon
any termination of the right of the holders of the Series A Preferred
Shares as a class to vote for directors as herein provided, the term of
office of all directors then in office elected by the holders of Series A
Preferred Shares pursuant to this Section shall terminate immediately.
Whenever the term of office of the directors elected by the holders of the
Series A Preferred Shares pursuant to this Section shall terminate and the
special voting powers vested in the holders of the Series A Preferred
Shares pursuant to this Section shall have expired, the maximum number of
members of the Board of Directors of the Corporation shall be such number
as may be provided for in the Bylaws of the Corporation irrespective of any
increase made pursuant to the provisions of this Section.
(D) Except as otherwise provided herein or required by law, holders of
Series A Preferred Shares shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Shares as provided herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever any quarterly dividends or other dividends or distributions
payable on the Series A Preferred Shares as provided in Section 2 are in
arrears, then, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on Series A Preferred Shares outstanding
shall have been paid in full, the Corporation shall not:
4
<PAGE>
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Shares, other than dividends paid or
payable in such junior shares;
(ii) declare or pay dividends on or make any other distributions on
any shares ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Shares, except
dividends paid ratably on the Series A Preferred Shares and all such parity
shares on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Shares, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
any such parity shares in exchange for shares of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding
up) to the Series A Preferred Shares; or
(iv) purchase or otherwise acquire for consideration any Series A
Preferred Shares, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of the Corporation
unless the Corporation could, under paragraph (A) of this Section, purchase or
otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Series A Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued preferred shares and may be
reissued as part of a new series of preferred shares to be created by resolution
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any
voluntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Shares unless, prior thereto, the holders of Series A Preferred Shares
shall have received $1.00 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference").
5
<PAGE>
Following the payment of the full amount of the Series A Liquidation Preference,
no additional distributions shall be made to the holders of Series A Preferred
Shares unless, prior thereto, the holders of Common Shares shall have received
an amount per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately
adjusted as set forth in subparagraph C below to reflect such events as share
splits, share dividends and recapitalizations with respect to the Common Shares)
(such number in clause (ii), the "Adjustment Number"). Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding Series A Preferred Shares and Common Shares,
respectively, holders of Series A Preferred Shares and holders of Common Shares
shall receive their ratable and proportionate share of the remaining assets to
be distributed in the ratio, on a per share basis, of the Adjustment Number to 1
with respect to such Series A Preferred Shares and Common Shares, on a per share
basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred shares, if any, which
rank on a parity with the Series A Preferred Shares, then such remaining assets
shall be distributed ratably to the holders of the Series A Preferred Shares and
such parity shares in proportion to their respective liquidation preferences.
(C) In the event the Corporation shall at any time following March 12,
1996 (i) declare any dividend on Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares or (iii) combine the outstanding Common
Shares into a smaller number of shares, then in each such case the Adjustment
Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator of which is the
number of Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were outstanding
immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the Common Shares are exchanged for or changed into other shares or securities,
cash and/or any other property, then in any such case, the Series A Preferred
Shares shall at the same time be similarly exchanged or changed in an amount per
share (subject to the provision for adjustment hereinafter set forth) equal to
100 times the aggregate amount of shares, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
Common Share is exchanged or changed. In the event the Corporation shall at any
time (i) declare any dividend on Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares or (iii) combine the outstanding Common
Shares into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of Series
A Preferred Shares shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of Common Shares outstanding immediately
after such event and the denominator of which is the number of Common Shares
that were outstanding immediately prior to such event.
6
<PAGE>
Section 8. Redemption. The Series A Preferred Shares shall not be
redeemable by the Corporation. The preceding sentence shall not limit the
ability of the Corporation to purchase or otherwise deal in such shares to the
extent permitted by law.
Section 9. Ranking. The Series A Preferred Shares shall rank junior to
all other series of the Corporation's preferred stock (whether with or without
par value) as to the payment of dividends and the distribution of assets, unless
the terms of any such series shall provide otherwise.
Section 10. Amendment. Neither the Corporation's Amended and Restated
Articles of Incorporation, nor any Articles Supplementary relating to the Series
A Preferred Shares shall be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A Preferred
Shares so as to affect the holders of Series A Preferred Shares adversely
without the affirmative vote of the holders of a majority or more of the
outstanding Series A Preferred Shares, voting separately as a class.
Section 11. Fractional Shares. Series A Preferred Shares may be issued in
fractions of a share that are integral multiples of one-one hundredth of a
share, which shall entitle the holder, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends and participate in
distributions and to have the benefit of all other rights of holders of Series A
Preferred Shares.
FOURTH: The undersigned officer acknowledges these Articles Supplementary
to be the act of the Corporation and further, as to all matters or facts
required to be verified under oath, such officer acknowledges that to the best
of his or her knowledge, information and belief, these matters and facts are
true in all material respects and that this statement is made under the
penalties of perjury.
7
<PAGE>
IN WITNESS WHEREOF, these Articles Supplementary have been duly executed by
the undersigned officer this 12th day of March, 1996.
SECURITY CAPITAL ATLANTIC INCORPORATED
By:____________________________________
Name:__________________________________
Title:_________________________________
8
<PAGE>
Exhibit B
[Form of Right Certificate]
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER MARCH 12, 2006 OR EARLIER IF THE RIGHTS EXPIRE UNDER
CERTAIN CIRCUMSTANCES OR ARE EXCHANGED OR REDEEMED BY THE CORPORATION. THE
RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE CORPORATION, AT $.01
PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH
TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH
RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHT
CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME VOID IN THE
CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]*
Right Certificate
SECURITY CAPITAL ATLANTIC INCORPORATED
This certifies that , or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of March 12, 1996 (the "Rights Agreement"),
between Security Capital Atlantic Incorporated, a Maryland corporation (the
"Corporation"), and The First National Bank of Boston (the "Rights Agent") to
purchase from the Corporation at any time after the Distribution Date (as such
term is defined in the Rights Agreement) and prior to 5:00 p.m. (Eastern time)
on March 12, 2006 or notice of redemption or exchange at the office of the
Rights Agent (or its successors as Rights Agent) designated for such purpose,
one one-
- ------------------------
* The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE>
hundredth of a fully paid, non-assessable Series A Junior Participating
Preferred Share (a "Preferred Share") of the Corporation, at a purchase price of
$40.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate with the appropriate Form
of Election to Purchase and related Certificate duly executed. The number of
Rights evidenced by this Right Certificate (and the number of Preferred Shares
which may be purchased upon exercise thereof) set forth above, and the Purchase
Price per Preferred Share set forth above, are the number and Purchase Price as
of March 12, 1996, based on the Preferred Shares as constituted at such date.
Capitalized terms not defined in this Right Certificate that are defined in the
Rights Agreement shall have the meanings ascribed to them in the Rights
Agreement.
Upon the occurrence of a Triggering Event, if the Rights evidenced by this
Right Certificate are beneficially owned by (i) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person, (ii) under certain
circumstances specified in the Rights Agreement, a transferee of any such
Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of a person who, after such
transfer, became an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, such Rights shall become null and void and no holder hereof
shall have any right with respect to such Rights from and after the occurrence
of any such Triggering Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of Preferred Shares or other securities, which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Corporation and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under certain circumstances specified in such Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal corporate trust office of the Rights Agent, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Corporation at its option at a
redemption price of $.01 per Right at any time
2
<PAGE>
prior to the earlier of (i) such time as any Person becomes an Acquiring Person
or (ii) the close of business on the Final Expiration Date.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Corporation, be evidenced by depositary receipts), but in lieu thereof a
cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Preferred Shares or
of any other securities of the Corporation which may at any time be issuable on
the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a shareholder of the Corporation or any right to vote for the election of
trustees or upon any matter submitted to shareholders at any meeting thereof, or
to give or withhold consent to any trust action, or, to receive notice of
meetings or other actions affecting shareholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Corporation
and its seal.
Dated as of _______________ __, 19__
SECURITY CAPITAL ATLANTIC INCORPORATED
By:
---------------------------------
Name:
Title:
Attest: (SEAL)
- --------------------------
Name:
Title:
3
<PAGE>
Countersigned:
THE FIRST NATIONAL BANK OF BOSTON
By:
--------------------------------
Authorized Signature
4
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such holder desires to transfer
the Right Certificate.)
FOR VALUE RECEIVED ________________________________________hereby sells, assigns
and transfers unto _____________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ______________________ Attorney,
to transfer the within Right Certificate on the books of the within-named
Corporation, with full power of substitution.
Date:___________________, 19___ ___________________________________________
Signature
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [_] is [_] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [_]
did [_] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Date:_____________, 19___ ______________________________________________
Signature
NOTICE
------
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise Rights represented by the
Right Certificate.)
To: SECURITY CAPITAL ATLANTIC INCORPORATED
The undersigned hereby irrevocably elects to exercise _______ Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or such other securities of the Corporation or
of any other person which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares be issued in the name of:
Please insert social security
or other identifying number: __________________________________________________
- -------------------------------------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance of such Rights shall
be registered in the name of and delivered to:
Please insert social security
or other identifying number: _________________________________________________
- --------------------------------------------------------------------------------
(Please print name and address)
Date:____________________ , 19__ _________________________________
Signature
<PAGE>
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [_] are [_] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [_]
did [_] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.
Dated:_______________ , 19___ ___________________________________________
Signature
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
TRANSFER AND REGISTRATION RIGHTS AGREEMENT
------------------------------------------
THIS TRANSFER AND REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made
and entered into as of December 15, 1995, among Security Capital Atlantic
Incorporated, a Maryland corporation ("ATLANTIC"), and the investors listed on
the signature pages hereto (herein, together with their successors and permitted
assigns, referred to collectively as the "Investors" and individually as an
"Investor").
ATLANTIC and each Investor is a party to a Subscription Agreement of even
date herewith (each, a "Subscription Agreement"). In order to induce each
Investor to enter into the Subscription Agreement, ATLANTIC has agreed to
provide the rights set forth in this Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
respective meanings:
"Affiliate": with regard to a Person, a Person that controls, is
controlled by, or is under common control with, such original Person. For
purposes of this definition, "control" when used with respect to any 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 "affiliated," "controlling" and "controlled" have
correlative meanings.
"Agreement": as defined in the preamble to this Agreement.
"ATLANTIC": as defined in the preamble to this Agreement.
"Closing Price": the reported last sale price of a share of Common Stock
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, or, if the Common Stock is not
listed or admitted to trading on such exchange, on the American Stock Exchange
Composite Tape, or, if the Common Stock is not listed or admitted to trading on
such exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading; or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the closing sales
price, or, if there is no closing sales price, the average of the closing bid
and asked prices, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or, if
not so reported, as reported by the National Quotation Bureau, Incorporated, or
any successor thereof; or, if not so reported, the average of the closing bid
and asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by ATLANTIC for that
purpose; or, if no such prices are furnished, the fair market value of a share
of Common Stock as estimated by a nationally recognized investment banking firm
selected by the Investor (subject to ATLANTIC's approval,
<PAGE>
which will not be unreasonably withheld), which estimate shall be prepared at
the expense of ATLANTIC; provided, however, that any determination of the
"Closing Price" of a share of Common Stock hereunder shall be based on the
assumption that such share is freely transferable without registration under the
Securities Act.
"Commission": the Securities and Exchange Commission.
"Common Stock": ATLANTIC's common stock, $.01 par value per share,
together with any securities issued as (or issuable upon conversion of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
Common Stock.
"Demand Registration": an effective registration pursuant to a request
made by an Investor as a Requesting Investor pursuant to Section 3.1.
"Exchange Act": the Securities Exchange Act of 1934, as amended.
"First Effective Date": the effective date of the First Registration
Statement in the event of a Proration.
"First Registration Statement": in the event of a Proration, the
registration statement initially filed in which all securities sought to be
included were not so included.
"Form": as defined in Section 4.3.
"Incidental Registration": as defined in Section 4.7(b).
"Investor" and "Investors": as defined in the preamble to this Agreement.
"Offer": as defined in Section 2.1(b).
"Offered Interest": as defined in Section 2.1(b).
"Offerees": as defined in Section 2.1(b).
"Offering": the Offering of up to $150 million of the Common Stock
pursuant to ATLANTIC's Private Placement Memorandum dated October 16, 1995, as
supplemented and amended.
"Offering Investor": as defined in Section 5(a).
"Offering Notice": as defined in Section 5(a).
2
<PAGE>
"Offerors": as defined in Section 2.1(b).
"Overhang Risk": a substantial risk that the sale of some or all shares of
Common Stock sought to be sold will substantially reduce the proceeds or price
per share to be derived from a registration or private placement, as applicable,
by the Person on whose behalf a registration statement shall be filed or a
private placement memorandum shall be prepared, as applicable.
"Person": an individual, partnership, corporation, limited liability
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Piggyback Registration Rights": the right of any holder of Common Stock
to include any or all of such holder's Common Stock in a registration statement
filed by ATLANTIC under the Securities Act for the sale of Common Stock for
ATLANTIC's own account.
"Placement Agent": either an affiliate of ATLANTIC or a nationally
recognized investment banking firm, in either case mutually acceptable to the
Offeror and ATLANTIC and appointed to effect a private placement in accordance
with Section 2.2.
