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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER 1-12303
SECURITY CAPITAL ATLANTIC INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 85-0415503
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
SIX PIEDMONT CENTER, SUITE 600
ATLANTA, GEORGIA 30305
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(404) 237-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $0.01
per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Series A Cumulative Redeemable
Preferred Stock, par value
$0.01 per share New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Based on the closing price of the registrant's common stock on March 18,
1998, the aggregate market value of the voting common equity held by non-
affiliates of the registrant was approximately $489,412,223.
At March 18, 1998, there were outstanding approximately 47,760,965 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1998 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
<TABLE>
<C> <S> <C>
PART I
1. Business............................................................ 1
Security Capital Atlantic Incorporated.............................. 1
1997 Strategic Accomplishments...................................... 2
Business Strategy................................................... 4
Operating System.................................................... 7
Directors and Officers of ATLANTIC.................................. 10
Employees........................................................... 15
Competition......................................................... 15
Americans with Disabilities Act..................................... 15
Environmental Matters............................................... 15
Insurance Coverage.................................................. 16
2. Properties.......................................................... 16
Portfolio Composition............................................... 16
Geographic Distribution............................................. 17
Communities......................................................... 17
3. Legal Proceedings................................................... 24
4. Submission of Matters to a Vote of Security Holders................. 24
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters............................................................. 25
6. Selected Financial Data............................................. 28
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations............................................... 29
Overview............................................................ 30
Real Estate Investments............................................. 31
Results of Operations............................................... 34
Liquidity and Capital Resources..................................... 40
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 46
8. Financial Statements and Supplementary Data......................... 46
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure Matters........................................ 46
PART III
10. Directors and Executive Officers of the Registrant.................. 47
11. Executive Compensation.............................................. 47
12. Security Ownership of Certain Beneficial Owners and Management...... 47
13. Certain Relationships and Related Transactions...................... 47
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 47
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PART I
ITEM 1. BUSINESS
SECURITY CAPITAL ATLANTIC INCORPORATED
The objective of Security Capital Atlantic Incorporated ("ATLANTIC") is to
be the preeminent multifamily real estate operating company in its target
market. ATLANTIC is an internally managed, fully integrated operating company
with 90 professionals and 520 property-level and support personnel dedicated
to carrying out its operating strategy which focuses on the development,
acquisition, operation and long-term ownership of multifamily communities.
ATLANTIC is a Maryland corporation and has elected to be taxed as a real
estate investment trust ("REIT") for federal income tax purposes.
At January 31, 1998, ATLANTIC's portfolio consisted of 28,468 multifamily
units, including 6,775 units under construction or in planning, in 17
metropolitan areas and 51 submarkets in growth areas of the south-Atlantic,
mid-Atlantic and midwestern regions of the United States. At January 31, 1998,
the total expected investment of ATLANTIC's 77 operating communities,
including budgeted capital expenditures, was approximately $1.15 billion and
the total budgeted development cost of ATLANTIC's 24 communities under
construction or in planning was approximately $450.8 million. Additionally, at
January 31, 1998, ATLANTIC had land in planning and under control for the
development of 1,752 units with a total budgeted development cost of $126.3
million.
To achieve long-term sustainable growth in per share cash flow, ATLANTIC
utilizes a highly-focused, value-added operating system. This system is
designed to maximize the operating performance of its core portfolio and
concentrates its experienced team of professionals on developing and acquiring
industry-leading product in targeted submarkets exhibiting strong job growth
and favorable demographic trends. Since its inception in 1993, ATLANTIC has
employed a research-driven investment approach, deploying its capital in
markets and submarkets that exhibit strong long-term market fundamentals.
Additionally, ATLANTIC's investment strategy targets one of the largest and
most underserved segments of the renter population utilizing a pricing
strategy that appeals to the value-conscious resident. See "--Business
Strategy--Investment Strategy--Value-Conscious Pricing Approach".
The table below illustrates the growth in ATLANTIC's multifamily portfolio
resulting from the execution of its investment strategy (in thousands):
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<CAPTION>
TOTAL EXPECTED INVESTMENT(1)
-----------------------------------------------
DECEMBER 31,
JANUARY 31, ----------------------------------
1998 1997 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating communities:
Acquired, net of disposi-
tions..................... $ 932,170 $ 921,214 $ 878,029 $ 757,986
Developed.................. 213,063 212,800 81,832 25,462
---------- ---------- ---------- ----------
Total operating communi-
ties.................... 1,145,233 1,134,014 959,861 783,448
Communities under construc-
tion........................ 383,833 382,873 290,486 176,740
Communities in planning and
owned(2).................... 66,924 66,923 53,410 69,788
---------- ---------- ---------- ----------
Total owned communi-
ties(3)................. $1,595,990 $1,583,810 $1,303,757 $1,029,976
========== ========== ========== ==========
% of owned communities
targeted to the moderate
income resident............. 56% 56% 47% 40%
========== ========== ========== ==========
Communities in planning and
under control(2)............ $ 126,292 $ 127,518 $ 139,275 $ 48,261
========== ========== ========== ==========
</TABLE>
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(1) For operating communities, represents cost, plus budgeted capital
expenditures. For communities under construction and in planning,
represents total budgeted development cost, which includes the cost of
land,
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fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through a contingent contract or letter of intent) during
a contractually agreed-upon time period to acquire land for future
development of multifamily communities, but does not currently own the
land.
(3) Does not include land held for future development (construction is not
anticipated to commence in the next 12 months), which is less than 1% of
assets, based on cost.
The ownership of the common equity of ATLANTIC by Security Capital Group
Incorporated ("Security Capital"), ATLANTIC's principal shareholder, dropped
from 56.9% at December 31, 1996 to 49.9% at December 31, 1997. Security
Capital's ownership interests in the other operating companies in which it
invests are generally between 30% and 50%. By not participating in ATLANTIC's
future securities offerings on a proportionate basis, Security Capital intends
to allow its ownership in ATLANTIC to drop further such that its ownership
level in ATLANTIC is more consistent with its other interests.
1997 STRATEGIC ACCOMPLISHMENTS
Operating Accomplishments
. ATLANTIC's growth in 1997 was driven by its successful investment
strategy with 50% of growth in its funds from operations produced by the
stabilization of new development communities and 28% by the positive
impact of acquisitions completed in 1996 and 1997. ATLANTIC's communities
that were fully operational throughout 1997 and 1996 realized an increase
in adjusted net operating income of 3.49% and generated 22% of ATLANTIC's
funds from operations growth. The contribution of ATLANTIC's development
activities to funds from operations growth occurred even though the
short-term dilution resulting from these activities was greater in 1997
than in 1996 (average of $250.6 million of assets under development or in
lease-up during 1997 as compared to $168.4 million during 1996). As these
communities reach stabilization in 1998 and subsequent years, they are
expected to add significantly to ATLANTIC's long-term performance.
. ATLANTIC generated earnings from operations of $51.1 million in 1997, an
increase of $18.1 million over 1996. ATLANTIC's cash flow from operations
was $83.1 million for 1997 as compared to $54.4 million for 1996.
ATLANTIC's 45 communities that were fully operating for both 1996 and
1997 realized an increase in adjusted net operating income of 3.49%. This
increase is the result of a 1.95% increase in ATLANTIC's collections and
a 0.47% decrease in ATLANTIC's operating expenses.
. On September 9, 1997, ATLANTIC became an internally managed REIT when it
acquired the operations and business of its external REIT management and
property management companies in exchange for 2,306,591 shares of
ATLANTIC's common stock. Both companies were owned by Security Capital.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Merger Transaction".
Investment Accomplishments
. The development of multifamily communities continues to be a major
component of ATLANTIC's investment strategy. During 1997, ATLANTIC
commenced construction on 3,892 units at a total expected investment of
$264.7 million. Of that total, 73.7% were communities that are targeted
to the moderate income resident.
. In 1997, ATLANTIC completed construction of seven communities aggregating
2,124 units at a total expected investment of $132.2 million.
. Five developed communities representing a total expected investment of
$109.5 million achieved stabilization in 1997, adding 1,892 units to
ATLANTIC's stabilized portfolio.
. ATLANTIC continues to take advantage of attractive investment
opportunities throughout its target market. During 1997, ATLANTIC
acquired six operating communities in five primary target market cities
consisting of 1,220 units at a total expected investment of $59.9
million.
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. As a result of ATLANTIC's market research efforts, ATLANTIC entered two
new markets, Columbus, Ohio and Indianapolis, Indiana, in 1997. These
markets have attractive supply and demand characteristics and provide
opportunities for long-term growth. ATLANTIC intends to build a regional
presence in the midwestern region of the United States.
. ATLANTIC completed the disposition of five communities in 1997 which were
no longer consistent with its long-term investment objectives and
redeployed the proceeds into strategic acquisitions and developments.
ATLANTIC realized an aggregate gain of $1.6 million on proceeds of $66.5
million from these dispositions.
.In 1997, ATLANTIC invested in mortgage notes that are convertible into the
common stock of an affiliated, extended-stay lodging company, Homestead
Village Incorporated ("Homestead"). At December 31, 1997, these
convertible mortgage notes had a fair value of $122.5 million (principal
amount of $93.5 million) and were received in exchange for funding $106.0
million of the $111.1 million required by a funding commitment agreement.
ATLANTIC expects to fund additional amounts in 1998 increasing the
principal amount of the convertible mortgage notes to $98.0 million. As of
December 31, 1997, assuming expected full funding and that the mortgage
notes are fully converted and assuming the closing price of Homestead
common stock on that date, this investment would result in $0.64 of
additional value to ATLANTIC's shareholders for each share of common stock
owned. See "Item 7. Management's Discussion of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Homestead
Convertible Mortgages".
Financing Accomplishments
.In July 1997, ATLANTIC received an investment grade rating on its senior
unsecured debt. In August 1997, ATLANTIC completed an offering of $100
million of 7.25% senior unsecured notes due 2009 and $50 million of 7.86%
senior unsecured notes due 2017. Proceeds from the offering were
approximately $148.6 million, net of costs.
. In August 1997, ATLANTIC completed an initial offering of preferred
stock. Proceeds from the offering were approximately $48.1 million, net
of costs.
. During 1997, ATLANTIC's interest rate on its unsecured line of credit was
reduced from LIBOR plus 1.375% to LIBOR plus 0.75%. Additionally, under a
new competitive bid option, ATLANTIC may be able to borrow at a lower
interest rate spread over LIBOR, depending on market conditions. This
option is available on up to $175 million of borrowings on the unsecured
line of credit.
. ATLANTIC arranged for a $25 million unsecured line of credit in June 1997
(which was increased to $50 million in January 1998). This line of credit
allows ATLANTIC to make same-day borrowings at an overnight interest rate
and provides ATLANTIC with additional flexibility in managing its
outstanding borrowings and minimizing idle cash balances, thus reducing
interest expense.
. In connection with ATLANTIC's acquisition of the management companies
owned by Security Capital, ATLANTIC's common shareholders (other than
Security Capital) received warrants from Security Capital in September
1997 to purchase 1,675,940 shares of Security Capital's Class B common
stock at a price of $28.00 per share.
. ATLANTIC completed a rights offering of common stock in September 1997 at
a price of $22.375 per share, generating proceeds of approximately $56.5
million, net of costs.
. ATLANTIC closed two public common stock offerings in 1997, in addition to
the rights offering described above, raising net proceeds of $89.6
million.
. In November 1997, a $500 million shelf registration statement was
declared effective by the Securities and Exchange Commission. These
securities can be issued in the form of senior unsecured debt, preferred
stock or common stock on an as-needed basis, subject to ATLANTIC's
ability to effect an offering on satisfactory terms. On December 31,
1997, ATLANTIC had $492.6 million of unissued securities available under
the shelf registration.
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. ATLANTIC's long-term debt as a percentage of total long-term
undepreciated book capitalization (the sum of long-term debt and
shareholders' equity after adding back accumulated depreciation) was
25.1% at December 31, 1997, a level that provides considerable financial
flexibility to ATLANTIC.
ATLANTIC's 1997 strategic accomplishments, highlighted above, are discussed
further in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the notes to the Financial
Statements in Item 14.
BUSINESS STRATEGY
Overview
To achieve its objective of being the preeminent multifamily real estate
operating company in its target market, ATLANTIC has identified a business
strategy that includes an operational, investment and financing focus. In
addition, ATLANTIC has put an "Operating System" in place that it believes
will enable it to successfully carry out this business strategy. ATLANTIC
believes that its business strategy and "Operating System" (discussed below)
position ATLANTIC to achieve long-term growth in per share cash flow and
distributions to its shareholders.
Investment Strategy
ATLANTIC's investment strategy is focused in these areas: extensive real
estate research, strong target market, development of multifamily communities,
opportunistic acquisitions, value-conscious pricing approach and portfolio and
asset optimization.
Extensive Real Estate Research
ATLANTIC is dedicated to ongoing research and development related to markets
and products. ATLANTIC conducts comprehensive evaluations of its target market
on a submarket-by-submarket basis to identify those submarkets and product
types that present attractive growth opportunities. These evaluations,
combined with ATLANTIC's extensive market experience in the south-Atlantic,
mid-Atlantic and midwestern regions of the United States, enable ATLANTIC to
identify submarkets that offer continued opportunities for favorable yields
and long-term growth in per share cash flow. In addition to market research,
considerable resources are devoted to product research. ATLANTIC continually
evaluates and refines its multifamily communities to incorporate technologies
and designs that will enhance the long-term livability for its residents.
Strong Target Market
ATLANTIC's south-Atlantic, mid-Atlantic and midwestern target market
exhibits strong long-term market fundamentals and provides opportunity for
favorable yields and growth on a long-term basis. ATLANTIC believes that
population and employment growth are the primary demand generators for
multifamily communities. Accordingly, ATLANTIC has identified the following
primary target market cities: Atlanta, Georgia; Charlotte, North Carolina;
Columbus, Ohio; Indianapolis, Indiana; Nashville, Tennessee; Orlando, Florida;
Raleigh, North Carolina; Richmond, Virginia; Southeast Florida (which includes
Ft. Lauderdale and West Palm Beach); Tampa, Florida; and Washington, D.C.
Based on forecasts published by Woods & Poole Economics, Inc., the projected
population growth in ATLANTIC's primary target market cities is 33.7% for the
years 1998 through 2017, whereas the projected population growth of the United
States as a whole for the same period is 16.7%. For the years 1998 through
2017, job growth is projected to be 27.3% in ATLANTIC's primary target market
cities, compared to 19.4% for the United States as a whole. ATLANTIC is
continually researching additional submarkets and cities and may add or delete
primary target market cities in the future based upon the results of this
research.
Development of Multifamily Communities
ATLANTIC's research-driven investment strategy also includes the development
of state of the art communities in attractive submarkets that respond to
renter preferences and demographic trends. ATLANTIC
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believes that developing communities designed for long-term appeal to the
renter population will allow ATLANTIC to achieve more consistent rental rate
increases and higher occupancies over the long term and thereby realize strong
per share cash flow growth. ATLANTIC intends to be a long-term owner of the
communities that it develops. Hence, ATLANTIC emphasizes long-term durability
by using materials and designs that minimize ongoing operation and maintenance
costs.
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
communities, using guaranteed maximum price contracts. ATLANTIC also targets
markets for development that exhibit population and job growth fundamentals
that indicate increases in demand for multifamily product over the long term.
ATLANTIC cannot eliminate all development risk, but believes that the
opportunities to better control its product and realize higher returns from
development communities compensate for any additional risk.
In most cases, ATLANTIC will commence development immediately after
acquiring a tract of land. However, in cases where land prices are favorable,
ATLANTIC has acquired and will continue to acquire, on an unleveraged basis,
prudent amounts of zoned land for the future development of multifamily
communities. In addition, to provide for growth, ATLANTIC may utilize options
and rights of first refusal in order to control land for the future
development of communities.
Over an extended period, management believes that operating results from
ATLANTIC's development communities will contribute significantly to ATLANTIC's
per share cash flow growth. By year-end 1998, ATLANTIC anticipates that
approximately 48.7% of its total portfolio, based on total expected
investment, will consist of communities ATLANTIC has developed or is in the
process of developing.
Opportunistic Acquisitions
ATLANTIC realizes it is often advantageous to acquire existing multifamily
communities in markets that are expected to experience favorable growth in
occupancies and rental rates. In many cases, communities can be acquired and
redeveloped at prices well below the cost to build a comparable community in
the same area. Through the acquisition of an existing operating community,
ATLANTIC can obtain a presence in that submarket and benefit from the
favorable market conditions.
ATLANTIC's investment professionals have the capability to thoroughly
analyze and evaluate communities in an efficient manner which, together with
ATLANTIC's access to capital, provides ATLANTIC with a competitive advantage
in acquiring multifamily communities. This strategy has resulted in
multifamily community acquisitions that have produced attractive returns.
In 1997, ATLANTIC acquired six operating communities consisting of 1,220
units in five primary target market cities, representing a total expected
investment of $59.9 million.
Value-Conscious Pricing Approach
ATLANTIC utilizes a price-point strategy in determining the type of
multifamily community that is best suited for a particular submarket and
prices its units at a level that will appeal to the value-conscious resident.
These residents typically fall into the category of moderate income households
with incomes ranging from 65% to 90% of the submarket median household income
or middle income households with incomes ranging from 90% to 115% of the
submarket median household income (as compared to 115% to 140% for upper
middle income households). These residents typically are couples, single
parents and families with one or two children whose primary focus is on unit
livability and practical amenities such as washer/dryer hookups, storage space
and playgrounds, in addition to the physical characteristics of the community.
ATLANTIC prices the monthly rental rate for units in these communities at $50
to $200 below that of other communities in the submarket that appeal to higher
income residents.
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ATLANTIC believes that the moderate income segment in particular is a
significantly underserved market with limited competition because few
competitors in ATLANTIC's primary target market currently focus on communities
that appeal to these residents. Also, the lack of financial resources prevents
these residents from relocating frequently. Therefore, resident turnover is
often significantly lower for these residents. Because the cost of
refurbishing and re-leasing a unit ranges from $700 to $1,500, lower resident
turnover can have a material impact on a community's profitability. Due to
these positive operating characteristics and market fundamentals, ATLANTIC
believes that, by focusing on the value-conscious resident, it is favorably
positioned to achieve sustainable cash flow growth.
Of ATLANTIC's total portfolio at January 31, 1998, 59 communities with a
total expected investment of $897.4 million are communities that are targeted
to the moderate income resident. ATLANTIC has 35 communities, with a total
expected investment of $564.6 million, that are targeted to the middle income
resident because these communities provide some additional amenities. The
remaining 7 communities in ATLANTIC's portfolio provide extensive amenities to
its residents and are categorized as upper middle income communities. These
communities have a total expected investment of $134.0 million.