"Prohibited Offeree": as defined in Section 6.1(b).
"Prohibited Transaction": as defined in Section 6.1(a).
"Proration": any reduction pursuant to Section 2.2(d) or Section 3.1(e) in
the number of shares of Common Stock to be privately placed or to be registered,
as applicable.
"Requesting Investors": as defined in Section 3.1(a).
"Securities Act": the Securities Act of 1933, as amended.
"Selling Period": (a) for purposes of a Proration pursuant to a
registration, the period beginning on the First Effective Date and ending on the
earlier of: (i) 90 days after the First Effective Date or (ii) one day after any
date on which the Closing Price of a share of Common Stock shall be at least
110% of the offering price listed in the prospectus included in the First
Registration Statement (or, if no offering price is listed in the prospectus
included in the First Registration Statement, the Closing Price on the First
Effective Date) and (b) for purposes of a Proration pursuant to a private
placement, the period beginning with the date a private placement is commenced
in accordance with Article 2 and ending 90 days thereafter or such longer period
as is deemed necessary by the Placement Agent.
"Shares": shares of the Common Stock purchased by Investors in the
Offering, together with any securities issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares.
3
<PAGE>
"Subscription Agreement": as defined in the recital to this Agreement.
"Unincluded Securities": any Shares sought to be registered or privately
placed, as applicable, but which are not registered or privately placed due to a
Proration.
2. TRANSFER RIGHTS.
2.1. Rights to Sell Shares.
---------------------
(a) Election to Transfer. In the event the Common Stock is not registered
under Section 12(b) or 12(g) of the Exchange Act on or prior to the third
anniversary of the date of this Agreement, any Investor then holding Shares may,
from and after the third anniversary of the date of this Agreement until such
time as the Common Stock is so registered, elect to transfer or assign such
Shares pursuant to the rights set forth in this Article 2, which shall not be
deemed exclusive of any right of any Investor to otherwise transfer Shares in
accordance with the applicable provisions of the Articles of Amendment and
Restatement and Bylaws of ATLANTIC, this Agreement and any other agreement
governing such Shares.
(b) Right of First Offer.
--------------------
(i) Subject to the requirements of paragraph (a) above, if any
Investor or Investors (the "Offerors") desire to sell or offer for sale or
otherwise transfer from time to time all or any portion of the Offerors'
Shares (all or such portion is hereinafter referred to as the "Offered
Interest") pursuant to Section 2.2 or Section 3.1, the Offerors shall first
furnish to ATLANTIC a written notice setting forth an offer to sell the
Offered Interest for a specific cash dollar amount (the "Offer"). ATLANTIC
may elect to repurchase all or any portion of the Offered Interest by
providing written notice to the Offerors of its election to purchase within
25 days after receipt of the Offer. If ATLANTIC does not elect to purchase
all of the Offered Interest and the remaining portion of the Offered
Interest equals or exceeds $1 million in value (as set forth in the Offer),
ATLANTIC shall distribute the Offer to all Investors then holding Shares
(the "Offerees") as promptly as practicable (but in no event later than the
end of such 25-day period), notifying the Offerees of their right to
purchase the remaining portion of the Offered Interest, pro rata in
accordance with their percentage ownership of Shares. For a period of 30
days after the receipt by an Offeree of the Offer, such Offeree shall have
a first right to purchase its pro rata portion of the remaining portion of
the Offered Interest which such Offeree must exercise by notice in writing
to ATLANTIC within such 30-day period together with a statement of the
maximum additional amount of the Offered Interest such Offeree would
purchase in the event other Offerees elect not to purchase their pro rata
share.
(ii) If ATLANTIC or the Offerees, as the case may be, shall timely
exercise the first right to purchase all or any portion of the Offered
Interest, the Offerors shall sell all or such portion of the Offered
Interest to ATLANTIC or the Offerees, as the case may be, who
4
<PAGE>
shall pay the cash price specified in the Offer to the Offerors, and the
parties shall otherwise consummate such transaction no later than 90 days
after the delivery of the Offer to ATLANTIC. If ATLANTIC shall not exercise
its right to purchase any portion of the Offered Interest and the Offerees
shall timely exercise their first right to purchase, indicating in their
written notice pursuant to subparagraph (i) a desire to purchase an
aggregate amount of the Offered Interest in excess of the portion of the
Offered Interest remaining unsold, each such Offeree shall be allocated
Shares of such unsold portion of the Offered Interest (up to, but not
exceeding the maximum additional amount specified by such Offeree in its
written notice to ATLANTIC) pro rata in accordance with their percentage
ownership of Shares.
(iii) The right of any Investor to sell Shares owned by such Investor
in a private transaction shall be subject to the applicable provisions of
the Articles of Amendment and Restatement and By-Laws of ATLANTIC, this
Agreement and any other agreement governing the Shares.
2.2. Private Placement Right.
-----------------------
(a) Request. If any portion of the Offered Interest would remain unsold
following the procedures specified in subparagraphs (i) and (ii) of Section
2.1(b), the Offerors may request that ATLANTIC appoint a Placement Agent to
privately place such remaining portion of the Offered Interest for a cash
purchase price which is acceptable to the Offeror, but not less than 90% of the
proposed purchase price in the Offer applicable to such portion of the Offered
Interest, provided such portion of the Offered Interest equals or exceeds 10% of
the Shares sold by ATLANTIC in the Offering, and ATLANTIC shall effect the
private placement of such portion of the Offered Interest, all in accordance
with the following provisions of this Article 2.
(b) Participation Rights of Other Investors. Whenever ATLANTIC shall be
requested by Offerors pursuant to Section 2.2(a) to effect the private placement
of any portion of an Offered Interest, ATLANTIC shall:
(i) promptly (but not later than 10 days after such request) give
written notice of such proposed private placement to all Investors then
holding Shares;
(ii) as expeditiously as possible (but not later than 45 days after
such request) prepare a private placement memorandum with respect to:
(A) such portion of the Offered Interest that ATLANTIC has been
requested to appoint a Placement Agent to privately place pursuant to
paragraph (a) of this Section 2.2; and
(B) all other Shares then held by Investors that have made
written request to ATLANTIC for inclusion thereof in the private
placement within 15 days after
5
<PAGE>
ATLANTIC has given written notice to such Investors, to permit the
disposition by the Investors of such Shares in the private placement;
and
(iii) use its reasonable efforts to consummate such private placement
as quickly as practicable.
(c) ATLANTIC's Ability to Postpone. ATLANTIC may postpone for up to 120
days the commencement of a private placement under this Section 2.2 if a private
placement or registration of ATLANTIC's securities is in progress or imminent
and the distribution pursuant thereto not yet completed; provided, however, that
if the Common Stock becomes registered under Section 12(b) or 12(g) of the
Exchange Act during the postponement period, all rights postponed pursuant to
this Section 2.2(c) shall have no further effect.
(d) Proration. If the Placement Agent advises that the number of shares of
Common Stock sought to be privately placed by the Investors and any other
shareholders having the right to include their shares of Common Stock in such
private placement would create an Overhang Risk, then the number of shares of
Common Stock to be privately placed by the Investors including the Offeror and
by such other shareholders shall be reduced pro rata in proportion to the number
of shares of Common Stock sought to be privately placed by all shareholders to
the extent necessary to reduce the number of shares of Common Stock to be
privately placed to the number recommended by the Placement Agent.
(e) Agreement with Placement Agent. All Investors proposing to distribute
Shares through a private placement shall (together with ATLANTIC as provided in
Section 2.3(c)) enter into an agreement in customary and usual form with the
Placement Agent.
(f) Option to Include Shares in Private Placement. Each Investor, subject
to the provisions of paragraphs (b) and (d) of this Section 2.2, shall have the
option to include its Shares in a private placement conducted on behalf of the
Offerors. The Offerors shall not be required to include any Investor's Shares
in the private placement unless such Investor accepts the terms of the private
placement as agreed upon between the Offerors and the Placement Agent (provided
such terms are usual and customary for selling shareholders) and agrees to
execute and/or deliver such documents in connection with such private placement
as the Offerors may reasonably request.
(g) Number of Private Placements. The Investors shall together be entitled
to an aggregate of one private placement, subject to the provisions for up to
one additional private placement in the event of a Proration as provided in
Section 4.8.
2.3. Procedures. If and whenever ATLANTIC is required by any of the
provisions of this Article 2 to use its reasonable efforts to effect the private
placement of any of the Shares, ATLANTIC will (except as otherwise provided in
this Agreement), as expeditiously as possible:
6
<PAGE>
(a) prepare a private placement memorandum, together with such amendments
and supplements thereto as may be necessary to comply with the provisions of the
Securities Act with respect to the sale or other disposition of the Shares
covered by such private placement memorandum whenever the Investors shall desire
to sell or otherwise dispose of the same;
(b) use its reasonable efforts to perfect exemptions for the Shares covered
by such private placement memorandum under all applicable rules and regulations
of the Commission and the securities or blue sky laws of such jurisdictions as
each Investor shall request, and do any and all other acts and things reasonably
requested by such Investor to assist such Investor to consummate the sale or
other disposition in such jurisdictions of the Shares owned by such Investor,
except that ATLANTIC shall not for any such purpose be required to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified or to file therein any general consent to service of process;
(c) enter into and perform its obligations under a private placement agency
agreement, in usual and customary form, with the Placement Agent, including,
without limitation, obtaining an opinion of counsel to ATLANTIC in the usual and
customary form for such private placement; and
(d) notify each Investor holding Shares covered by such private placement
memorandum, at any time when a private placement memorandum is required to be
delivered under the applicable law, of the happening of any event of which
ATLANTIC has knowledge as a result of which the private placement memorandum, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of circumstances then existing.
3. REGISTRATION RIGHTS.
3.1. Demand Registrations.
--------------------
(a) Demand. In the event the Shares are not registered under Section
12(b) or 12(g) of the Exchange Act on or prior to the third anniversary of the
date of this Agreement, any Investor or Investors (the "Requesting Investors")
may, from and after the third anniversary of the date of this Agreement until
such time as the Shares are so registered, request registration of all or any
part of their Shares (which request shall state that the Investors intend to
dispose of such Shares through an underwritten public offering), provided that
the number of Shares requested to be registered by the Requesting Investors
equals or exceeds ten percent (10%) of the Shares sold by ATLANTIC in the
Offering, and ATLANTIC shall effect the registration of such Shares under the
Securities Act in accordance with the following provisions of this Article 3.
(b) Participation Rights of Other Investors. Whenever ATLANTIC shall be
requested by Requesting Investors pursuant to paragraph (a) of this Section 3.1
to effect the registration of any of their Shares under the Securities Act,
ATLANTIC shall:
7
<PAGE>
(i) promptly (but not later than 10 days after such request) give
written notice of such proposed registration to all Investors then holding
Shares;
(ii) as expeditiously as possible (but not later than 45 days after
such request) file a registration statement under the Securities Act with
respect to:
(A) those Shares that ATLANTIC has been requested to register
pursuant to paragraph (a) of this Section 3.1; and
(B) all other Shares then held by Investors that have made
written request to ATLANTIC for registration thereof within 15 days
after ATLANTIC has given written notice to such Investors, to permit
the disposition by the Investors of such Shares; and
(iii) use its reasonable efforts to effect such registration as
quickly as practicable.
(c) ATLANTIC's Ability to Postpone. ATLANTIC may postpone the filing of a
registration statement under this Section 3.1 for a reasonable period of time
(not exceeding 60 days) if ATLANTIC furnishes the Requesting Investors with a
certificate signed by the Chairman or a Managing Director of ATLANTIC stating
that, in its good faith judgment, ATLANTIC's Board of Directors has determined
that effecting the registration at such time would adversely affect a material
financing, acquisition, disposition of assets or stock, merger or other
comparable transaction or would require ATLANTIC to make public disclosure of
information not otherwise required to be publicly disclosed at such time, the
public disclosure of which would have a material adverse effect upon ATLANTIC.
ATLANTIC may also postpone for up to 120 days the filing of a registration
statement under this Section 3.1 if a private placement or registration of
ATLANTIC's securities is in progress or imminent and the distribution pursuant
thereto not yet completed.
(d) Selection of Underwriters. In the case of an underwritten Demand
Registration, the holders of a majority of the Shares to be registered will have
the right to select the investment banker(s) and manager(s) to administer the
offering, subject to ATLANTIC's approval, which will not be unreasonably
withheld.
(e) Proration. If the managing underwriter advises that the number of
shares of Common Stock sought to be registered by the Investors and any other
shareholders having the right to include their shares of Common Stock in such
Demand Registration would create an Overhang Risk, then the number of shares of
Common Stock to be registered by the Investors including the Requesting
Investors and by such other shareholders shall be reduced pro rata in proportion
to the number of shares of Common Stock sought to be registered by all
shareholders to the extent necessary to reduce the number of shares of Common
Stock to be registered to the number recommended by the managing underwriter.
8
<PAGE>
(f) Agreement with Underwriters. All Investors proposing to distribute
Shares through an underwritten Demand Registration shall (together with ATLANTIC
as provided in Section 3.2(g)) enter into an underwriting agreement in customary
and usual form with the underwriter or underwriters selected for such
underwriting as provided in Section 3.1(d).