Portfolio and Asset Optimization
ATLANTIC develops and acquires communities with a view to effective long-
term operation and ownership. However, ATLANTIC continually reviews its asset
base in light of prevailing market conditions. These reviews assist ATLANTIC
in identifying communities in its portfolio that no longer meet its long-term
investment objectives. ATLANTIC's asset optimization program allows ATLANTIC
to dispose of such assets and redeploy the proceeds, preferably through tax-
deferred exchanges, into assets with better prospects for long-term cash flow
growth. 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 per share cash flow growth. During 1997,
ATLANTIC disposed of five operating communities aggregating 1,396 units. These
dispositions produced an aggregate gain of $1.6 million on proceeds of $66.5
million, which were redeployed into existing multifamily communities or land
to be used for the future development of multifamily communities.
Operating Strategy
As part of ATLANTIC's strategy to increase cash flow and enhance the long-
term economic performance of its communities, ATLANTIC actively manages its
communities and its operating personnel maintain a customer-driven focus.
Approximately 95% of ATLANTIC's operating multifamily units are managed
internally, with the balance in various stages of transition from third-party
management companies. ATLANTIC's network of 11 local property management
offices improves ATLANTIC's ability to respond to changes in local market
conditions and in particular to its residents' specific needs. ATLANTIC's
operating personnel are dedicated to maximizing the performance of ATLANTIC's
communities by providing consistent high-quality customer services to its
residents.
ATLANTIC believes that the underlying long-term fundamentals of its target
market, including its continued job and population growth, should continue to
support strong occupancy levels and allow for consistent increases in rental
income. Additionally, ATLANTIC expects to reduce operating costs and improve
profit margins through operating efficiencies resulting from the purchasing
power and name recognition which result from holding a critical mass in a
market and by lower resident turnover from ATLANTIC's increasing focus on
value-conscious residents.
Financing Strategy
ATLANTIC's ability to efficiently access the capital markets permits it to
capitalize on the development and acquisition opportunities that exist in its
target market. In addition, the borrowing capacity available through
ATLANTIC's $350 million and $50 million unsecured lines of credit enables
ATLANTIC to react quickly to
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investment opportunities between securities offerings. ATLANTIC's long-term
debt as a percentage of total long-term book capitalization was 25.1% at
December 31, 1997, a level that provides considerable flexibility for ATLANTIC
to prudently utilize long-term debt as a financing tool in the future.
Accordingly, ATLANTIC expects to arrange additional fully amortizing, fixed
rate, long-term unsecured debt in the future, the proceeds of which will be
used primarily for the reduction of line of credit balances incurred as a
result of ATLANTIC's investment activities.
As of March 18, 1998, $211.9 million of borrowings were outstanding under
the $350 million and $50 million unsecured lines of credit. ATLANTIC's
conservative financing strategy to date has provided ATLANTIC with significant
incremental debt capacity and is expected to allow ATLANTIC to take advantage
of future investment opportunities on a non-dilutive basis, contributing to
ATLANTIC's objective of long-term growth in per share cash flow.
OPERATING SYSTEM
Overview
ATLANTIC has 90 professionals and 520 property-level and support personnel
dedicated to implementing its highly focused business strategy. In addition to
its own personnel, ATLANTIC receives specialized research and administrative
services from personnel of Security Capital under an administrative services
agreement (the "ASA"). The specialized research and administrative services
provided to ATLANTIC under the ASA supplement the work done by ATLANTIC's
employees. Security Capital has invested in sophisticated systems and high
quality personnel to provide these types of services to its investees,
including ATLANTIC. Accordingly, ATLANTIC can obtain these services at a lower
cost than the cost ATLANTIC would incur to perform these functions internally.
These services are provided at ATLANTIC's option and include payroll and tax
administration services, cash management and accounts payable services, data
processing and other computer services, human resources, research, insurance
administration and legal administration. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Merger Transaction".
ATLANTIC believes that its employees along with the services procured from
Security Capital under the ASA provide ATLANTIC with high quality and depth of
management personnel and resources. These resources are organized into six
functional areas which comprise ATLANTIC's "Operating System": research; due
diligence and investment analysis; acquisitions; multifamily developments;
property management; and capital raising and finance. By focusing on a single
discipline, professionals within each of these areas develop substantial
expertise. While the interaction and communication among these functional
areas remain fluid, the separation promotes certain checks and balances.
Research
ATLANTIC has access, through the ASA, to experienced personnel who are
dedicated to the research function. These research specialists conduct
comprehensive proprietary evaluations of ATLANTIC's target market on a
submarket-by-submarket basis taking into account 24 key variables that have
been identified as having the greatest impact on multifamily operating
performance. These variables include market demand analysis, detailed supply
evaluations of each submarket and other economic and demographic data. This
research provides ATLANTIC with the information needed to target specific
resident profiles and identify the unit mix, density and amenities that will
provide the greatest opportunity for consistent rental rate increases and high
occupancies for a particular community.
In addition to dedicated market research and continuous refinement of the
traditional multifamily product, considerable resources are devoted to
researching new products and businesses. These research and development
efforts resulted in the creation of a state of the art extended-stay lodging
product, Homestead Village (R). ATLANTIC's investment in Homestead Village (R)
properties was sold to the newly formed growth company,
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Homestead, in 1996. This transaction resulted in a special distribution to
ATLANTIC's shareholders and in ATLANTIC's current investment in convertible
mortgage notes from Homestead ("Homestead Convertible Mortgages"). See "Item
5. Market for the Registrant's Common Equity and Related Stockholder Matters"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Homestead Transaction" and "--
Liquidity and Capital Resources--Homestead Convertible Mortgages".
Due Diligence and Investment Analysis
ATLANTIC has three full-time professionals dedicated to performing
intelligent and thorough due diligence. 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 decisions are based upon the expected
contribution of the community to long-term cash flow growth on an unleveraged
basis. The expected economic contribution is based on an evaluation of a
community's stabilized operations, including an estimate of all cash revenues
from leases and other revenue sources, minus expenses incurred in operating
the community including real estate taxes, insurance, maintenance, turnover
costs (such as carpet and appliance replacement), personnel costs, utility
charges and a reserve for capital expenditures.
ATLANTIC believes that its investment committees provide discipline and
guidance to its investment process and enable ATLANTIC to achieve its
investment goals. All acquisition and development investments must be approved
by a four-member investment committee comprised of senior officers and
ultimately by the investment committee of ATLANTIC's Board of Directors (the
"Board"). The four members of ATLANTIC's senior officer investment committee
have a combined 99 years experience in the real estate industry. See "--
Directors and Officers of ATLANTIC". The investment committee receives
detailed written analyses and research, in a standardized format, and
evaluates all prospective investments pursuant to uniform underwriting
criteria prior to making a final determination. The quality of the investment
committee process is demonstrated by ATLANTIC's ability to achieve its
investment goals with respect to initial return and growth projections.
Acquisitions
ATLANTIC's initial investment activity was concentrated on the acquisition
of operating communities in order to provide a base of established multifamily
communities to generate cash flow while ATLANTIC's internal development
process was put into place. ATLANTIC continues to opportunistically acquire
multifamily communities where demographic and market trends indicate a high
likelihood of achieving superior operating results. As of January 31, 1998,
ATLANTIC's portfolio of communities acquired, net of dispositions, aggregated
18,055 operating units, representing a total expected investment of $932.2
million.
Upon acquisition, ATLANTIC will classify a community as "pre-stabilized".
The term "pre-stabilized" means that renovation, repositioning, new management
and new marketing programs have not been completed and in effect for a
sufficient period of time to achieve 93% occupancy at market rents. Once these
programs are completed, a community is then classified as "stabilized". For
operating communities acquired by ATLANTIC, stabilized operations generally
have been achieved between six and 12 months after acquisition.
Multifamily Developments
ATLANTIC has 15 professionals with substantial multifamily development
experience dedicated to its objective of developing state of the art
communities designed for long-term appeal to the renter population. ATLANTIC
has selectively developed multifamily communities where land costs and
demographic and market trends indicate a high likelihood of achieving
attractive, sustainable operating results. As of January 31, 1998, ATLANTIC's
completed development communities and its owned communities both under
construction and in
8
<PAGE>
planning together comprised 42% of its multifamily portfolio, based on total
expected investment. As of January 31, 1998, the development portion of
ATLANTIC's multifamily portfolio consisted of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
TOTAL
NUMBER EXPECTED
OF UNITS INVESTMENT(1)
-------- -------------
<S> <C> <C>
Communities completed.................................... 3,638 $213,063
Communities under construction........................... 5,847 383,833
Communities in planning and owned(2)(3).................. 928 66,924
------ --------
Totals(4).............................................. 10,413 $663,820
====== ========
</TABLE>
- --------
(1) For completed communities, represents cost, plus budgeted capital
expenditures. For communities under construction and in planning,
represents total 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.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months.
(3) Does not include land in planning and under control for the development of
1,752 units with a total budgeted development cost of $126.3 million. The
term "under control" means that ATLANTIC has an exclusive right (through a
contingent contract or letter of intent) during a contractually agreed-
upon time period to acquire land for future development of multifamily
communities, but ATLANTIC does not currently own the land.
(4) Does not include land held for future development (construction is not
anticipated to commence in the next 12 months), which is less than 1% of
assets, based on cost.
For communities that it is developing, ATLANTIC expects stabilized
operations generally to be achieved 12 to 18 months after construction
commences. Once a community is completed, it is classified as a pre-stabilized
operating community. The community is considered stabilized when it has
achieved 93% occupancy at market rents.
Property Management
ATLANTIC emphasizes locally based management through its 11 local offices
and its approximately 540 employees working in the property management area.