(g) Option to Include Shares in Underwritten Offering. Each Investor,
subject to the provisions of paragraphs (b) and (e) of this Section 3.1, shall
have the option to include its Shares in an underwritten Demand Registration.
The Requesting Investors shall not be required to include any Investor's Shares
in such underwritten Demand Registration unless such Investor accepts the terms
of the underwriting as agreed upon between the Requesting Investors and the
underwriters (provided such terms are usual and customary for selling
shareholders) and agrees to execute and/or deliver such documents in connection
with such registration as the Requesting Investors may reasonably request.
(h) Number of Demand Registrations. The Investors shall together be
entitled to an aggregate of one Demand Registration, subject to the provisions
for up to one additional registration in the event of a Proration as provided in
Section 4.8.
3.2. Registration Procedures. If and whenever ATLANTIC is required by any
of the provisions of this Article 3 to use its reasonable efforts to effect the
registration of any of the Shares under the Securities Act, ATLANTIC will
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission a registration statement with
respect to such Shares and use its reasonable efforts to cause such registration
statement to become effective and remain effective for as long as shall be
necessary (up to a maximum of 90 days) to complete the distribution of the
Shares so registered;
(b) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus contained therein as may be
necessary to keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of the Shares registered by such registration statement whenever the Investors
shall desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sale of Shares from time to time in connection
with a registration statement pursuant to Rule 415 under the Securities Act);
(c) furnish to each Investor such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus contained in
such registration statement, including any preliminary prospectus, and any
amendment or supplement thereto, in conformity with the requirements of the
Securities Act, and such other documents, as such Investor may reasonably
request in order to facilitate the public sale or other disposition of the
Shares owned by such Investor;
9
<PAGE>
(d) use its reasonable efforts to register and qualify, or perfect
exemptions for, the Shares registered by such registration statement under the
securities or blue sky laws of such jurisdictions as each Investor shall
request, and do any and all other acts and things reasonably requested by each
Investor to assist such Investor to consummate the public sale or other
disposition in such jurisdictions of the Shares owned by such Investor, except
that ATLANTIC shall not for any such purpose be required to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified or to file therein any general consent to service of process;
(e) otherwise use its reasonable efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the registration statement, which earning
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
(f) use its reasonable efforts to list the Shares registered by such
registration statement on any securities exchange on which any stock of ATLANTIC
is then listed, if the listing of such Shares is then permitted under the rules
of such exchange;
(g) in the case of an underwritten Demand Registration, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering, including, without limitation, obtaining an opinion of counsel to
ATLANTIC and a "comfort letter" from the independent public accountants to
ATLANTIC in the usual and customary form for such underwritten offering; and
(h) notify each Investor holding Shares registered by such registration
statement, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event of which
ATLANTIC has knowledge as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
circumstances then existing.
4. PROVISIONS APPLICABLE TO TRANSFER RIGHTS AND REGISTRATION RIGHTS.
4.1. Expenses.
--------
(a) All expenses incurred in any private placement (or any attempted
private placement that is not consummated) or in any Demand Registration (or any
attempted Demand Registration which does not become effective) of the Investors'
Shares under this Agreement shall be paid by the participating Investors and any
other participating shareholders pro rata based upon the number of shares of
Common Stock included in the private placement or Demand Registration, as
applicable.
(b) The expenses referred to in paragraph (a) of this Section 4.1 shall
include, without limitation, underwriting and brokerage commissions, printing
and photocopying expenses, fees and
10
<PAGE>
disbursements of counsel for ATLANTIC and the participating Investors and other
participating shareholders as a group (provided, however, that if a majority in
interest of participating Investors and other participating shareholders cannot
agree on one counsel, or if any Investor uses separate counsel, such Investors
shall pay their own fees and disbursements of counsel), expenses of any special
audits to which ATLANTIC shall agree or which shall be necessary to comply with
governmental requirements in connection with any such private placement or
registration, as applicable, all registration and filing fees for the Investors'
Shares under Federal and state securities laws, expenses of complying with the
securities or blue sky laws of any jurisdictions pursuant to Section 2.3(b) or
3.2(d) and expenses of ATLANTIC's independent auditors in connection with any
comfort letter required by any underwriters.
4.2. Indemnification. In the event any Shares then held by Investors are
included in a private placement under Article 2 or in a Demand Registration
under Article 3:
(a) Indemnity by ATLANTIC. Without limitation of any other indemnity
provided to any Investor, to the extent permitted by law, ATLANTIC will
indemnify and hold harmless each Investor, the Affiliates, officers, directors
and partners of each Investor, any underwriter (as defined in the Securities
Act) or Placement Agent for such Investor, and each Person, if any, who controls
such Investor or underwriter (within the meaning of the Securities Act) or
Placement Agent, against any losses, claims, damages, liabilities and expenses
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or any other federal or state law, insofar as such losses,
claims, damages, liabilities and expenses (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in a registration statement
(including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto) or in any private placement memorandum
(including any amendments or supplements thereto), (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or (iii) any other violation or alleged
violation by ATLANTIC of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law, and ATLANTIC will reimburse each
such Investor, Affiliate, officer, director, partner, underwriter, Placement
Agent or controlling person for any reasonable legal or other expenses incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability, expense or action; provided, however, that ATLANTIC shall not
be liable to any Investor in any such case for any such loss, claim, damage,
liability, expense or action to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration or
private placement, as applicable, by such Investor or any officer, director,
partner or controlling person thereof or through such Investor's failure to
deliver a copy of the prospectus or private placement memorandum or any
amendment or supplement thereto after ATLANTIC has furnished such Investor with
a sufficient number of copies of the same.
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(b) Indemnity by Investor. In connection with any registration or private
placement, as applicable, in which an Investor is participating, each such
Investor will furnish to ATLANTIC in writing such information and affidavits as
ATLANTIC reasonably requests for use in connection with any such registration
statement or private placement memorandum, as applicable, and, to the extent
permitted by law, will indemnify ATLANTIC, its directors and officers and each
Person who controls ATLANTIC (within the meaning of the Securities Act) against
any losses, claims, damages, liabilities and expenses resulting from any
Violation, but only to the extent that such Violation occurs in reliance upon
and in conformity with written information so furnished by such Investor or
through such Investor's failure to deliver a copy of the prospectus or private
placement memorandum or any amendment or supplement thereto after ATLANTIC has
furnished such Investor with a sufficient number of copies of the same; provided
that the obligation to indemnify will be several and not joint and several with
any other Person and will be limited to the net amount received by such Investor
from the sale of Shares pursuant to such registration statement or private
placement memorandum, as applicable.
(c) Notice; Right to Defend. Promptly after receipt by an indemnified
party under this Section 4.2 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
4.2, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
if the indemnifying party agrees in writing that it will be responsible for any
costs, expenses, judgments, damages and losses incurred by the indemnified party
with respect to such claim, jointly with any other indemnifying party similarly
noticed, to assume the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party shall have the right to
retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if the indemnified party reasonably believes that
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding, provided that the indemnifying party shall not be
responsible for the fees and expenses of more than one counsel for the
indemnified parties. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 4.2 only if and to the extent that such failure is prejudicial to
its ability to defend such action, and the omission so to deliver written notice
to the indemnifying party will not relieve it of any liability that it may have
to any indemnified party other than under this Section 4.2.
(d) Contribution. If the indemnification provided for in this Section 4.2
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage, liability or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other
hand in connection with the statements or omissions which resulted
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in such loss, claim, damage, liability or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and the
indemnified party shall be determined by reference to, among other things,
whether the untrue statement or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
any Investor shall be obligated to contribute pursuant to this Section 4.2(d)
shall be limited to an amount equal to the proceeds to such Investor of the
Shares sold pursuant to the registration statement or the private placement
memorandum, as applicable, which gives rise to such obligation to contribute
(less the aggregate amount of any damages which the Investor has otherwise been
required to pay in respect of such loss, claim, damage, liability or expense or
any substantially similar loss, claim, damage, liability or expense arising from
the sale of such Shares).
(e) Survival of Indemnity and Contribution. The indemnification and
contribution provided by this Section 4.2 shall be a continuing right to
indemnification and contribution and shall survive the registration and sale of
any Shares by any Person entitled to indemnification and contribution hereunder
and the expiration or termination of this Agreement.
4.3. Rule 144; Reporting Requirements. From and after the time ATLANTIC
has securities registered under Section 12(b) or 12(g) of the Exchange Act, in
order to permit the Investors to sell the Shares they hold, if they so desire,
from time to time pursuant to an effective shelf registration or pursuant to
Rule 144 promulgated by the Commission or any successor to such rule or any
other rule or regulation of the Commission that may at any time permit an
Investor to sell its Shares to the public without registration (the "Resale
Rules") or pursuant to a registration statement on Form S-3 at any time after
ATLANTIC so qualifies or any successor to such form or any other form permitting
incorporation by reference of documents filed with the Commission subsequent to
the filing of the registration statement (the "Forms"), ATLANTIC will:
(a) comply with all rules and regulations of the Commission applicable in
connection with use of the Resale Rules, Form S-3 (including the registrant
requirements thereof) and any other Forms, and use its reasonable efforts to
qualify for use of Form S-3 as quickly as possible;
(b) make and keep adequate and current public information available, as
those terms are understood and defined in the Resale Rules, at all times;
(c) file with the Commission in a timely manner all reports and other
documents required of ATLANTIC under the Securities Act (including any Forms)
and the Exchange Act;
(d) furnish annually to all Investors material containing the information
required by Rule 14a-3(b) under the Exchange Act and Items 401, 402 and 403 of
Regulation S-K of the Commission;
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(e) furnish to any Investor so long as such Investor owns any Shares,
forthwith upon request (i) a written statement by ATLANTIC that it has complied
with the reporting requirements of the Resale Rules, the Securities Act and the
Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of ATLANTIC and any other reports and
documents filed by ATLANTIC under the Securities Act or the Exchange Act and
(iii) such other information as may be reasonably requested in availing any
Investor of any rule or regulation of the Commission which permits the selling
of any such Shares without registration or pursuant to a Form; and
(f) take any action (including cooperating with the Investor to cause the
transfer agent to remove any restrictive legend on certificates evidencing the
Shares) which shall be reasonably requested by any Investor or which shall
otherwise facilitate the sale of Shares from time to time by the Investors
pursuant to the Resale Rules or an effective shelf registration.
4.4. Rule 144A Information. Until such time as ATLANTIC is subject to
Section 13 or 15(d) of the Exchange Act, ATLANTIC will make available, upon
request, to each Investor and prospective purchaser or transferee of Shares
designated by the Investor, the information required to allow the resale or
other transfer of such Shares pursuant to Rule 144A under the Securities Act.
4.5. Assignment of Rights. The rights of the Investors under this
Agreement, including the rights to cause ATLANTIC to privately place Shares and
to register Shares, shall be deemed to be automatically assigned with a transfer
of Shares, but only for transfers made in accordance with the Articles of
Amendment and Restatement and By-Laws of ATLANTIC, this Agreement and any other
agreement governing the Shares.
4.6. Limitations on Other Registrations and Private Placements. Except as
otherwise set forth in this Agreement, ATLANTIC shall not, without the prior
written consent of Investors holding a majority of the Shares then held by
Investors, file any registration statement on behalf of any Person not an
Investor (including ATLANTIC), or permit any registration statement filed on
behalf of any Person not an Investor (including ATLANTIC) to become effective,
or commence a private placement of securities of ATLANTIC in excess of 10% of
the total shareholders' equity and long-term indebtedness of ATLANTIC, during
any period commencing with ATLANTIC's receipt of a registration request from
Requesting Investors and ending 60 days after the effective date of the
registration statement filed pursuant to such request; provided, however, that
the foregoing limitations shall not apply during the period of any postponement
in the filing of a registration statement pursuant to Section 3.1(c).
4.7. Piggyback Registration Rights.
-----------------------------
(a) Except as otherwise set forth in this Section 4.7, nothing contained
in this Agreement shall confer upon any holder of securities of ATLANTIC any
Piggyback Registration Rights; provided, however, that in the event that
ATLANTIC shall grant to any holder of its outstanding securities any Piggyback
Registration Rights, ATLANTIC shall grant similar rights to the Investors
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(in addition to the rights specifically granted in this Section 4.7); provided,
further, that in the event that ATLANTIC is entitled to include any securities
of ATLANTIC held by ATLANTIC in any registration statement filed upon the demand
of another security holder of ATLANTIC, ATLANTIC shall, before including any
such securities in such registration statement, cause the Investors to be
afforded the same right to participate in such registration.
(b) If ATLANTIC proposes to register any of its securities under the
Securities Act in connection with any offering other than ATLANTIC's initial
public offering, and if, for any reason (other than the volume and holding
period limitations) Rule 144 or any successor rule under the Securities Act
shall not be available to permit the resale of the Shares held by any Investor
without registration under the Securities Act and any Investor notifies ATLANTIC
of such unavailability and delivers to ATLANTIC an opinion of counsel confirming
such unavailability, ATLANTIC will, each time it intends to effect a
registration for an offering of equity securities for cash, give written notice
to all Investors then holding Shares who have so notified ATLANTIC, at least 30
days prior to the initial filing of the registration statement with the
Commission pertaining thereto, informing such Investors of its intent to file
such registration statement and of such Investors' rights under this Section
4.7. Upon the written request of any Investor made within 15 days after any such
notice is given (which request shall specify the number of Shares intended to be
disposed of by such Investor), ATLANTIC will use its best efforts to effect the
registration (an "Incidental Registration") under the Securities Act of all the
Shares which ATLANTIC has been so requested to register by the Investors to the
extent requisite to permit the disposition of the Shares so to be registered;
provided, however, if at any time after giving written notice of its intent to
register any securities and prior to the effective date of the registration
statement filed in connection with such Incidental Registration, ATLANTIC shall
determine for any reason not to register or to delay registration of such
securities, ATLANTIC may, at its election, give written notice of such
determination to each Investor requesting to register Shares and, thereupon, (i)
in the case of a determination not to register, ATLANTIC shall be relieved of
its obligation to register any Shares in connection with such registration and
(ii) in the case of a determination to delay registering, ATLANTIC shall be
permitted to delay registering any such Shares for the same period as the delay
in registering other securities. The registration rights granted pursuant to
this Section 4.7 shall be in addition to the registration rights granted
pursuant to the other provisions of this Agreement. ATLANTIC further agrees, if
necessary, to supplement or amend the Incidental Registration statement, if
required by the rules, regulations or instructions applicable to the
registration form used by ATLANTIC for such Incidental Registration statement or
by the Securities Act or by any other rules and regulations thereunder for
registration. An Investor shall be permitted to withdraw all or any part of the
Shares from an Incidental Registration statement at any time prior to the
effective date of the Incidental Registration statement, provided that any such
withdrawal shall be irrevocable with respect to such Incidental Registration
statement.
(c) All expenses incurred in connection with any Incidental Registration
shall be allocated among all Persons, including ATLANTIC, on whose behalf
securities of ATLANTIC are included in such registration on the basis of the
respective dollar amounts of the securities then being registered on their
behalf; provided, however, in connection with any Incidental Registration, each
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holder of securities being registered shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such holders' securities pursuant to such registration.
(d) If an Incidental Registration involves an underwritten offering of the
securities so being registered, whether or not for sale for the account of
ATLANTIC, which securities are to be distributed (on a firm commitment basis) by
or through one or more underwriters of recognized standing under underwriting
terms appropriate for such transactions, and the underwriter or managing
underwriter, as the case may be, of such underwritten offering advises that the
amount of securities sought to be included in such registration would create an
Overhang Risk, then ATLANTIC will include in such registration (i) first, all of
the securities of ATLANTIC which ATLANTIC proposes to sell for its own account
and (ii) second, to the extent of the remaining amount recommended by the
underwriter or managing underwriter, securities requested to be included in such
registration by the holders thereof pro rata in proportion to the respective
dollar amounts of the securities requested to be included by all such holders.
4.8. Prorations. In the event of a Proration:
(a) upon the expiration of the Selling Period, ATLANTIC shall be obligated
to file an additional registration statement (which registration statement shall
contain a current prospectus) or prepare an additional private placement
memorandum, as applicable, relating to the Unincluded Securities;
(b) ATLANTIC shall use its reasonable efforts to effect the registration
or consummate the private placement, as applicable, of the Unincluded Securities
as quickly as possible thereafter; and
(c) any Investor may withdraw its Unincluded Securities from such
additional registration or private placement, as applicable, without cost or
penalty at any time prior to the effective date of such additional registration
or the commencement of such additional private placement, as applicable.
4.9. Notice of Private Placement and Registration. ATLANTIC shall provide
prompt notice to all Investors then holding Shares of any request for a private
placement or registration of Shares which it is obligated to pursue.
5. RIGHT OF FIRST REFUSAL.
(a) If any Investor (the "Offering Investor") shall receive and intend in
any way to accept a bona fide offer, whether in writing or otherwise, for the
sale, assignment, transfer or other disposition of all or any portion of its
Shares (other than an offer pursuant to Article 2 and other than any sale,
assignment, transfer or other disposition to any (i) wholly owned subsidiary of
such Investor, (ii) Person or Persons owning all of the outstanding capital
securities of such Investor, (iii)
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Person, all of the outstanding capital securities of which are owned by the
Persons specified in clauses (i) or (ii), or (iv) Person constituting an
employee benefit plan or trust maintained by the same employer that maintains
the Offering Investor or maintained by any other Person belonging to the same
controlled group of corporations as such employer for purposes of (S)414(b) of
the Internal Revenue Code of 1986, as amended), prior to the Shares being
registered under Section 12(b) or 12(g) of the Exchange Act, such Offering
Investor shall not sell, assign, transfer or dispose of such Shares or any
portion thereof without first giving ATLANTIC notice (the "Offering Notice"),
which notice shall fully disclose all material terms of the proposed
transaction, including but not limited to, the name of the proposed purchaser or
transferee, the purchase price or other consideration, the terms of payment, the
period of payment, the rate of interest on any unpaid balance, and the security,
if any, to be given by the proposed purchaser or transferee. ATLANTIC may elect
to purchase all, but not less than all, such Shares at the price or other
consideration (or substantially similar consideration, if the consideration is
non-cash consideration) and upon the terms offered by the prospective purchaser
or transferee by providing written notice to the Offering Investor within 10
days after receipt of the Offering Notice.
(b) If ATLANTIC shall timely elect to purchase such Shares, the Offering
Investor shall sell such Shares to ATLANTIC at the price or other consideration
(or substantially similar consideration, if the consideration is non-cash
consideration) and upon the terms offered by the prospective purchaser as set
forth in the Offering Notice, and the parties shall otherwise consummate such
transaction no later than 30 days after the delivery of the election by
ATLANTIC. If ATLANTIC shall not elect to purchase such Shares from the Offering
Investor or fails to consummate the transaction within such 30-day period, the
Offering Investor may sell such Shares to the prospective purchaser or
transferee at the price or other consideration and upon the terms offered by the
prospective purchaser as set forth in the Offering Notice provided such sale
occurs within 60 days of the non-election or failure by ATLANTIC to acquire such
Shares.
(c) Notwithstanding anything to the contrary in this Agreement, the rights
of ATLANTIC under this Article 5 shall expire upon the registration of the
Shares under Section 12(b) or 12(g) of the Exchange Act.
6. MISCELLANEOUS.
6.1. ERISA Compliance.
(a) Prohibited Transactions. Notwithstanding anything to the contrary, no
provision of this Agreement shall be construed to require or permit any
transaction which, in the reasonable belief of ATLANTIC or any Offeror or other
Investor endeavoring to transfer or assign its securities pursuant hereto, would
constitute a non-exempt prohibited transaction under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), would cause ATLANTIC's assets
to become "plan assets" within the meaning of 29 C.F.R. (S)2510.3-101 or
otherwise, or would otherwise cause ATLANTIC to be subject to ERISA (a
"Prohibited Transaction").
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(b) Prohibited Offerees. In the event that ATLANTIC shall notify any
Investor, or any Offeror or other Investor shall notify ATLANTIC, that the
purchase or transfer of such Investor's Shares by an identified purchaser or
transferee (the "Prohibited Offeree") would, in its reasonable belief in
accordance with Section 6.1(a), constitute a Prohibited Transaction, and such
Prohibited Offeree does not demonstrate to the reasonable satisfaction of
ATLANTIC and such Investor no later than 20 days after such notice that such
purchase or transfer would not constitute a Prohibited Transaction, the purchase
or transfer of such Shares shall be prohibited.
(c) Proration. In the event that any Investor is precluded from including
its Shares in any private placement by reason of this Section 6.1, the failure
to include such Shares shall be treated as a Proration pursuant to Section 4.8.
6.2. Dividend Reinvestment Plans. Notwithstanding anything in this
Agreement to the contrary, any shares of Common Stock purchased pursuant to a
dividend reinvestment plan shall not be subject to the right of first offer
under Section 2.1(b) or the right of first refusal under Section 5(a).
6.3. Notices.
(a) All communications under this Agreement shall be in writing and shall
be mailed by first class mail, postage prepaid, or telegraphed or telexed, or
given by facsimile, or delivered by hand:
(1) if to ATLANTIC, at:
Security Capital Atlantic Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attn: Ariel Amir
Facsimile: (505) 988-8920
or at such other address as it may have furnished in writing to the holders
of Shares at the time outstanding, or
(2) if to any Investor, to the address of such Investor as it appears
in the stock ledger of ATLANTIC.
(b) Any notice so addressed, when mailed by registered or certified mail
shall be deemed to be given three days (seven days in the case of Investors
whose address is not in the United States of America) after so mailed, and when
telegraphed or telexed or delivered by hand shall be deemed to be given
immediately, and when given by facsimile, shall be deemed to be given when
confirmed electronically or telephonically provided that the original is mailed
by first class mail, postage prepaid, at the same time in accordance with
Section 6.3(a).
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6.4. Successors and Assigns. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of ATLANTIC and each of the Investors.
6.5. Amendment and Waiver. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, but only with the
written consent of ATLANTIC and Investors holding two-thirds of the Shares then
held by Investors; provided, however, that no such amendment or waiver shall
take away any private placement or registration right of any Investor without
the consent of such Investor; provided, further, that without the consent of any
other Investor, any Investor may from time to time enter into one or more
agreements amending, modifying or waiving the provisions of this Agreement with
respect to such Investor if such action does not adversely affect the rights or
interest of any other Investor. No delay on the part of any party in the
exercise of any right, power or remedy shall operate as a waiver thereof, nor
shall any single or partial exercise by any party of any right, power or remedy
preclude any other or further exercise thereof, or the exercise of any other
right, power or remedy.
6.6. Counterparts. One or more counterparts of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
6.7. Governing Law. This Agreement shall be construed in accordance with
and governed by the internal laws of the State of Maryland.
6.8. Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected thereby.
6.9. Headings. The headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect the meaning or
interpretation of any provisions hereof.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date and year first above written.
SECURITY CAPITAL ATLANTIC INCORPORATED
By: /s/ Paul E. Szurek
------------------------------------------
Paul E. Szurek
Secretary
------------------------------------------
Name of Investor
By
----------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
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SUPPLEMENTAL REGISTRATION RIGHTS AGREEMENT
------------------------------------------
THIS SUPPLEMENTAL REGISTRATION RIGHTS AGREEMENT (this "Supplemental
Agreement") is made and entered into as of December 15, 1995, among
Security Capital Atlantic Incorporated, a Maryland corporation ("ATLANTIC"), and
the investors listed on the signature pages hereto (herein, together with their
successors and permitted assigns, referred to collectively as the "PCS
Investors" and individually as a "PCS Investor").
ATLANTIC and each PCS Investor is a party to a Subscription Agreement of
even date herewith (each, a "Subscription Agreement") and ATLANTIC and the PCS
Investors, together with the other investors in the Offering (as hereinafter
defined), are parties to a Transfer and Registration Rights Agreement of even
date herewith (the "Agreement"). In order to induce each PCS Investor to enter
into the Subscription Agreement, ATLANTIC has agreed to provide the rights set
forth in this Supplemental Agreement, which are in addition to the rights of
each PCS Investor under the Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. DEFINITIONS.
As used in this Supplemental Agreement, the following terms shall have the
following respective meanings:
"Affiliate": with regard to a Person, a Person that controls, is
controlled by, or is under common control with, such original Person. For
purposes of this definition, "control" when used with respect to any 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 "affiliated," "controlled" and "controlling" have
correlative meanings.
"Agreement": as defined in the recital to this Supplemental Agreement.
"ATLANTIC": as defined in the preamble to this Supplemental Agreement.
"Commission": the Securities and Exchange Commission.
"Common Stock": ATLANTIC's common stock, $.01 par value per share,
together with any securities issued as (or issuable upon conversion of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
Common Stock.
"Demand Registration": an effective registration pursuant to a request
made by a PCS Investor as a Requesting PCS Investor pursuant to Section 3.1.
<PAGE>
"Demand Registration Statement": as defined in Section 3.2.
"Exchange Act": the Securities Exchange Act of 1934, as amended.
"Offering": the offering of up to $150 million of Common Stock pursuant to
ATLANTIC's Private Placement Memorandum dated October 16, 1995, as supplemented
and amended.
"Overhang Risk": a substantial risk that the sale of some or all shares of
Common Stock sought to be sold will substantially reduce the proceeds or price
per share to be derived from a registration by the Person on whose behalf a
registration statement shall be filed.
"PCS Investor" and "PCS Investors": as defined in the preamble to this
Supplemental Agreement.
"Person": an individual, partnership, corporation, limited liability
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Registrable Shares": shares of the Common Stock purchased by PCS
Investors in the Offering, together with any securities issued as (or issuable
upon conversion of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Registrable Shares. As to any particular Registrable
Shares, such shares shall cease to be Registrable Shares when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act or transferred in a transfer
not made in accordance with Section 4.3. A PCS Investor whose shares have
ceased to be Registrable Shares pursuant to the preceding sentence or are
registered by an effective Shelf Registration Statement pursuant to Article 2
hereof shall no longer be entitled to the private placement rights pursuant to
Article 2 of the Agreement or the registration rights pursuant to Article 3 of
the Agreement with respect to such shares.