This network allows ATLANTIC to respond quickly to changes in local market
conditions and resident needs. ATLANTIC believes it has superior operating
procedures, financial controls, information systems and training programs in
place and that its property management system positively affects rental
returns and occupancy rates. In addition, ATLANTIC utilizes incentive
compensation programs for on-site property managers to further improve the
performance of the communities. ATLANTIC's strong property management system
has contributed to the positive operating results of ATLANTIC's "same store"
communities. Net operating income on a same store basis increased 3.49% from
1996 to 1997 for the 45 communities that were fully operational during both
periods. See "Item 7. Management's Discussion of Financial Condition and
Results of Operations--Results of Operations--Communities Fully Operating
Throughout Both Periods--Operating Summary".
ATLANTIC recognizes that a highly focused customer service approach to day-
to-day management is essential to maximizing short-term and long-term cash
flow from each of its multifamily communities. As a result, ATLANTIC's
professionals focus only on ATLANTIC's communities and the needs of ATLANTIC's
residents. ATLANTIC's property management personnel work closely together with
ATLANTIC's other real estate professionals to develop innovative new programs
to maintain high resident satisfaction while maximizing cash flow. Key
programs initiated by ATLANTIC's property management team include:
. Revenue sharing arrangements: Agreements with certain cable television
and telephone service providers that increase the quality and
accessibility of these services to residents and allow ATLANTIC to
receive
9
<PAGE>
a percentage of the service providers' revenues generated from subscribing
residents. Additionally, these agreements require the telecommunications
providers to continually upgrade service to ensure state of the art
offerings in this rapidly changing industry.
. Utility submetering: ATLANTIC has implemented submetering programs at
approximately 43% of its operating communities as of December 31, 1997
and expects to increase this to approximately 71% of its operating
communities by the end of 1998. Under this program, water and sewer usage
is individually metered and billed, enabling ATLANTIC to better control
operating expenses while providing residents with the incentive to
minimize usage.
. Vendor management: ATLANTIC has negotiated purchase agreements with a
select group of vendors for its 21 operating communities in Atlanta.
These agreements, primarily in the landscaping, make-ready, maintenance
and marketing areas, provide ATLANTIC with volume discounts on high
quality services and products. By contracting exclusively with these
vendors, ATLANTIC's communities benefit from reductions in operating
expenses as well as assuring continuity of quality customer service to
its residents. ATLANTIC is making similar arrangements in Raleigh and
Southeast Florida.
Capital Raising and Finance
ATLANTIC has a team of professionals in place with far reaching experience
in the areas of capital raising and finance. Under the ASA, ATLANTIC can
utilize Security Capital Markets Group Incorporated ("Capital Markets Group"),
a registered broker/dealer subsidiary of Security Capital, to maximize the
effectiveness of its financing activities and provide access to major
institutional investors. The strategic vision of ATLANTIC's finance
professionals has taken ATLANTIC from a privately held to a publicly traded
REIT and has produced a conservative balance sheet that provides significant
incremental debt capacity that will allow ATLANTIC to take advantage of future
investment opportunities.
ATLANTIC raised approximately $700 million through private placements of its
Common Shares prior to its initial public offering in October 1996 which
raised additional net proceeds of approximately $110 million. Since the
initial public offering, ATLANTIC has raised approximately $343 million in net
proceeds from public offerings of both debt and equity securities with
unaffiliated underwriters or Capital Markets Group, as placement agent.
To meet its short-term borrowing needs, ATLANTIC has a $350 million
unsecured line of credit that provides for interest at LIBOR plus 0.75%.
ATLANTIC can reduce the margin it pays on this line of credit through a
competitive bid option covering up to $175 million of borrowings. ATLANTIC has
an additional $50 million unsecured line of credit that allows for same-day
borrowings at an overnight interest rate. This facility provides ATLANTIC with
additional flexibility to manage its outstanding borrowings and minimize idle
cash balances, thus reducing interest expense.
ATLANTIC has a credit enhancement agreement with the Federal National
Mortgage Association ("FNMA") covering its tax-exempt bond issues. The
agreement allowed ATLANTIC to receive a favorable interest rate on the bond
issues and required ATLANTIC to enter into swap agreements to mitigate the
interest rate exposure on the nine bond issues with variable interest rates.
As a result of the credit enhancement agreement and the swap agreements,
ATLANTIC pays interest on these nine variable rate bond issues at an all-in,
fixed rate of 6.61%.
DIRECTORS AND OFFICERS OF ATLANTIC
Directors
MANUEL A. GARCIA III--54--Director of ATLANTIC since December 1995 and a
Director of Homestead Village Incorporated since April 1997. Since May 1969,
Mr. Garcia has been 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. Mr. Garcia is a Director
10
<PAGE>
of The Foundation for Orange County Public Schools and the Florida Cities
Sports Association and is National Director of Cities in Schools. Mr. Garcia
is also a member of the Board of the National Conference of Christians and
Jews and an Honorary Director of the Boys' Clubs and Boy Scouts of Central
Florida. Mr. Garcia was a member of former President Bush's Drug Advisory
Council.
NED S. HOLMES--53--Director of ATLANTIC since May 1994. Mr. Holmes has been
the President and Chief Executive Officer of Laing Properties, Inc. since May
1990 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 since April 1984. Mr. Holmes is a Director of Heritage
Bank, a Director of Commercial Bancshares, Inc. and Chairman of the Port
Commission of the Port of Houston Authority. He also serves as a Director of
the Institute of International Education, the Houston International Protocol
Alliance and is Vice Chairman of Greater Houston Partnership.
CONSTANCE B. MOORE--42--Co-Chairman, Chief Operating Officer and Director of
ATLANTIC since January 1996, where she has overall responsibility for
operations. Ms. Moore had comparable responsibilities with ATLANTIC's former
REIT manager from January 1996 to September 1997. From May 1994 to December
1995, Ms. Moore was Managing Director of Security Capital Pacific Trust
("PTR") and Director and Managing Director of PTR's former REIT manager where
she had overall responsibility for operations. She was Senior Vice President
of Security Capital from March 1993 to April 1994 and is a Director of the
National Multi Housing Council.
JAMES C. POTTS--51--Co-Chairman and Chief Investment Officer of ATLANTIC
since January 1996 and Director of ATLANTIC since October 1993, where he has
overall responsibility for investments. Mr. Potts was Chairman of ATLANTIC
from May 1994 to December 1995 and he had comparable responsibilities with
ATLANTIC's former REIT manager from October 1993 to September 1997. From
December 1992 to April 1994, Mr. Potts was Managing Director of PTR's former
REIT manager, where he supervised the asset management of all of PTR's
multifamily communities and oversaw the relationship of PTR's REIT manager and
property manager, which provided on-site management for these communities.
JOHN M. RICHMAN--70--Director of ATLANTIC since September 1996. Mr. Richman
has been Counsel to the law firm of Wachtell, Lipton, Rosen & Katz since
January 1990. He was Chairman and Chief Executive Officer of Kraft, Inc. from
1979 to 1989, prior to which he was Senior Vice President--Administration and
General Counsel of that company. He is a Director of BankAmerica Corporation
and Bank of America National Trust and Savings Association, USX Corporation,
and Stream International Inc. He is a Trustee of the Chicago Symphony
Orchestra, Northwestern University and The Johnson Foundation. He is a retired
director of R.R. Donnelley & Sons Company and served as Acting Chairman and
Chief Executive Officer of that company from October 1996 to April 1997. Mr.
Richman is a Director of The Chicago Council on Foreign Relations and Lyric
Opera of Chicago and a member of The Business Council, The Commercial Club of
Chicago and the Economic Club of Chicago.
C. RONALD BLANKENSHIP--48--Advisory Director of ATLANTIC since September
1996 and Director from April 1996 to September 1996. Mr. Blankenship has been
Non-Executive Chairman of PTR since June 1997 and Chairman of PTR from June
1991 to June 1997, where he supervises the overall operations of PTR. He was
Chairman of PTR's former REIT manager from March 1991 to September 1997 and he
has served as Trustee of PTR since June 1991. Mr. Blankenship has been
Managing Director of Security Capital since March 1991, and has served as an
Advisory Director of Homestead Village Incorporated since October 1996. Mr.
Blankenship has served as a Director of Storage USA, Inc. since December 1997.
Senior Officers
ATLANTIC believes that management should have several senior executives with
the leadership, operational, investment and financial skills and experience to
oversee its entire operations. ATLANTIC believes
11
<PAGE>
that several of its senior officers could serve as the principal executive
officer and continue ATLANTIC's performance. The executive officers of
ATLANTIC are listed below. All of the executive officers are employees of
ATLANTIC except for Mr. Klopf who is an employee of Security Capital. Mr.
Klopf's services are provided to ATLANTIC under the ASA.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Constance B. Moore................. 42 Co-Chairman and Chief Operating Officer
James C. Potts..................... 51 Co-Chairman and Chief Investment Officer
J. Lindsay Freeman................. 52 Managing Director
Bradley C. Miller.................. 50 Managing Director
William Kell....................... 41 Senior Vice President and Controller
Jeffrey A. Klopf................... 49 Senior Vice President and Secretary
</TABLE>
Members of ATLANTIC's Investment Committee are designated by an asterisk.
*CONSTANCE B. MOORE--See--"Directors".
*JAMES C. POTTS--See--"Directors".
*J. LINDSAY FREEMAN--52--Managing Director of ATLANTIC since December 1997
where he has responsibility for operations and Senior Vice President of
ATLANTIC from May 1994 to November 1997. Mr. Freeman had comparable
responsibilities with ATLANTIC's former REIT manager from May 1994 to
September 1997 and was a Director of that company from March 1995 to September
1997. From June 1980 to March 1994, Mr. Freeman was Senior Vice President and
Operating Partner of Lincoln Property Company in Atlanta, Georgia, where he
was responsible for acquisitions, financing, construction and management of
multifamily communities within the Atlantic region and oversaw operations of
16,000 multifamily units.