"Requesting PCS Investors": as defined in Section 3.1.
"Securities Act": the Securities Act of 1933, as amended.
"Shelf Registration Statement": as defined in Section 2.1.
"Subscription Agreement": as defined in the recital to this Supplemental
Agreement.
"Supplemental Agreement": as defined in the preamble to this Supplemental
Agreement.
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2. SHELF REGISTRATION.
2.1. Shelf Registration Statement. ATLANTIC shall cause to be filed, no
later than the earlier to occur of (a) the first anniversary of the closing date
of ATLANTIC's initial public offering of Common Stock or (b) June 30, 1997, a
registration statement (the "Shelf Registration Statement") under Rule 415 under
the Securities Act registering the lesser of (x) the amount of Registrable
Shares purchased by PCS Investors in the Offering or (y) $50,000,000 of the
Registrable Shares; provided, however, that ATLANTIC shall not be required to
file the Shelf Registration Statement if it is not eligible to use Form S-3
under the Securities Act on the earlier to occur of the dates set forth in
clauses (a) and (b) above.
2.2. ATLANTIC's Ability to Postpone. ATLANTIC may postpone the filing of
the Shelf Registration Statement under Section 2.1 for a reasonable period of
time (not exceeding 60 days) if ATLANTIC furnishes the PCS Investors with a
certificate signed by the Chairman of the Board or a Managing Director of
ATLANTIC stating that, in its good faith judgment, ATLANTIC's Board of Directors
has determined that filing the Shelf Registration Statement at such time would
adversely affect a material financing, acquisition, disposition of assets or
stock, merger or other comparable transaction or would require ATLANTIC to make
public disclosure of information not otherwise required to be publicly disclosed
at such time, the public disclosure of which would have a material adverse
effect upon ATLANTIC. ATLANTIC may also postpone the filing of the Shelf
Registration Statement under Section 2.1 if a private placement or registration
of ATLANTIC's securities is in progress and the distribution pursuant thereto
not yet completed or if ATLANTIC's Board of Directors has approved a private
placement or registration of ATLANTIC's securities which is not yet in progress.
Any postponement pursuant to the immediately preceding sentence shall not extend
beyond the earlier of (a) 120 days after the date ATLANTIC would be required to
file the Shelf Registration Statement under Section 2.1 or (b) 90 days after the
date of the private placement memorandum relating to an offering of ATLANTIC's
securities or the effective date of the registration statement relating to an
offering of ATLANTIC's securities or the filing date of the final prospectus
supplement relating to a shelf offering of ATLANTIC's securities, as applicable.
2.3. Selection of Underwriters. In the case of an underwritten offering
from the Shelf Registration Statement, the holders of a majority of the
Registrable Shares to be offered will have the right to select the investment
banker(s) and manager(s) to administer the offering, subject to ATLANTIC's
approval, which will not be unreasonably withheld.
2.4. Agreement with Underwriters. All PCS Investors proposing to
distribute Registrable Shares through an underwritten offering from the Shelf
Registration Statement shall (together with ATLANTIC as provided in Section
2.7(g)) enter into an underwriting agreement in customary and usual form with
the underwriter or underwriters selected for such underwriting as provided in
Section 2.3.
2.5. Option to Include Registrable Shares in Underwritten Offering. Each
PCS Investor, subject to the provisions of Section 2.6, shall have the option to
include its Registrable Shares in an
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<PAGE>
underwritten offering from the Shelf Registration Statement. ATLANTIC shall not
be required to include any PCS Investor's Registrable Shares in such an
underwritten offering unless such PCS Investor accepts the terms of the
underwriting as agreed upon between ATLANTIC and the underwriters (provided such
terms are usual and customary for selling shareholders) and agrees to execute
and/or deliver such documents in connection with such underwritten offering as
ATLANTIC or any other PCS Investor may reasonably request.
2.6. Proration. If the amount of Registrable Shares purchased by PCS
Investors in the Offering exceeds $50,000,000, then the number of Registrable
Shares to be registered by the Shelf Registration Statement on behalf of each
PCS Investor shall be reduced pro rata in proportion to the number of
Registrable Shares purchased by all PCS Investors in the Offering to the extent
necessary to reduce the amount of Registrable Shares registered by the Shelf
Registration Statement to $50,000,000. If the managing underwriter advises that
the number of Registrable Shares sought to be offered through an underwritten
offering from the Shelf Registration Statement would create an Overhang Risk,
then the number of Registrable Shares to be offered on behalf of each PCS
Investor in such underwritten offering shall be reduced pro rata in proportion
to the number of Registrable Shares sought to be offered by all PCS Investors to
the extent necessary to reduce the number of Registrable Shares to be offered to
the number recommended by the managing underwriter.
2.7. Registration Procedures. If and when ATLANTIC is required to file the
Shelf Registration Statement pursuant to Section 2.1, ATLANTIC will (except as
otherwise provided in the Agreement or this Supplemental Agreement), as
expeditiously as possible:
(a) Prepare and file with the Commission the Shelf Registration
Statement and, except as provided in Section 4.4, use its reasonable efforts to
cause the Shelf Registration Statement to become effective and remain effective
for as long as shall be necessary to complete the distribution of all of the
Registrable Shares owned by PCS Investors which are registered by the Shelf
Registration Statement and cannot be sold by the PCS Investors pursuant to Rule
144 under the Securities Act without regard to any volume or manner of sale
limitations;
(b) Prepare and file with the Commission such amendments and
supplements to the Shelf Registration Statement and the prospectus contained
therein as may be necessary, except as provided in Section 4.4, to keep the
Shelf Registration Statement effective for as long as shall be necessary to
complete the distribution of all of the Registrable Shares owned by PCS
Investors which are registered by the Shelf Registration Statement and cannot be
sold by the PCS Investors pursuant to Rule 144 under the Securities Act without
regard to any volume or manner of sale limitations and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of the Registrable Shares registered by the Shelf Registration Statement
whenever the PCS Investors shall desire to sell or otherwise dispose of the same
within such period;
(c) Furnish to each PCS Investor such number of copies of the Shelf
Registration Statement, each amendment and supplement thereto, the prospectus
contained in the Shelf Registration Statement, including any preliminary
prospectus, and any amendment or supplement
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<PAGE>
thereto, in conformity with the requirements of the Securities Act, and such
other documents, as such PCS Investor may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by such PCS Investor;
(d) Use its reasonable efforts to register and qualify, or perfect
exemptions for, the Registrable Shares registered by the Shelf Registration
Statement under the securities or blue sky laws of such jurisdictions as each
PCS Investor shall request, and do any and all other acts and things reasonably
requested by each PCS Investor to assist such PCS Investor to consummate the
public sale or other disposition in such jurisdictions of the Registrable Shares
owned by such PCS Investor, except that ATLANTIC shall not for any such purpose
be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
(e) Otherwise use its reasonable efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the Shelf Registration Statement, which
earning statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(f) Use its reasonable efforts to list the Registrable Shares
registered by the Shelf Registration Statement on any securities exchange on
which any stock of ATLANTIC is then listed, if the listing of such Registrable
Shares is then permitted under the rules of such exchange;
(g) If an offering from the Shelf Registration Statement is an
underwritten offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter or underwriters of such underwritten offering, including, without
limitation, obtaining an opinion of counsel to ATLANTIC and a "comfort letter"
from the independent public accountants to ATLANTIC in the usual and customary
form for such underwritten offering; and
(h) Notify each PCS Investor holding Registrable Shares registered by
the Shelf Registration Statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event of which ATLANTIC has knowledge as a result of which the prospectus
included in the Shelf Registration Statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of circumstances then existing.
3. DEMAND REGISTRATION.
3.1. Demand Registration Statement. In the event ATLANTIC shall not have
(a) filed the Shelf Registration Statement on or prior to June 30, 1997 or (b)
furnished the PCS Investors with a certificate signed by the Chairman of the
Board or a Managing Director of ATLANTIC pursuant
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<PAGE>
to Section 2.2 on or prior to June 30, 1997 (and subsequently filed the Shelf
Registration Statement on or prior to the end of the 60 or 120 day period
referred to in Section 2.2, as applicable), any PCS Investor or PCS Investors
(the "Requesting PCS Investors") may, from and after the later of the dates
referred to in clauses (a) and (b) above, request registration of all or any
part of their Registrable Shares (which request shall state that the Requesting
PCS Investors intend to dispose of such Registrable Shares through an
underwritten public offering), provided that the amount of Registrable Shares
requested to be registered by the Requesting PCS Investors equals or exceeds
$10,000,000 of Registrable Shares (based upon a price of $11.50 per share), and
ATLANTIC shall effect the registration of up to an aggregate of $50,000,000 of
such Registrable Shares (based upon a price of $11.50 per share) under the
Securities Act in accordance with the following provisions of this Article 3;
provided, however, that if the Common Stock is not registered under Section
12(b) or 12(g) of the Exchange Act at the time that the Requesting PCS Investors
request such registration, ATLANTIC may, at its option and in its sole
discretion, elect to repurchase all (up to an aggregate of $50,000,000), but not
less than all, of the Registrable Shares requested to be registered by the
Requesting PCS Investors at a purchase price of $11.50 per share and upon
customary terms and conditions, which purchase price shall be paid by certified
check or wire transfer to each Requesting PCS Investor not later than 30 days
after the date ATLANTIC elects to repurchase such Registrable Shares.
3.2. Participation Rights of Other PCS Investors and Other Shareholders. If
and when ATLANTIC shall be requested by Requesting PCS Investors pursuant to
Section 3.1 to effect the registration of any of their Registrable Shares
(provided that the requested amount equals or exceeds $10,000,000 of Registrable
Shares, based upon a price of $11.50 per share) under the Securities Act,
ATLANTIC shall:
(a) Promptly (but not later than 10 days after such request) give
written notice of such proposed Demand Registration to all PCS Investors
then holding Registrable Shares; provided, that if the Common Stock is not
registered under Section 12(b) or 12(g) of the Exchange Act at the time,
ATLANTIC may, at its option, give such notice to all holders of outstanding
Common Stock other than Security Capital Group Incorporated or its
subsidiaries;
(b) As expeditiously as possible (but not later than 45 days after
such request) file a registration statement (the "Demand Registration
Statement") under the Securities Act with respect to:
(i) Those Registrable Shares that ATLANTIC has been requested to
register pursuant to Section 3.1; and
(ii) All other Registrable Shares that have made written request
to ATLANTIC for registration thereof within 15 days after ATLANTIC has
given written notice to such PCS Investors, up to an aggregate of
$50,000,000 of Registrable Shares then held by PCS Investors including
the Requesting PCS
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<PAGE>
Investors (based upon a price of $11.50 per share) to permit the
disposition by the PCS Investors of such Registrable Shares; provided,
that if the Common Stock is not registered under Section 12(b) or
12(g) of the Exchange Act at the time, ATLANTIC may, at its option,
include in the proposed Demand Registration any or all shares of
Common Stock then held by shareholders that have made written request
to ATLANTIC for registration thereof other than Security Capital Group
Incorporated or its subsidiaries; and
(c) Use its reasonable efforts to effect such Demand Registration as
quickly as practicable.
3.3. ATLANTIC's Ability to Postpone. ATLANTIC may postpone the filing of
the Demand Registration Statement under Section 3.2 for a reasonable period of
time (not exceeding 60 days) if ATLANTIC furnishes the Requesting PCS Investors
with a certificate signed by the Chairman of the Board or a Managing Director of
ATLANTIC stating that, in its good faith judgment, ATLANTIC's Board of Directors
has determined that filing the Demand Registration Statement at such time would
adversely affect a material financing, acquisition, disposition of assets or
stock, merger or other comparable transaction or would require ATLANTIC to make
public disclosure of information not otherwise required to be publicly disclosed
at such time, the public disclosure of which would have a material adverse
effect upon ATLANTIC. ATLANTIC may also postpone the filing of the Demand
Registration Statement under Section 3.2 if a private placement or registration
of ATLANTIC's securities is in progress and the distribution pursuant thereto
not yet completed or if ATLANTIC's Board of Directors has approved a private
placement or registration of ATLANTIC's securities which is not yet in progress.
Any postponement pursuant to the immediately preceding sentence shall not extend
beyond the earlier of (a) 120 days after the date ATLANTIC receives a request
from Requesting PCS Investors under Section 3.1 or (b) 90 days after the date of
the private placement memorandum relating to an offering of ATLANTIC's
securities or the effective date of the registration statement relating to an
offering of ATLANTIC's securities or the filing date of the final prospectus
supplement relating to a shelf offering of ATLANTIC's securities, as applicable.
3.4. Selection of Underwriters. In the case of an underwritten Demand
Registration, the holders of a majority of the shares of Common Stock to be
registered will have the right to select the investment banker(s) and manager(s)
to administer the offering, subject to ATLANTIC's approval, which will not be
unreasonably withheld.