*BRADLEY C. MILLER--50--Managing Director of ATLANTIC since December 1997
where he is responsible for investments and Senior Vice President of ATLANTIC
from June 1996 to November 1997. Mr. Miller had comparable responsibilities
with ATLANTIC's former REIT manager from June 1996 to September 1997 and was
Director of that company from February 1997 to September 1997. From October
1979 to May 1996, Mr. Miller was Senior Vice President and Operating Partner
of Lincoln Property Company 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.
WILLIAM KELL--41--Senior Vice President of ATLANTIC since December 1997 and
Controller of ATLANTIC since January 1996, where he supervises accounting and
financial reporting for ATLANTIC and Vice President of ATLANTIC from January
1996 to November 1997. Mr. Kell was Vice President of ATLANTIC's former REIT
manager from January 1996 to September 1997 where he had comparable
responsibilities. From June 1991 to December 1995, Mr. Kell was Vice President
and Controller of PTR, where he had overall responsibility for multifamily
accounting and financial reporting.
JEFFREY A. KLOPF--49--Senior Vice President and Secretary of ATLANTIC and
Security Capital since January 1996, where he provides securities offerings
and corporate acquisition services and oversees the provision of legal
services for affiliates of Security Capital. Mr. Klopf had comparable
responsibilities with the ATLANTIC's former REIT manager from January 1996 to
September 1997. From January 1988 to December 1995, Mr. Klopf was a partner of
Mayer, Brown & Platt where he practiced corporate and securities law.
Other Officers
RAYMOND D. BARROWS--35--Vice President of ATLANTIC since May 1994, where he
is a Development Manager; prior thereto, he supervised the due diligence
group. Mr. Barrows was Vice President of ATLANTIC's former REIT manager from
May 1994 to September 1997 where he had comparable responsibilities and from
12
<PAGE>
January 1994 to December 1995, he was a member of ATLANTIC's asset management
group. Prior thereto, Mr. Barrows was a member of PTR's asset management
group. From May 1990 to August 1993, he was 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--44--Vice President of ATLANTIC since June 1996, where she
is responsible for asset and property management for the Southeast region. Ms.
Bivins was Vice President of ATLANTIC's former REIT manager from June 1996 to
September 1997 and was with ATLANTIC's property manager from May 1994 to
September 1997 where she had comparable responsibilities. From January 1992 to
May 1994, Ms. Bivins was 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.
NEIL T. BROWN--41--Vice President of ATLANTIC since April 1996, where he is
responsible for directing the development of new multifamily communities in
the Southern region. Mr. Brown was Vice President of ATLANTIC's former REIT
manager from April 1996 to September 1997 where he had comparable
responsibilities. From July 1992 to December 1995, Mr. Brown was Regional Vice
President/Regional Partner of JPI Development Partners, Inc. where he was
responsible for all development activity in Florida.
JOSEPH J. DOMINGUEZ--38--Vice President of ATLANTIC since April 1996, where
he is responsible for production of all multifamily communities; prior
thereto, he was a member of the development group. Mr. Dominguez was Vice
President of ATLANTIC's former REIT manager from April 1996 to September 1997
where he had comparable responsibilities. From November 1984 to August 1995,
Mr. Dominguez was Vice President of Operations for The Casden Company, where
he had overall responsibility for the start-up and operations of a general
contracting subsidiary.
JAN H. EPPS--42--Vice President of ATLANTIC since March 1997, where she has
overall responsibility for marketing. Ms. Epps was a Vice President of
ATLANTIC's former REIT manager from March 1997 to September 1997 where she had
comparable responsibilities. Prior thereto, Ms. Epps was an Operations Manager
for ATLANTIC's Mid-Atlantic region and Regional Marketing Manager. From
October 1988 to September 1994, Ms. Epps held several property management
positions with Trammell Crow and Gables Residential including transition,
training and trouble-shooting operations.
NADINE M. FRANCIS--42--Vice President of ATLANTIC since March 1997, where
she has overall responsibility for sales, operations, computer training,
program development and career development efforts. Ms. Francis was a Vice
President of ATLANTIC's former REIT manager from March 1997 to September 1997
where she had comparable responsibilities. From April 1996 to February 1997,
Ms. Francis was the Regional Training Manager for ATLANTIC's Mid-Atlantic
portfolio and from April 1992 to March 1996 she was self-employed as a
training consultant.
RICHARD L. GLEICHAUF--45--Vice President of ATLANTIC since March 1997, where
he has been responsible for financial planning and analysis since April 1996.
Mr. Gleichauf was Vice President of ATLANTIC's former REIT manager from March
1997 to September 1997 where he had comparable responsibilities. From 1977 to
1996, Mr. Gleichauf was manager with various El Paso Energy Corporation
subsidiaries in El Paso, Texas and Paris, France, where he was responsible for
financial accounting, budgeting and forecasting, and auditing.
GEORGE E. KELLY--45--Vice President of ATLANTIC since December 1996, where
he is a Production Manager; prior thereto he was a member of the development
group. Mr. Kelly was Vice President of ATLANTIC's former REIT manager from
December 1996 to September 1997 where he had comparable responsibilities. From
May 1995 to November 1996, Mr. Kelly was Construction Manager for Security
Capital and from February 1995 to April 1995 he was Real Estate and
Construction Management Consultant to Security Capital's property management
companies. From August 1992 to January 1995, he was Assistant Vice President
of The Travelers Realty Investment Company in Atlanta, Georgia.
13
<PAGE>
MONA D. KING--37--Vice President of ATLANTIC since May 1997, where she has
overall responsibility for human resources. Ms. King was a Vice President of
ATLANTIC's former REIT manager from May 1997 to September 1997 where she had
comparable responsibilities. From September 1994 to May 1997, Ms. King was
Regional Human Resources Manager for ATLANTIC's property manager. From June
1989 to September 1994, she had a variety of Human Resources positions for
Rich's Department Stores.
MARY CAPERTON LESTER--43--Vice President of ATLANTIC since July 1995, where
she is responsible for asset and property management for the Mid-Atlantic
region; prior thereto, she was a member of the asset management group. Ms.
Lester was Vice President of ATLANTIC's former REIT manager from July 1995 to
September 1997 and was with ATLANTIC's property manager from June 1994 to
September 1997, where she had comparable responsibilities. From May 1993 to
May 1994, Ms. Lester was with Summit Management Company, where she specialized
in new business development; and from April 1984 to May 1993 she was with
Trammell Crow Residential Services, most recently as a Vice President, where
she was responsible for property operations, marketing and new business
development.
CHRISTOPHER T. NOLAN--34--Vice President of ATLANTIC since February 1998,
where he manages the acquisitions group. From January 1997 to February 1998,
Mr. Nolan was Managing Director of R&B Realty Group, where he managed their
multifamily expansion effort. Mr. Nolan was Vice President of ATLANTIC and
ATLANTIC's former REIT manager from December 1995 to January 1997 where he had
responsibility for acquisitions. From May 1994 to December 1995, he was a
member of ATLANTIC's asset management group and from February 1989 to May
1994, he was a member of USF&G Corporation's real estate division.
GLENN T. RAND--37--Vice President of ATLANTIC since June 1996, where he is
responsible for asset and property management for the Florida region. Mr. Rand
was Vice President of ATLANTIC's former REIT manager from June 1996 to
September 1997 and he was with ATLANTIC's property manager from June 1995 to
September 1997 where he had comparable responsibilities. From August 1987 to
April 1995, Mr. Rand was 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.
JAMES C. ROOT--42--Vice President of ATLANTIC since December 1996, where he
is responsible for major capital expenditures. Mr. Root was Vice President of
ATLANTIC's former REIT manager from December 1996 to September 1997, where he
had comparable responsibilities and prior thereto, he was Construction
Services Manager of ATLANTIC, where he was responsible for capital budgeting,
major repairs and renovations. From February 1993 to February 1994, Mr. Root
was Construction Manager and Consultant in Chicago, Illinois, where he
evaluated potential acquisitions for Republic Management, a Houston-based,
nationwide property management company. From June 1992 to February 1993, he
was Construction Services Director with Genmar Realty Group, Inc. in Chicago,
where he established the Construction Department responsible for capital items
for a nationwide portfolio of apartment communities.
ANN L. SCHUMACHER--39--Vice President of ATLANTIC since July 1994 and a
member of the accounting group since January 1994, where she is responsible
for accounting and financial reporting. Ms. Schumacher was Vice President of
ATLANTIC's former REIT manager from July 1994 to September 1997, where she had
comparable responsibilities. From September 1988 to October 1993, Ms.
Schumacher 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.
L. DOUGLAS SNIDER--44--Vice President of ATLANTIC since July 1995, where he
is responsible for directing the development of new multifamily communities in
the Mid-Atlantic region; prior thereto, he was a member of the development
group. Mr. Snider was Vice President of ATLANTIC's former REIT manager from
July 1995 to September 1997, where he had comparable responsibilities. From
July 1993 to March 1995, Mr. Snider was Vice President of Operations with
American Constructors, where he was responsible for all design/build
activities. From June 1990 to July 1993, he was Vice President of Robert L.
Mayer Corporation, where he was responsible for residential and commercial
development activities.
14
<PAGE>
C. MELVIN WHITE--58--Vice President of ATLANTIC since April 1996, where he
is a Development Manager; prior thereto he was a member of the development
group. Mr. White was Vice President of ATLANTIC's former REIT manager from
April 1996 to September 1997, where he had comparable responsibilities. From
September 1991 to August 1995, Mr. White was Founder/Partner of Sherrill and
Associates, an interior specialty contracting firm.