3.5. Agreement with Underwriters. All PCS Investors proposing to distribute
Registrable Shares through an underwritten Demand Registration shall (together
with ATLANTIC as provided in Section 3.9(g)) enter into an underwriting
agreement in customary and usual form with the underwriter or underwriters
selected for such underwriting as provided in Section 3.4.
3.6. Option to Include Common Stock in Underwritten Offering. Each PCS
Investor, subject to the provisions of Sections 3.2 and 3.7, shall have the
option to include its Registrable
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Shares in an underwritten Demand Registration and, at ATLANTIC's option, each
other shareholder shall have the option to include its Common Stock in an
underwritten Demand Registration. The Requesting PCS Investors shall not be
required to include any other PCS Investor's Registrable Shares or other
shareholder's Common Stock in an underwritten Demand Registration unless such
PCS Investor or other shareholder accepts the terms of the underwriting as
agreed upon between ATLANTIC, the Requesting PCS Investors and the underwriters
(provided such terms are usual and customary for selling shareholders) and
agrees to execute and/or deliver such documents in connection with such
underwritten Demand Registration as ATLANTIC or any Requesting PCS Investor may
reasonably request.
3.7. Proration. If the amount of Registrable Shares sought to be registered
by PCS Investors in the Demand Registration exceeds $50,000,000, then the number
of Registrable Shares to be registered by the Demand Registration Statement on
behalf of each PCS Investor including the Requesting PCS Investors shall be
reduced pro rata in proportion to the number of Registrable Shares sought to be
registered by all PCS Investors to the extent necessary to reduce the amount of
Registrable Shares registered by the Demand Registration Statement to
$50,000,000. If the managing underwriter advises that the number of shares of
Common Stock sought to be registered by the PCS Investors and other shareholders
would create an Overhang Risk, then the number of shares of Common Stock to be
registered on behalf of each PCS Investor and each other shareholder shall be
reduced pro rata in proportion to the number of shares of Common Stock sought to
be registered by each PCS Investor and each other shareholder to the extent
necessary to reduce the number of shares of Common Stock to be registered to the
number recommended by the managing underwriter.
3.8. Number of Demand Registrations. The PCS Investors shall together be
entitled to an aggregate of one Demand Registration, and they shall be entitled
to such Demand Registration only if ATLANTIC shall not have (a) filed the Shelf
Registration Statement on or prior to June 30, 1997 or (b) provided the PCS
Investors with a certificate signed by the Chairman of the Board or a Managing
Director of ATLANTIC pursuant to Section 2.2 on or prior to June 30, 1997 (and
subsequently filed the Shelf Registration Statement on or prior to the end of
the 60 or 120 day period referred to in Section 2.2, as applicable). A purchase
by ATLANTIC of the Requesting PCS Investors' Registrable Shares pursuant to
Section 3.1 shall be deemed to satisfy ATLANTIC's obligation to provide the PCS
Investors with one Demand Registration pursuant to this Supplemental Agreement
provided that ATLANTIC shall have offered to purchase all PCS Investors'
Registrable Shares in accordance with the procedures set forth in Section 3.2
and shall have purchased all Registrable Shares then held by PCS Investors that
shall have made written request to ATLANTIC within the 15-day period.
3.9. Registration Procedures. If and when ATLANTIC is required to file the
Demand Registration Statement pursuant to Section 3.2, ATLANTIC will (except as
otherwise provided in the Agreement or this Supplemental Agreement), as
expeditiously as possible:
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<PAGE>
(a) Prepare and file with the Commission the Demand Registration
Statement and use its reasonable efforts to cause the Demand Registration
Statement to become effective and remain effective for as long as shall be
necessary to complete the distribution of all of the Registrable Shares owned by
PCS Investors which are registered by the Demand Registration Statement and
cannot be sold by the PCS Investors pursuant to Rule 144 under the Securities
Act without regard to any volume or manner of sale limitations;
(b) Prepare and file with the Commission such amendments and
supplements to the Demand Registration Statement and the prospectus contained
therein as may be necessary to keep the Demand Registration Statement effective
for as long as shall be necessary to complete the distribution of all of the
Registrable Shares owned by PCS Investors which are registered by the Demand
Registration Statement and cannot be sold by the PCS Investors pursuant to Rule
144 under the Securities Act without regard to any volume or manner of sale
limitations and to comply with the provisions of the Securities Act with respect
to the sale or other disposition of the Registrable Shares registered by the
Demand Registration Statement whenever the PCS Investors shall desire to sell or
otherwise dispose of the same within such period;
(c) Furnish to each PCS Investor such number of copies of the Demand
Registration Statement, each amendment and supplement thereto, the prospectus
contained in the Demand Registration Statement, including any preliminary
prospectus, and any amendment or supplement thereto, in conformity with the
requirements of the Securities Act, and such other documents, as such PCS
Investor may reasonably request in order to facilitate the public sale or other
disposition of the Registrable Shares owned by such PCS Investor;
(d) Use its reasonable efforts to register and qualify, or perfect
exemptions for, the Registrable Shares registered by the Demand Registration
Statement under the securities or blue sky laws of such jurisdictions as each
PCS Investor shall request, and do any and all other acts and things reasonably
requested by such PCS Investor to assist such PCS Investor to consummate the
public sale or other disposition in such jurisdictions of the Registrable Shares
owned by such PCS Investor, except that ATLANTIC shall not for any such purpose
be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
(e) Otherwise use its reasonable efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the Demand Registration Statement, which
earning statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(f) Use its reasonable efforts to list the Registrable Shares
registered by the Demand Registration Statement on any securities exchange on
which any stock of ATLANTIC is then listed, if the listing of such Registrable
Shares is then permitted under the rules of such exchange;
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(g) In the case of an underwritten Demand Registration, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering, including, without limitation, obtaining an opinion of counsel to
ATLANTIC and a "comfort letter" from the independent public accountants to
ATLANTIC in the usual and customary form for such underwritten offering; and
(h) Notify each PCS Investor holding Registrable Shares registered by
the Demand Registration Statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event of which ATLANTIC has knowledge as a result of which the prospectus
included in the Demand Registration Statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of circumstances then existing.
4. PROVISIONS APPLICABLE TO REGISTRATION RIGHTS.
4.1. Expenses.
--------
(a) Except as set forth in Section 4.1(b), all expenses incurred in a
Demand Registration or a Shelf Registration (or any attempted Demand
Registration or Shelf Registration which does not become effective) of the PCS
Investors' Registrable Shares under this Supplemental Agreement shall be paid by
the participating PCS Investors and any other participating shareholders pro
rata based upon the number of shares of Common Stock included in the Demand
Registration or Shelf Registration, as applicable. Such expenses shall include,
without limitation, underwriting and brokerage commissions, printing and
photocopying expenses, fees and disbursements of counsel for the participating
PCS Investors and other participating shareholders as a group (provided,
however, that if a majority in interest of participating PCS Investors and other
participating shareholders cannot agree on one counsel, or if any PCS Investor
uses separate counsel, such PCS Investors shall pay their own fees and
disbursements of counsel), all registration and filing fees under Federal and
state securities laws, expenses of complying with the securities or blue sky
laws of any jurisdictions pursuant to Section 2.7(d) or 3.9(d) and expenses of
ATLANTIC's independent auditors in connection with any comfort letter required
by any underwriters.
(b) ATLANTIC shall pay the expenses of its internal counsel (or, if
ATLANTIC so chooses, its outside counsel) to prepare the Demand Registration
Statement or the Shelf Registration Statement and the prospectus contained
therein and any amendments or supplements thereto, and the expenses of any
special audits to which ATLANTIC shall agree or which shall be necessary to
comply with governmental requirements in connection with such Shelf Registration
or Demand Registration, as applicable.
4.2. Indemnification and Contribution. In the event any Registrable Shares
then held by PCS Investors are included in a Shelf Registration under Article 2
or a Demand Registration under
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Article 3, the indemnification and contribution provisions contained in
Section 4.2 of the Agreement shall apply.
4.3. Assignment of Rights. The rights of the PCS Investors under the
Agreement and this Supplemental Agreement, including the rights to cause
ATLANTIC to privately place and register Registrable Shares, shall be deemed to
be automatically assigned with a transfer of Registrable Shares, but only for
transfers made in accordance with the Articles of Amendment and Restatement and
Bylaws of ATLANTIC, the Agreement, this Supplemental Agreement and any other
agreement governing such Registrable Shares.
4.4. Selling Restrictions.
--------------------
(a) Each PCS Investor agrees to notify ATLANTIC in writing at least five
business days prior to a disposition of Registrable Shares pursuant to a Shelf
Registration Statement or a Demand Registration Statement of such PCS Investor's
intent to dispose of such Registrable Shares. At any time within such five
business day period, ATLANTIC may restrict disposition of such Registrable
Shares for a reasonable period of time (not to exceed 60 days), in which event
such PCS Investor agrees not to dispose of such Registrable Shares, if ATLANTIC
furnishes such PCS Investor with a certificate signed by the Chairman of the
Board or a Managing Director of ATLANTIC stating that, in its good faith
judgment, ATLANTIC's Board of Directors has determined that disposition of such
Registrable Shares at such time would adversely affect a material financing,
acquisition, disposition of assets or stock, merger or other comparable
transaction or would require ATLANTIC to make public disclosure of information
not otherwise required to be publicly disclosed at such time, the public
disclosure of which would have a material adverse effect upon ATLANTIC.
(b) Each PCS Investor agrees that, upon notice from ATLANTIC of the
occurrence of an event described in Section 2.7(h), 3.9(h) or 4.4(a) or of the
issuance by the Commission or any state securities commission of any stop order
suspending the effectiveness or qualification or exemption from qualification of
a Shelf Registration Statement or a Demand Registration Statement, such PCS
Investor shall forthwith discontinue disposition of Registrable Shares until
such PCS Investor receives copies of a supplemented or amended prospectus from
ATLANTIC or until such PCS Investor is advised in writing by ATLANTIC that use
of the prospectus may be resumed, and, if so directed by ATLANTIC, such PCS
Investor will deliver to ATLANTIC all copies of the prospectus then in the
possession of such PCS Investor. ATLANTIC will use its reasonable efforts to
limit the duration of any discontinuance pursuant to this Section 4.4(b).
(c) The PCS Investors shall not, without the prior written consent of
ATLANTIC, effect any public sale or distribution (including sales pursuant to
Rule 144 under the Securities Act) of securities of ATLANTIC during any period
commencing 30 days prior to the filing of and ending 60 days after the effective
date of any registration statement filed by ATLANTIC solely for its benefit or
for the benefit of Security Capital Group Incorporated, its assigns or pledgees
(as to which filing ATLANTIC shall give at least 30 days' prior written notice
to the PCS Investors), other than a registration statement on Form S-8 or any
successor form.
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(d) The restrictions described in this Section 4.4 are in addition to, and
not in limitation of, any other restrictions which may be applicable to
Registrable Shares held by the PCS Investors contained in the Articles of
Amendment and Restatement and Bylaws of ATLANTIC, the Agreement, this
Supplemental Agreement and any other agreement governing such Registrable
Shares.
5. MISCELLANEOUS
5.1. Notices.
-------
(a) All communications under this Supplemental Agreement shall be in
writing and shall be mailed by first class mail, postage prepaid, or telegraphed
or telexed, or given by facsimile, or delivered by hand:
(i) if to ATLANTIC, at:
Security Capital Atlantic Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attn: Ariel Amir
Facsimile: (505) 988-8920
or at such other address as it may have furnished in writing to the PCS
Investors, or
(ii) if to any PCS Investor, to the address of such PCS Investor as
it appears in the stock ledger of ATLANTIC.
(b) Any notice so addressed, when mailed by registered or certified mail
shall be deemed to be given three days (seven days in the case of PCS Investors
whose address is not in the United States of America) after so mailed, and when
telegraphed or telexed or delivered by hand shall be deemed to be given
immediately, and when given by facsimile, shall be deemed to be given when
confirmed electronically or telephonically provided that the original is mailed
by first class mail, postage prepaid, at the same time in accordance with
Section 6.3(a).
5.2. Successors and Assigns. Except as otherwise expressly provided herein,
this Supplemental Agreement shall inure to the benefit of and be binding upon
the successors and assigns of ATLANTIC and each of the PCS Investors.
5.3. Amendment and Waiver. This Supplemental Agreement may be amended, and
the observance of any term of this Supplemental Agreement may be waived, but
only with the written consent of ATLANTIC and PCS Investors holding two-thirds
of the Registrable Shares then held by PCS Investors; provided, however, that no
such amendment or waiver shall take away any registration right of any PCS
Investor without the consent of such PCS Investor; provided, further,
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that without the consent of any other PCS Investor, any PCS Investor may from
time to time enter into one or more agreements amending, modifying or waiving
the provisions of this Supplemental Agreement with respect to such PCS Investor
if such action does not adversely affect the rights or interest of any other PCS
Investor. No delay on the part of any party in the exercise of any right, power
or remedy shall operate as a waiver thereof, nor shall any single or partial
exercise by any party of any right, power or remedy preclude any other or
further exercise thereof, or the exercise of any other right, power or remedy.