EMPLOYEES
At January 31, 1998, ATLANTIC had 90 operating professionals and 520
property-level and support personnel dedicated to implementing ATLANTIC's
highly focused business strategy. None of ATLANTIC's employees are covered by
a collective bargaining agreement. ATLANTIC believes that relations with its
employees are good.
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with ATLANTIC in seeking land for
development, communities for acquisition and disposition and residents for
communities. All of ATLANTIC's multifamily communities are located in
developed areas that include other multifamily communities. The number of
competitive multifamily communities in a particular area could have a material
adverse effect on ATLANTIC's ability to lease units and on the rents charged.
In addition, other forms of single family and multifamily residential
communities provide housing alternatives to both residents and potential
residents of ATLANTIC's multifamily communities.
Few competitors in ATLANTIC's primary target market currently focus on the
moderate income resident. Consequently, ATLANTIC believes that moderate income
residents are a significantly underserved market with limited competition.
AMERICANS WITH DISABILITIES ACT
ATLANTIC's communities must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that such communities are "public
accommodations" and/or "commercial facilities" as defined by the ADA. The ADA
does not consider multifamily communities to be public accommodations or
commercial facilities, except portions of such facilities open to the public,
such as the leasing office. Noncompliance could result in imposition of fines
or an award of damages to private litigants. ATLANTIC believes that the
mandated portions of its communities comply with all present requirements
under the ADA and applicable state laws.
ENVIRONMENTAL MATTERS
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 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 communities.
ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability or other claim in connection with any of its communities
owned or being acquired at January 31, 1998, and ATLANTIC is not aware of any
environmental condition with respect to any of its communities that is likely
to be material. ATLANTIC has subjected each of its communities to a Phase I
environmental assessment (which does not
15
<PAGE>
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 have
revealed, nor is ATLANTIC aware of, any environmental liability (including
asbestos-related liability) that it believes would have a material adverse
effect on its business, financial condition or results of operations. No
assurance can be given, however, that these assessments and investigations
revealed 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 unreimbursed costs relating to
environmental liabilities.
INSURANCE COVERAGE
ATLANTIC carries comprehensive general liability coverage on its owned
communities, with limits of liability customary within the industry, to insure
against liability claims and related defense costs. Similarly, ATLANTIC is
insured against the risk of direct physical damage in amounts necessary to
reimburse ATLANTIC on a replacement cost basis for costs incurred to repair or
rebuild each community, including loss of rental income during the
reconstruction period.
ITEM 2. PROPERTIES
PORTFOLIO COMPOSITION
The following table indicates the composition of communities owned by
ATLANTIC at January 31, 1998 based upon the primary household income
categories of each community's residents:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMMUNITIES ASSETS(1)
----------- -------------
<S> <C> <C>
Moderate income.................................... 59 56%
Middle income...................................... 35 36
Upper middle income................................ 7 8
--- ---
Total............................................ 101 100%
=== ===
</TABLE>
- --------
(1) Percentages are based on total expected investment which, for operating
communities, represents cost, plus budgeted capital expenditures. For
communities under construction and in planning, total expected investment
represents total 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. Does not include land held for future development
(construction is not anticipated to commence in the next 12 months), which
is less than 1% of assets, based on cost.
16
<PAGE>
GEOGRAPHIC DISTRIBUTION
ATLANTIC has organized the operations within its target market into three
geographic regions to more effectively manage its communities. These operating
regions are titled: Mid-Atlantic, Southeast and Florida. ATLANTIC's
communities are located in 17 metropolitan areas in 9 states and the District
of Columbia. The table below demonstrates the geographic distribution of
ATLANTIC's portfolio (operating communities and total communities, which
includes operating communities and owned communities under construction and in
planning) at January 31, 1998:
<TABLE>
<CAPTION>
OPERATING COMMUNITIES TOTAL COMMUNITIES
------------------------- -------------------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
COMMUNITIES ASSETS(1) COMMUNITIES ASSETS(1)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North
Carolina................. 4 5% 6 5%
Columbus, Ohio............ 1 1 1 1
Greenville, South
Carolina................. 1 1 1 1
Indianapolis, Indiana..... -- -- 1 1
Memphis, Tennessee........ 2 2 2 1
Nashville, Tennessee...... 3 4 4 4
Raleigh, North Carolina... 9 11 12 12
Richmond, Virginia........ 2 3 6 6
Washington, D.C........... 5 9 6 8
--- --- --- ---
Total Mid-Atlantic...... 27 36% 39 39%
--- --- --- ---
SOUTHEAST:
Atlanta, Georgia.......... 21 31% 25 28%
Birmingham, Alabama....... 3 4 4 5
--- --- --- ---
Total Southeast......... 24 35% 29 33%
--- --- --- ---
FLORIDA:
Ft. Lauderdale/West Palm
Beach, Florida........... 9 11% 13 13%
Ft. Myers, Florida........ 1 1 1 1
Jacksonville, Florida..... 4 6 5 5
Orlando, Florida.......... 5 4 7 4
Sarasota, Florida......... 1 2 1 1
Tampa, Florida............ 6 5 6 4
--- --- --- ---
Total Florida........... 26 29% 33 28%
--- --- --- ---
Total................. 77 100% 101 100%
=== === === ===
</TABLE>
- --------
(1) Percentages are based on total expected investment which, for operating
communities, represents cost, plus budgeted capital expenditures. For
communities under construction and in planning, total expected investment
represents total 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. The term "in planning" means that construction is
anticipated to commence within 12 months. Does not include land held for
future development (construction is not anticipated to commence in the
next 12 months), which is less than 1% of assets, based on cost.
COMMUNITIES
The information in the following table is as of December 31, 1997 for
communities owned at December 31, 1997, except total expected investment which
is as of January 31, 1998, (dollar amounts in thousands). Additional
information on ATLANTIC's communities is contained in Schedule III, Real
Estate and Depreciation, in "Item 8. Financial Statements and Supplementary
Data". No individual community, or group of communities
17
<PAGE>
operated as a single business unit, amounts to 10% or more of ATLANTIC's
consolidated total assets at December 31, 1997 nor does the gross revenue from
any such communities amount to 10% or more of ATLANTIC's consolidated gross
revenues for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
COMMUNITIES OWNED AS OF
DECEMBER 31, 1997:
OPERATING
COMMUNITIES(3):
MID-ATLANTIC:
Charlotte, North
Carolina:
STABILIZED:
Cameron at Hickory
Grove(4)............. 1996 95.1% 202 $ 8,464 $ 8,550
Cameron Oaks.......... 1994 97.7 264 15,444 15,521
Waterford Hills*...... 1995 95.6 270 13,530 13,586
PRE-STABILIZED:
Waterford Square
I*(5)................ 1996 87.5 408 21,497 21,503
---- ----- -------- --------
Subtotals/Average... 93.1 1,144 58,935 59,160
---- ----- -------- --------
Columbus, Ohio:
PRE-STABILIZED:
Arbors of Dublin...... 1997 92.4 288 14,625 14,995
Greenville, South Caro-
lina:
PRE-STABILIZED:
Cameron Court(6)(7)... 1996 94.4 234 11,248 11,524
Memphis, Tennessee:
STABILIZED:
Arbors at Century Cen-
ter.................. 1996 93.6 420 16,428 16,603
Country Oaks(8)....... 1996 88.0 200 8,676 8,757
---- ----- -------- --------
Subtotals/Average... 91.8 620 25,104 25,360
---- ----- -------- --------
Nashville, Tennessee:
STABILIZED:
Arbor Creek(9)........ 1994 91.1 360 18,293 18,610
Enclave at Brentwood.. 1995 91.1 380 16,276 16,589
PRE-STABILIZED:
Shadowbluff(10)....... 1997 84.6 220 8,484 8,739
---- ----- -------- --------
Subtotals/Average... 89.6 960 43,053 43,938
---- ----- -------- --------
Raleigh, North Caroli-
na:
STABILIZED:
Cameron Ridge(11)..... 1996 95.2 228 10,398 10,492
Cameron Square........ 1994 96.3 268 16,067 16,258
Waterford Forest*..... 1997 92.2 384 21,535 21,563
Waterford Point*...... 1996 97.3 336 16,953 16,963
PRE-STABILIZED:
Bryn Athyn............ 1997 89.5 172 9,306 9,623
Cameron Brooke(7)*.... 1997 94.7 228 13,479 13,669
Cameron Lake I(7)..... 1996 95.4 196 9,774 9,869
Cameron Lake II....... 1997 95.4 172 9,230 9,665
Emerald Forest(7)..... 1996 92.2 320 15,130 15,243
---- ----- -------- --------
Subtotals/Average... 94.3 2,304 121,872 123,345
---- ----- -------- --------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Richmond, Virginia:
STABILIZED:
Cameron at Gayton(12).. 1994 94.1% 220 $ 10,209 $ 10,436
Cameron at Wellesley... 1994 93.8 340 19,605 19,654
---- ----- -------- --------
Subtotals/Average.... 93.9 560 29,814 30,090
---- ----- -------- --------
Washington, D.C.:
STABILIZED:
Camden at Kendall
Ridge................. 1994 93.5 184 11,796 11,905
Cameron at Milestone*.. 1997 97.8 444 31,502 31,628
Cameron at Saybrooke... 1994 97.6 252 19,481 19,548
Sheffield Forest....... 1995 91.8 256 15,969 16,096
West Springfield Ter-
race.................. 1996 95.5 244 16,815 17,076
---- ----- -------- --------
Subtotals/Average.... 95.7 1,380 95,563 96,253
---- ----- -------- --------
Subtotals/Average--
Mid-Atlantic...... 93.5 7,490 400,214 404,665
---- ----- -------- --------
SOUTHEAST:
Atlanta, Georgia:
STABILIZED:
Azalea Park(13)(14).... 1995 92.4 447 26,106 26,177
Balmoral Village....... 1996 94.2 312 19,532 19,721
Cameron Ashford........ 1994 95.9 365 25,031 25,128
Cameron
Briarcliff(12)........ 1994 95.9 220 14,333 14,426
Cameron Brook(13)(15).. 1994 96.8 440 22,616 22,766
Cameron Crest.......... 1994 97.4 377 23,995 24,311
Cameron Dunwoody....... 1994 92.0 238 17,008 17,095
Cameron Forest......... 1995 90.8 152 6,364 6,442
Cameron Place.......... 1995 88.7 212 8,219 8,297
Cameron Pointe......... 1996 97.7 214 15,035 15,164
Cameron Sta-
tion(13)(16).......... 1995 96.3 348 16,341 16,460
Cameron Woodlands...... 1995 95.0 644 26,092 26,392
Clairmont
Crest(13)(17)......... 1994 95.8 213 11,124 11,229
The Greens(13)(18)..... 1994 94.1 304 13,826 13,963
Lake Ridge at Dunwoo-
dy.................... 1993 97.8 268 17,470 17,590
Morgan's Landing....... 1993 96.4 165 8,709 8,796
Old Salem.............. 1994 96.5 172 8,356 8,511
Trolley Square......... 1994 95.6 270 14,004 14,191
Vinings Landing........ 1994 99.0 200 10,046 10,159
WintersCreek(13)(19)... 1995 93.0 200 7,934 8,068
PRE-STABILIZED:
Cameron Creek(5)(7).... (20) 92.6 664 45,254 45,612
---- ----- -------- --------
Subtotals/Average.... 94.9 6,425 357,395 360,498
---- ----- -------- --------
Birmingham, Alabama:
STABILIZED:
Cameron on the
Cahaba(21)............ 1995 94.3 400 19,085 19,317
Morning Sun Villas..... 1994 91.9 184 9,463 9,562
PRE-STABILIZED:
Colony Woods(7)(22).... (23) 95.4 414 21,740 22,017
---- ----- -------- --------
Subtotals/Average.... 94.3 998 50,288 50,896
---- ----- -------- --------
Subtotals/Average--
Southeast......... 94.8 7,423 407,683 411,394
---- ----- -------- --------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA:
Ft. Lauderdale/West
Palm Beach, Florida:
STABILIZED:
Cameron at Bayberry
Lake................... 1996 92.5% 308 $ 17,313 $ 17,396
Cameron at Meadow
Lakes.................. 1995 98.4 189 8,970 9,042
Cameron at the Vil-
lages(12).............. 1994 97.1 384 19,769 19,944
Cameron Cove(13)(24).... 1994 96.8 221 9,444 9,642
Cameron View............ 1995 97.2 176 8,789 8,859
Park Place at Turtle
Run.................... 1996 96.3 350 15,947 16,096
PRE-STABILIZED:
Cameron Hidden Har-
bor(25)................ 1997 95.5 200 10,939 11,235
Parrot's Landing
I(5)(7)(13)(26)........ 1994 92.9 408 19,072 19,172
Parrot's Landing
II*(7)................. 1997 97.4 152 10,201 10,293
---- ------ --------- ---------
Subtotals/Average..... 95.6 2,388 120,444 121,679
---- ------ --------- ---------
Ft. Myers, Florida:
STABILIZED:
Forestwood(13)(27)...... 1994 96.7 397 14,076 14,358
Jacksonville, Florida:
STABILIZED:
Bay Club................ 1994 94.6 220 12,299 12,441
Cameron Deerwood*....... 1997 97.0 336 17,725 17,738
Cameron Timberlin Parc I
*...................... 1997 90.0 320 17,226 17,253
PRE-STABILIZED:
Cameron Lakes I*(5)..... 1996 81.5 302 16,705 17,919(28)
---- ------ --------- ---------
Subtotals/Average..... 90.7 1,178 63,955 65,351
---- ------ --------- ---------
Orlando, Florida:
STABILIZED:
Camden Springs.......... 1994 95.9 340 17,559 17,721
Cameron Villas I(29).... 1994 95.3 192 8,150 8,313
Cameron Villas II(12)... 1995 95.2 42 1,830 1,894
Kingston Village........ 1995 93.3 120 6,178 6,342
Wellington I(12)........ 1994 99.0 192 8,075 8,162
---- ------ --------- ---------
Subtotals/Average..... 96.1 886 41,792 42,432
---- ------ --------- ---------
Sarasota, Florida:
STABILIZED:
Camden Palmer Ranch..... 1994 96.3 432 24,435 24,552
Tampa, Florida:
STABILIZED:
Camden Downs............ 1994 96.8 250 12,674 12,761
Cameron Lakes........... 1995 97.1 207 8,709 8,784
Country Place Vil-
lage(30)............... 1995 98.4 188 8,605 8,800
Foxbridge on the
Bay(13)(31)............ 1994 98.6 358 11,011 11,141
PRE-STABILIZED:
Cameron Bayshore(7)..... 1996 97.6 328 11,579 11,688
Cameron Palm Har-
bor(32)................ 1997 99.4 168 7,334 7,628
---- ------ --------- ---------
Subtotals/Average..... 97.9 1,499 59,912 60,802
---- ------ --------- ---------
Subtotals/Average--
Florida............ 95.4 6,780 324,614 329,174
---- ------ --------- ---------
Subtotals/Average--
Operating
Communities........ 94.5 21,693 1,132,511 1,145,233
---- ------ --------- ---------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
MID-ATLANTIC:
Charlotte, North
Carolina:
Cameron
Matthews*(33)....... 1998 N/A 212 $ 8,128 $ 12,184
Waterford Square
II*(33)............. 1998 N/A 286 15,788 16,708
--- ----- ------- --------
Subtotals.......... N/A 498 23,916 28,892
--- ----- ------- --------
Nashville, Tennessee:
Cameron
Overlook*(33)....... 1998 N/A 452 23,302 24,220
Raleigh, North
Carolina:
Cameron at
Southpoint*......... 1999 N/A 288 3,610 17,401
Cameron Woods*....... 1999 N/A 328 3,687 19,829
--- ----- ------- --------
Subtotals.......... N/A 616 7,297 37,230
--- ----- ------- --------
Richmond, Virginia:
Cameron at Virginia
Center*............. 1998 N/A 264 11,546 17,331
Cameron at
Wyndham*(33)........ 1998 N/A 312 19,037 21,232
Cameron Crossing
I*(33).............. 1998 N/A 280 18,318 18,891
Cameron Crossing
II*................. 1998 N/A 144 3,755 9,923
--- ----- ------- --------
Subtotals.......... N/A 1,000 52,656 67,377
--- ----- ------- --------
Subtotals--Mid-
Atlantic........ N/A 2,566 107,171 157,719
--- ----- ------- --------
SOUTHEAST:
Atlanta, Georgia:
Cameron at Barrett
Creek*.............. 1999 N/A 332 6,372 23,204
Cameron at North
Point*.............. 1999 N/A 264 6,542 20,335
Cameron Bridge*...... 1999 N/A 224 4,576 16,499
Cameron
Landing*(33)........ 1999 N/A 368 14,136 22,431
--- ----- ------- --------
Subtotals.......... N/A 1,188 31,626 82,469
--- ----- ------- --------
Birmingham, Alabama:
Cameron at the Summit
I*(33).............. 1998 N/A 372 21,305 21,873
--- ----- ------- --------
Subtotals--South-
east............ N/A 1,560 52,931 104,342
--- ----- ------- --------
FLORIDA:
Ft. Lauderdale/West
Palm Beach, Florida:
Cameron Gardens*..... 1999 N/A 300 5,454 21,555
Cameron Palms*....... 1999 N/A 340 6,065 24,605
Cameron Park I*...... 1999 N/A 196 3,390 14,530
Cameron
Waterways*(33)...... 1999 N/A 300 18,104 22,034
--- ----- ------- --------
Subtotals.......... N/A 1,136 33,013 82,724
--- ----- ------- --------
Jacksonville, Florida:
Cameron Lakes
II*(33)............. 1998 N/A 253 14,131 15,875(28)
Orlando, Florida:
Cameron Promenade*... 1999 N/A 212 5,348 14,067
Wellington II*....... 1998 N/A 120 4,471 9,106
--- ----- ------- --------
Subtotals.......... N/A 332 9,819 23,173
--- ----- ------- --------
Subtotals--
Florida......... N/A 1,721 56,963 121,772
--- ----- ------- --------
Subtotals--
Communities
Under
Construction.. N/A 5,847 217,065 383,833
--- ----- ------- --------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
COMMUNITIES IN PLANNING
AND OWNED (34):
MID-ATLANTIC:
Indianapolis, Indiana:
Cameron at River
Ridge*............... 2000 N/A 202 $ 1,838 $ 12,810
Raleigh, North
Carolina:
Cameron Chase*........ 2000 N/A 388 3,060 26,214
Washington, D.C.:
Cameron at Governor's
Green*............... 2000 N/A 338 5,811 27,900
---- ------ ---------- ----------
Subtotals-Mid-At-
lantic........... N/A 928 10,709 66,924
---- ------ ---------- ----------
Subtotals-Commu-
nities in Plan-
ning and
Owned.......... N/A 928 10,709 66,924
---- ------ ---------- ----------
LAND HELD FOR FUTURE
DEVELOPMENT(35)........ N/A -- 4,287 --
---- ------ ---------- ----------
Total Communi-
ties Owned at
December 31,
1997 and Janu-
ary 31, 1998... 94.5% 28,468 $1,364,572 $1,595,990
==== ====== ========== ==========
</TABLE>
As of January 31, 1998, ATLANTIC had land in planning and under control for
the development of 1,752 units with a total budgeted development cost of
$126.3 million. The term "under control" means that ATLANTIC has an exclusive
right (through a contingent contract or letter of intent) during a
contractually agreed-upon time period to acquire land for future development
of multifamily communities, but does not currently own the land. There can be
no assurance that such land will be acquired. The unit and total budgeted
development cost information for these developments is based on management's
best estimates of the cost upon completion of these developments.