5.4. Counterparts. One or more counterparts of this Supplemental Agreement
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
5.5. Governing Law. This Supplemental Agreement shall be construed in
accordance with and governed by the internal laws of the State of Maryland.
5.6. Invalidity of Provisions. If any provision of this Supplemental
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
5.7. Headings. The headings in this Supplemental Agreement are for
convenience of reference only and shall not be deemed to alter or affect the
meaning or interpretation of any provisions hereof.
5.8. Agreement. The terms and provisions of the Agreement, as supplemented
by this Supplemental Agreement, shall be and remain in full force and effect.
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IN WITNESS WHEREOF, the undersigned have executed this Supplemental
Agreement as of the date and year first above written.
SECURITY CAPITAL ATLANTIC INCORPORATED
By: /s/ Paul E. Szurek
------------------------------------
Paul E. Szurek
Secretary
---------------------------------------
NAME OF PCS INVESTOR
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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INVESTOR AGREEMENT
------------------
THIS INVESTOR AGREEMENT (this "Agreement") is made and entered into as of
October 28, 1993, by and between Security Capital Atlantic Incorporated, a
Delaware corporation (the "Company"), and Security Capital Realty Incorporated,
a Delaware corporation (the "Purchaser").
W I T N E S S E T H
-------------------
WHEREAS, the Purchaser desires to purchase shares of Common Stock, $.01 par
value per share, of the Company (the "Shares");
WHEREAS, the Purchaser is willing to purchase the Shares upon the terms and
conditions set forth herein and in consideration of the covenants of the Company
contained herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements and warranties herein contained, the parties hereto agree
as follows:
1. Purchase of Shares. Subject to the terms and conditions herein set
forth, the Purchaser agrees to purchase a minimum of 21,500 Shares at a price of
$1,000 per Share for an aggregate purchase price of $21,500,000.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows:
(a) Due Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware with all necessary power to own its properties and to
conduct its business as now conducted. The Company is duly qualified to do
business, and is in good standing, in each jurisdiction where the character
of its properties owned or held under lease or the nature of its activities
makes such qualification necessary, except where the failure to so qualify
will not have a material adverse effect on the Company and its subsidiaries
taken as a whole.
<PAGE>
(b) Authorization. The Company has the requisite power to enter into
this Agreement and to carry out its obligations hereunder. This Agreement
has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding agreement of the Company enforceable in
accordance with its terms, except to the extent that its enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or other
laws affecting the enforcement of creditors' rights generally or by general
equitable principles. Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby, nor compliance
with the terms, conditions or provisions of this Agreement will be a
violation of any of the terms, conditions or provisions of the Company's
Certificate of Incorporation or Bylaws or of any material agreement or
instrument to which the Company is a party or by which the Company or any
of its material properties may be bound, or constitute a default or create
a right of termination or acceleration thereunder, or result in the
creation or imposition of any security interest, mortgage, lien, charge or
encumbrance of any nature whatsoever upon the Company or any of its
properties or assets.
(c) Issuance. The Shares, when sold and delivered by the Company to
the Purchaser pursuant to this Agreement, will be duly authorized, validly
issued and, when paid for, will be fully paid and non-assessable, free and
clear of any security interest, lien, charge or encumbrance whatsoever
(other than arising from this Agreement) and will have the voting powers,
preferences and other rights, and will be subject to qualifications and
restrictions, as set forth in the Company's Certificate of Incorporation or
any amendment thereto or restatement thereof.
(d) Real Estate Operating Company. As of the date of the Company's
first investment, other than any short-term investment of funds pending
long-term commitment, at least 50% of its assets, valued at cost, were
invested in real estate that was "managed or developed" within the meaning
of Department of Labor regulations at 29 C.F.R. section 2510.3-101(e)(1).
At least 50% of its assets, valued at cost, have been, and will continue to
be, invested in real estate which is "managed or developed", within the
meaning of such
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regulations, on at least one day in each "annual valuation period" of the
Company, within the meaning of 29 C.F.R. section 2510.3-101(d)(5)(ii). At
all times from the date of the Company's first investment, other than any
short-term investment of funds pending long-term commitment, the Company in
the ordinary course of its business has been, and will continue to be,
engaged directly in real estate management or development activities,
within the meaning of 29 C.F.R. section 2510.3-101(e)(2).
3. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows:
(a) Due Organization. The Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, with corporate power to own its properties and to conduct its
business as now conducted.
(b) Authorization. The Purchaser has the requisite power to enter into
this Agreement and to carry out its obligations hereunder. This Agreement
has been duly authorized, executed and delivered by the Purchaser and
constitutes a valid and binding agreement of the Purchaser enforceable in
accordance with its terms, except to the extent that its enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or other
laws affecting the enforcement of creditors' rights generally or by general
equitable principles. Neither the execution and delivery of this Agreement,
consummation of the transactions contemplated hereby, nor compliance with
the terms, conditions or provisions of this Agreement will be a violation
of any of the terms, conditions or provisions of the Purchaser's charter or
bylaws, or of any material agreement or instrument to which the Purchaser
is a party or by which the Purchaser or any of its material properties may
be bound or constitute a default or create a right of termination or
acceleration thereunder.
(c) Purchase for Investment. The Purchaser is purchasing the Shares
for its own account and not with a view to or for sale in connection with
any public distribution thereof within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). The Purchaser understands that the
Shares will not be registered under the Securities
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<PAGE>
Act and cannot be resold without registration thereunder or exemption
therefrom.
(d) Sophistication of the Purchaser. The Purchaser believes it has
sufficient knowledge and experience in financial and business matters to
enable it to evaluate the merits and risks of investment in the Shares.
The Purchaser has the ability to bear the economic risk of acquiring the
Shares.
(e) Access to Information. The Purchaser has been supplied with, or
had access to, information to which a reasonable investor would attach
significance in making investment decisions, including, but not limited to,
information with respect to the Company's current financial condition,
business and prospects as it has requested, to answer all of its inquiries
about the Company, and to enable it to make its decision to purchase the
Shares.
(f) Transfer Restrictions. The Purchaser hereby acknowledges that the
Shares will not be registered under the Securities Act or any state
securities laws, and will be offered and sold pursuant to exemptions
therefrom. The Purchaser agrees that it will not transfer all or any
portion of such Shares unless such transfer has been registered or is
exempt from registration under the Securities Act and any applicable state
securities laws. The Shares shall contain a prominent legend with respect
to the restrictions specified in this Section 4(f). The Purchaser
acknowledges that it may not transfer the Shares if such transaction would,
in the reasonable belief of the Company, constitute a non-exempt prohibited
transaction under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), would jeopardize the Company's election, if any, to be
taxed as a real estate investment trust, would cause the Company's assets
to become "plan assets" as defined in regulations at 29 C.F.R. section
2510.3-101, or would otherwise cause the Company to be subject to ERISA.
(g) Accredited Investor. The Purchaser is an "accredited investor,"
as such term is defined in Regulation D promulgated under the Securities
Act.
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<PAGE>
4. Conditions to the Obligations of the Company. The obligations of the
Company under this Agreement are subject to the fulfillment of each of the
following conditions:
(a) Representations and Warranties. The representations and
warranties in this Agreement made by the Purchaser shall be true in all
material respects on the date hereof.
(b) Performance. The Purchaser shall have performed and complied in
all material respects with all agreements, covenants, obligations and
conditions required by this Agreement to be performed or complied with by
them.
(c) Injunctions. No preliminary or permanent injunction or other
final order by any United States Federal or state court shall have been
issued which prevents the purchase or sale of the Shares.
5. Conditions to the Obligations of the Purchaser. The obligations of
the Purchaser under this Agreement are subject to the fulfillment of each of the
following conditions:
(a) Representations and Warranties. The representations and
warranties in this Agreement made by the Company shall be true in all
material respects on the date hereof.
(b) Performance. The Company shall have performed and complied in all
material respects with all agreements, covenants, obligations and
conditions required by this Agreement to be performed or complied with by
it.
(c) Injunctions. No preliminary or permanent injunction or other final
order by any United States Federal or state court shall have been issued
which prevents the purchase or sale of the Shares.
(d) Offering. The Shares shall have been offered and sold in a
transaction exempt from the registration requirements of the Securities
Act. Such transaction shall be in compliance with the Securities Act and
with all applicable rules and regulations of the Securities and Exchange
Commission and all applicable state securities laws.
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<PAGE>
(e) Material Adverse Change. There shall not have occurred since the
date hereof any material adverse change to the business, properties or
financial condition of the Company not caused by any action of the
Purchaser or any of its affiliates (other than the Company).
(f) Legal Proceedings. The absence of any newly adopted statutes or
regulations, or any pending or threatened legal or governmental
proceedings, which would have a material adverse effect on the Shares being
offered or the Company's business or operations, or which challenge or seek
to enjoin any sale of Shares to the Purchaser.
6. Covenants of the Company. The Company covenants and agrees with the
Purchaser as follows:
(a) Board Representation. So long as the Purchaser owns 10% or more
of the Shares, the Company shall not increase the number of members of its
Board of Directors to more than seven (7), and Purchaser shall be entitled
to designate one or more persons for nomination to the Company Board of
Directors (such person, a "Nominee") as follows and the Company will use
its best efforts to cause the election of such Nominee or Nominees:
(i) So long as the Purchaser owns at least 10% but less than 20%
of the outstanding Shares, two (2) Nominees;
(ii) So long as the Purchaser owns 20% or more of the
outstanding Shares, three (3) Nominees.
(b) Budget. The Company shall submit its annual budget to the
Purchaser in December of each year and shall not implement or approve such
budget until the Company receives the approval of the Purchaser.
(c) Expenses. Without the prior approval of the Purchaser, the
Company shall not incur expenses in any year exceeding (i) any line item in
the annual budget by 20% and (ii) the total expenses set forth in the
annual budget by 5%.
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<PAGE>
(d) Assets. Without the prior approval of the Purchaser's internal
investment committee, the Company shall not acquire or sell any assets in
any single transaction or any series of related transactions where the
aggregate purchase price paid or received by the Company exceeds
$5,000,000.
(e) Contracts. The Company shall submit to the Purchaser for its
approval any existing contract with a service provider and, without the
prior approval of the Purchaser, the Company shall not enter into any new
contract with a service provider (i) for investment management, property
management, or leasing services or (ii) that reasonably contemplates annual
contract payments by the Company in excess of $100,000. In the event that
the Purchaser fails to approve any such existing service contract, the
Company shall take reasonable steps to terminate or amend such contract to
the satisfaction of the Purchaser. All service contracts entered by the
Company shall be terminable by the Company, without cause, upon not more
than 30-days' notice.
(f) Inspection. At any time during regular business hours and as
often as reasonably requested of the Company's officers, permit the
Purchaser or any authorized employee, agent or representative of the
Purchaser to examine and make copies and abstracts from the records and
books of account of, and to visit the properties of, the Company and to
discuss the affairs, finances, and accounts of the Company with any of its
officers of directors; provided, that all costs and expenses of such
inspection shall be borne by the Purchaser.
The approval of the Purchaser pursuant to paragraphs (b), (c) and (e) of
this Section 6 shall be deemed to have been received if the Purchaser does
not communicate otherwise to the Company by the fifteenth day after the
Purchaser shall have received a written request for such approval.
7. Registration Rights.
-------------------
(a) Demand. At any time after (i) the Company has completed a public
offering of the Shares under the Securities Act of 1933, as amended (the
"Securities Act") and the Shares
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<PAGE>
are registered under Section 12(b) or 12(g) of the Exchange Act of 1934, as
amended (the "Exchange Act") and (ii) the first anniversary of the date of
this Agreement, the Purchaser may request one registration of all or any
part of its Registrable Securities (as defined herein) pursuant to Rule 415
under the Securities Act by delivering written notice to the Company
specifying the number of Registrable Securities that the Purchaser desires
to sell and the Company shall use its reasonable efforts to effect the
registration of such Registrable Securities under the Securities Act.
(b) Registration Procedures. If and whenever the Company is required
by any of the provisions of this Section 3 to use its reasonable efforts to
effect the registration of any of the Registrable Securities under the
Securities Act, the Company shall:
(i) prepare and file with the Commission a registration
statement with respect to such securities and use its reasonable
efforts to cause such registration statement to become effective and
remain effective for as long as shall be necessary to complete the
distribution of at least 90% of the Registrable Securities so
registered;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for so long as shall be necessary to complete the
distribution of at least 90% of the Registrable Securities so
registered and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities
covered by such registration statement whenever the holders of such
Registrable Securities shall desire to sell or otherwise dispose of
the same within such period;
(iii) furnish to each seller of Registrable Securities such
numbers of copies of such registration statement, each amendment and
supplement thereto, the prospectus included in such registration
statement, including any preliminary prospectus, and any amendment
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<PAGE>
or supplement thereto, and such other documents, as such seller of
Registrable Securities may reasonably request in order to facilitate
the sale or other disposition of the Registrable Securities owned by
such holder;
(iv) use its reasonable efforts to register and qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller of
Registrable Securities shall reasonably request, and do any and all
other acts and things reasonably requested by such seller of
Registrable Securities to assist such seller to consummate the public
sale or other disposition in such jurisdictions of the securities
owned by such seller, except that the Company shall not for any such
purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or to file therein
any general consent to service of process;
(v) otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months,
beginning with the first fiscal quarter beginning after the effective
date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act;
(vi) use its reasonable efforts to list such securities on any
securities exchange on which any securities of the Company are then
listed, if the listing of such securities is then permitted under the
rules of such exchange; and
(vii) notify each seller of Registrable Securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event of which it has knowledge as a result of which
the prospectus included in such registration statement, as then in
effect, contains an untrue statement of a
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<PAGE>
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing.
(c) Company's Ability to Postpone. The Company shall have the right
to postpone the filing of a registration statement under this Section 7 for
a reasonable period of time (not exceeding 60 days) if the Company
furnishes the Purchaser with a certificate signed by the Chairman of the
Board or the President of the Company stating that, in its good faith
judgment, the Company's board of directors has determined that effecting
the registration at such time would adversely affect a material financing,
acquisition, disposition of assets or stock, merger or other comparable
transaction or would require the Company to make public disclosure of
information the public disclosure of that would have a material adverse
effect upon the Company.
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<PAGE>
(d) Expenses.
(i) Except as set forth in Section (d)(ii), all expenses
incurred in the registration of Registrable Securities under this
Agreement shall be paid by the Purchaser. The expenses shall include,
without limitation, the expenses of preparing the registration
statement and the prospectus used in connection therewith and any
amendment or supplement thereto, printing and photocopying expenses,
fees and disbursements of counsel for the holders of Registrable
Securities, all registration and filing fees under Federal and state
securities laws, and expenses of complying with the securities or blue
sky laws of any jurisdictions.
(ii) The Company shall pay the expenses of any audits to which
the Company shall agree and which shall be necessary to comply with
governmental requirements in connection with such registration.
(e) Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(i) Indemnity by Company. Without limitation of any other
indemnity provided to the Purchaser, to the extent permitted by law,
the Company will indemnify and hold harmless the Purchaser and its
officers, directors and partners and each individual, partnership,
corporation, trust or unincorporated organization (a "Person") if any,
who controls the Purchaser (within the meaning of the Securities Act
or the Exchange Act), against any losses, claims, damages, liabilities
and expenses (joint or several) to which they may become subject under
the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages, liabilities and expenses (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of
a material fact contained in any registration statement (including any
preliminary prospectus or final prospectus contained therein or any
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<PAGE>
amendments or supplements thereto), (ii) the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state
securities law, and the Company will reimburse the Purchaser and its
officers, directors and partners, and any controlling person thereof
for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability, expense or action; provided, however, that the
Company shall not be liable in any such case for any such loss, claim,
damage, liability, expense or action to the extent that it arises out
of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in
connection with such registration by the Purchaser or any officer,
director, partner or controlling person thereof.
(ii) Indemnity by the Purchaser. In connection with any
registration statement in which the Purchaser is participating, the
Purchaser will furnish to the Company in writing such information and
affidavits as the Company reasonably requests for use in connection
with any such registration statement or prospectus and, to the extent
permitted by law, will indemnify the Company, its directors and
officers and each Person who controls the Company (within the meaning
of the Securities Act or Exchange Act) against any losses, claims,
damages, liabilities and expenses resulting from any Violation, but
only to the extent that such Violation is contained in any information
or affidavit so furnished in writing by the Purchaser; provided, that
the obligation to indemnify will be several and not joint and several
with any other Person and will be limited to the net amount received
by the Purchaser from the sale of Registrable Securities pursuant to
such registration statement.
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(iii) Notice; Right to Defend. Promptly after receipt by an
indemnified party under this Section (e) of notice of the commencement
of any action (including any governmental action), such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section (e), deliver to the indemnifying
party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, if the
indemnifying party agrees in writing that it will be responsible for
any costs, expenses, judgments, damages and losses incurred by the
indemnified party with respect to such claim, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying
party, if the indemnified party reasonably believes that
representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party
under this Section (e) only if and to the extent that such failure is
prejudicial to its ability to defend such action, and the omission so
to deliver written notice to the indemnifying party will not relieve
it of any liability that it may have to any indemnified party other
than under this Section (e).
(iv) Contribution. If the indemnification provided for in this
Section (e) is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss,
liability, claim, damage or expense referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage
or expense in such
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<PAGE>
proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the
other hand in connection with the statements or omissions which
resulted in such loss, liability, claim, damage or expense as well as
any other relevant equitable considerations. The relevant fault of the
indemnifying party and the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. Notwithstanding the foregoing, the amount the Purchaser
shall be obligated to contribute pursuant to this Section (e)(iv)
shall be limited to an amount equal to the proceeds to the Purchaser
of the Registrable Securities sold pursuant to the registration
statement which gives rise to such obligation to contribute (less the
aggregate amount of any damages which the Purchaser has otherwise been
required to pay in respect of such loss, claim, damage, liability or
action or any substantially similar loss, claim, damage, liability or
action arising from the sale of such Registrable Securities).
(v) Survival of Indemnity. The indemnification provided by this
Section (e) shall be a continuing right to indemnification and shall
survive the registration and sale of any securities by any Person
entitled to indemnification hereunder and the expiration or
termination of this Agreement.
(f) Limitations on Registration Rights.
(i) The Company shall not, without the prior written consent of
the Purchaser include in any registration in which the Purchaser has a
right to participate pursuant to this Agreement any securities of any
Person other than the Purchaser.
(ii) The Purchaser shall not, without the prior written consent
of the Company, effect any public sale or
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distribution (including sales pursuant to Rule 144 under the
Securities Act) of securities of the Company during any period
commencing 30 days prior to and ending 60 days after the effective
date any registration statement filed by the Company on behalf of any
Person (including the Company), other than a registration statement on
Form S-8 or any successor form.
(g) Registrable Security. The term Registerable Security means (i)
any Shares issued to the Purchaser pursuant to the terms of this Agreement,
(ii) any other Shares issued to the Purchaser and (iii) any Shares or other
securities that may subsequently be issued with respect to such Shares as a
result of a stock split or dividend or any sale, transfer, assignment or
other transaction by the Company or the Purchaser involving the Shares and
any securities into which the Shares may thereafter be changed as a result
of merger, consolidation, recapitalization or otherwise. As to any
particular Registrable Securities, such securities will cease to be
Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold to the
public through a broker, dealer or market-maker in compliance with Rule 144
under the Securities Act.
(h) Assignment. The Purchaser may assign without the consent of the
Company its rights under this Section 7 with respect to any Registrable
Securities to any party (a "Lender") to whom it pledges, assigns or
hypothecates such Registrable Securities. If (i) the Purchaser assigns its
rights under this Section 7 with respect to Registrable Securities having
an aggregate offering value of at least $10,000,000 to a Lender, (ii) any
Event of Default occurs and is continuing under the related loan agreement
between the Purchaser and the Lender and (iii) the Company has not
completed a public offering of the Shares under the Securities Act and the
Shares are not registered under Section 12(b) or 12(g) of the Exchange Act,
the Lender may request one registration of all or part of its Registrable
Securities having an aggregate offering value of at least $10,000,000 on
Form S-11 (or any successor form) under the Securities Act by delivering
written notice to the Company specifying the number of Registrable
Securities that the Lender desires to sell and
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the Company shall use its reasonable efforts to effect the registration of
such Registrable Securities under the Securities Act in accordance with and
subject to the provisions of this Section 7.
8. Rule 144. From and after the time the Company has securities
registered under Section 12(b) or 12(g) of the Exchange Act, in order to permit
the Purchaser to sell the Registrable Securities it holds, if it so desires,
from time to time pursuant to Rule 144 under the Securities Act, or any
successor to such rule, the Company shall make available adequate current public
information and file with the Commission in a timely manner all reports and
other documents required of the Company under the Exchange Act.
9. Miscellaneous.
(a) Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and shall remain in full force and effect following
the consummation of the sale and purchase of the Shares; provided, that this
Agreement shall terminate and be of no further force or effect if the
Purchaser's beneficial ownership of Shares decreases below 10% of the Shares
then outstanding.
(b) Successors and Assigns. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto and their respective heirs, personal
representatives, successors, assigns and affiliates, but shall not be assignable
by any party hereto without the prior written consent of the other party hereto,
except as set forth in Section 7(h).
(c) Notices. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be in writing and shall be given by
delivery, by telex, telecopier or by mail (registered or certified mail, postage
prepaid, return receipt requested) to the respective parties as follows:
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If to the Company:
Security Capital Atlantic Incorporated
1790 Commerce Park Drive
El Paso, Texas 79912
Attention: Paul E. Szurek
Facsimile: (915) 877-3301
If to the Purchaser:
Security Capital Realty Incorporated
1790 Commerce Park Drive
El Paso, Texas 79912
Attention: Paul E. Szurek
Facsimile: (915) 877-3301
or to such other address with respect to a party as such party shall notify the
other in writing.
(d) Waiver. No party may waive any of the terms or conditions of this
Agreement, except by a duly executed writing referring to the specific provision
to be waived.
(e) Amendment. This Agreement may be amended only by a writing duly
executed by both the Company and the Purchaser.
(f) Severability. Insofar as is possible, each provision of this Agreement
shall be interpreted so as to render it valid and enforceable under applicable
law and severable from the remainder of this Agreement. A finding that any such
provision is invalid or unenforceable in any jurisdiction shall not affect the
validity or enforceability of any other provision or the validity or
enforceability of such provision under the laws of any other jurisdiction.
(g) Entire Agreement. This Agreement constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties hereto and their affiliates, with respect to the subject
matter hereof.
(h) Expenses. Except as otherwise expressly contemplated herein to the
contrary, regardless of whether the transactions
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contemplated hereby are consummated, each party hereto shall pay its own
expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby.
(i) Captions. The Section and Paragraph captions herein are for convenience
of reference only, do not constitute part of this Agreement and shall not be
deemed to limit or otherwise affect any of the provisions hereof.
(j) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
(k) Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the day and year first executed.
SECURITY CAPITAL ATLANTIC INCORPORATED
/s/ Paul E. Szurek
_____________________________________
Paul E. Szurek
Secretary
SECURITY CAPITAL REALTY INCORPORATED
/s/ Constance B. Moore
_____________________________________
Constance B. Moore
Senior Vice President
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EXHIBIT 21
Security Capital Atlantic Incorporated has 19 consolidated wholly owned
subsidiaries carrying on the same line of business and operating in the United
States.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Independent
Public Accountants and Experts" and to the use of our report dated May 21,
1996 with respect to the balance sheet as of April 30, 1996 of Homestead
Village Properties Incorporated ("Homestead") included in the Prospectus of
Homestead which is made a part of the Registration Statement on Form S-11 and
the related Prospectus of Security Capital Atlantic Incorporated for the
registration of its common stock.
Ernst & Young LLP
Dallas, Texas
June 27, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of (a) our report dated January 26, 1996 (except for Note 3, as to
which the date is February 5, 1996) with respect to the financial statements
at December 31, 1995 and 1994 and for each of the years ended December 31,
1995 and 1994 and the period October 26, 1993 (inception) through December 31,
1993 and schedule of Security Capital Atlantic Incorporated ("ATLANTIC"), (b)
our reports dated March 5, 1996 with respect to the combined Historical
Summaries of Gross Income and Direct Operating Expenses of the Group A and
Group B Properties of ATLANTIC and (c) our report dated April 26, 1996 with
respect to the combined Historical Summary of Gross Income and Direct
Operating Expenses of the Group C Properties of ATLANTIC, all of which are
included in the Registration Statement on Form S-11 and the related Prospectus
of ATLANTIC for the registration of its common stock.
Ernst & Young LLP
West Palm Beach, Florida
June 27, 1996
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees and Shareholders of Security Capital Pacific Trust
The Board of Trustees and Shareholders of Security Capital Atlantic
Incorporated
The Board of Trustees and Shareholders of Security Capital Group Incorporated
With respect to the accompanying registration statement on Form S-11 of
Security Capital Atlantic Incorporated which includes a prospectus related to
Homestead Village Properties Incorporated, we consent to:
(1) the use of our report dated May 1, 1996 on the combined balance
sheets of the PTR-Homestead Village Group as of December 31, 1994 and 1995,
the related combined statements of operations, owner's equity and cash
flows for each of the years in the three-year period ended December 31,
1995, and the related combined schedule as of December 31, 1995, which
report is included herein;
(ii) the use of our report dated May 1, 1996 on the combined balance
sheet of the Atlantic-Homestead Village Group as of December 31, 1995, the
related combined statements of operations, owners' equity, and cash flows
for the period from April 3, 1995 (date of formation) through December 31,
1995 and the related combined schedule as of December 31, 1995, which
report is included herein;
(iii) the use of our report dated May 1, 1996 on the combined balance
sheets of SCG-Homestead Village Group as of December 31, 1994 and 1995 and
the related combined statements of operations, shareholder's equity and
cash flows for each of the years in the three-year period ended December
31, 1995, which report is included herein; and
(iv) the reference to our firm under the heading "independent public
accountants and experts" in the Registration Statement.
KPMG Peat Marwick LLP
Chicago, Illinois
June 27, 1996
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
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0 0
0 0
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