- --------
* Community developed by ATLANTIC.
(1) With respect to communities under construction or communities in planning
and owned, represents expected completion date.
(2) For operating communities, represents cost, plus budgeted capital
expenditures. For communities under construction and in planning,
represents total 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. The term "in planning" means that construction
is anticipated to commence within 12 months.
(3) The term "stabilized" means that renovation, repositioning, new
management and new marketing programs (or development and marketing in
the case of newly developed communities) have been completed and in
effect for a sufficient period of time (but in no event longer than 12
months, except in cases of major rehabilitation) to achieve 93% occupancy
at market rents. Prior to being "stabilized", a community is considered
"pre-stabilized". See "Item 1. Business--Operating System--Acquisitions".
(4) Cameron at Hickory Grove is subject to a deed of trust securing mortgage
debt of $5.9 million.
(5) Community was classified as pre-stabilized in 1997 due to the effects of
lease-up activities at Phase II of this community.
(6) Community was classified as pre-stabilized at December 31, 1997 as it was
undergoing major rehabilitation.
(7) Community was stabilized in January 1998.
(8) Country Oaks is subject to a deed of trust securing mortgage debt of $5.9
million.
(9) The land associated with Arbor Creek is leased by ATLANTIC through the
year 2058 under an agreement with the Metropolitan Nashville Airport
Authority.
(10) Shadowbluff is subject to a deed of trust securing mortgage debt of $5.5
million.
(11) Cameron Ridge is subject to a deed of trust securing mortgage debt of
$5.7 million.
22
<PAGE>
(12) Community is pledged as additional security under ATLANTIC's 30-year
credit enhancement agreement with FNMA. For a discussion of the FNMA
credit enhancement agreement. See "Item 1. Business--Operating System--
Capital Raising and Finance".
(13) The tax-exempt bond issue associated with this community is included in
ATLANTIC's credit enhancement agreement with FNMA.
(14) Azalea Park is subject to a deed of trust securing mortgage debt related
to $15.5 million of tax-exempt bonds.
(15) Cameron Brook is subject to a deed of trust securing mortgage debt
related to $19.5 million of tax-exempt bonds
(16) Cameron Station is subject to a deed of trust securing mortgage debt
related to $14.5 million of tax-exempt bonds.
(17) Clairmont Crest is subject to a deed of trust securing mortgage debt
related to $11.6 million of tax-exempt bonds.
(18) The Greens is subject to a deed of trust securing mortgage debt related
to $10.4 million of tax-exempt bonds.
(19) WintersCreek is subject to a deed of trust securing mortgage debt related
to $5.0 million of tax-exempt bonds.
(20) Phase I of Cameron Creek, which consists of 404 units, was acquired in
1994. Phase II of Cameron Creek, which consists of 260 units, was
developed by ATLANTIC and completed in 1997.
(21) Phase II of Cameron on the Cahaba consists of 250 units and is subject to
a deed of trust securing mortgage debt of $8.0 million.
(22) Community was classified as pre-stabilized in 1997 due to the transfer of
on-site management from a third party to ATLANTIC.
(23) Phase I of Colony Woods, which consists of 216 units, was acquired in
1994. Phase II of Colony Woods, which consists of 198 units, was
developed by ATLANTIC and completed in 1995.
(24) Cameron Cove is subject to a deed of trust securing mortgage debt related
to $8.5 million of tax-exempt bonds.
(25) Cameron Hidden Harbor is subject to a deed of trust securing mortgage
debt of $5.5 million.
(26) Phase I of Parrot's Landing consists of 408 units and is subject to a
deed of trust securing mortgage debt related to $15.8 million of tax-
exempt bonds.
(27) Forestwood is subject to a deed of trust securing mortgage debt related
to $11.5 million of tax-exempt bonds.
(28) The total expected investment cost of this developed community includes a
potential incentive payment to the third party developer/manager that had
not been earned by them at December 31, 1997.
(29) Cameron Villas I is subject to a deed of trust securing mortgage debt of
$6.3 million.
(30) Phase I of Country Place Village consists of 88 units and is subject to a
deed of trust securing mortgage debt of $2.0 million.
(31) Foxbridge on the Bay is subject to a deed of trust securing mortgage debt
related to $10.4 million of tax-exempt bonds.
(32) Cameron Palm Harbor is subject to a deed of trust securing mortgage debt
of $5.3 million.
(33) Community was leasing completed units at January 31, 1998.
(34) The term "in planning" means that construction is anticipated to commence
within 12 months.
(35) Land held for future development means that construction is not
anticipated to commence in the next 12 months.
23
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the results of any
of such claims and litigation, individually or in the aggregate, will have a
material adverse effect on its business, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ATLANTIC's common stock, par value $0.01 per share ("Common Shares"), is
listed on the New York Stock Exchange ("NYSE") under the symbol "SCA". The
following table sets forth the high and low sales price of the Common Shares
as reported in the NYSE Composite Tape and cash distributions per Common Share
for the periods indicated.
<TABLE>
<CAPTION>
CASH
HIGH LOW DISTRIBUTIONS
------- -------- --------------
<S> <C> <C> <C>
1996:
First Quarter........................ (1) (1) 0.42
Second Quarter....................... (1) (1) 0.42
Third Quarter........................ (1) (1) 0.42
Fourth Quarter....................... $24 5/8 (1) $20 7/8 (1) 0.39(2)
-----
$1.65
=====
1997:
First Quarter........................ $26 1/2 $ 22 $0.39
Second Quarter....................... 24 1/8 20 3/4 0.39
Third Quarter........................ 24 3/16 21 1/2 0.39
Fourth Quarter....................... 23 1/8 20 7/16 0.39
-----
$1.56
=====
1998:
First Quarter (through March 18)..... $ 22 13/16 $20 5/8 $0.40
=====
</TABLE>
- --------
(1) The Common Shares commenced trading on the NYSE on October 15, 1996.
(2) In light of the transaction with Homestead Village Incorporated
("Homestead") in October 1996 that is discussed in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Homestead Transaction" and ATLANTIC's initial
public offering in October 1996, the Board adjusted the distribution in
the fourth quarter of 1996.
As of March 18, 1998, ATLANTIC had 47,760,965 Common Shares outstanding,
approximately 300 record holders of Common Shares and approximately 3,000
beneficial holders of Common Shares.
In addition to the quarterly cash distributions shown above, the following
distributions were made to ATLANTIC's shareholders:
. In connection with ATLANTIC's acquisition of the management companies
owned by Security Capital, ATLANTIC's holders of Common Shares (other
than Security Capital) as of September 16, 1997 received warrants from
Security Capital to purchase 1,675,940 shares of Security Capital's Class
B common stock (0.071116 warrants for each Common Share held). Each
warrant can be exercised for one share of Security Capital's Class B
common stock at an exercise price of $28.00 per share through September
18, 1998. Security Capital issued these warrants, in part, as an
incentive to ATLANTIC's shareholders to vote to approve the transaction.
The warrants are traded on the NYSE and the December 31, 1997 closing
price was $5.25 per warrant. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Merger Transaction--Terms of Transaction".
. ATLANTIC made a special distribution on November 12, 1996 to holders of
record of Common Shares on October 29, 1996 ("the Homestead
Distribution"). The Homestead Distribution consisted of Homestead common
stock and warrants to purchase Homestead common stock, which were
received as consideration for the sale of certain assets to Homestead.
For book purposes, the Homestead Distribution was valued at $58.2
million, which was based on the estimated fair value of the net assets
sold to Homestead. The securities distributed in the Homestead
Distribution (0.110875 shares of Homestead
25
<PAGE>
common stock and 0.074384 warrants to purchase shares of Homestead common
stock per ATLANTIC Common Share) had a market value of $2.67 per Common
Share based on the closing prices of such securities on the American Stock
Exchange on November 11, 1996, the day prior to the distribution date.
Consequently, the Homestead Distribution resulted in an adjustment of
$2.75 per Common Share to ATLANTIC's Common Share price by the NYSE on
November 12, 1996. Accordingly, ATLANTIC's October 1996 initial public
offering price, as adjusted for the Homestead Distribution, was $21.25 per
Common Share (as compared to the pre-adjustment price of $24.00 per Common
Share).
ATLANTIC, in order to qualify as a REIT, is required to make distributions
(other than capital gain distributions) to its shareholders in amounts at
least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends-paid deduction and its net capital gain) and
(B) 95% of the net income (after tax), if any, from foreclosure property,
minus (ii) the sum of certain items of non-cash income. ATLANTIC's long-term
distribution strategy is to distribute what it believes is a conservative
percentage of its cash flow, permitting ATLANTIC to retain funds for capital
improvements and other investments while funding its distributions. ATLANTIC
has paid 17 consecutive quarterly cash distributions on its Common Shares
since its inception in October 1993.
ATLANTIC announces the following year's projected annual distribution level
after the Board's annual budget review and approval in December of each year.
At its December 4, 1997 meeting, the Board announced a projected annual
distribution level of $1.60 per Common Share for 1998 and declared a
distribution of $0.40 per Common Share for the first quarter of 1998, which
was paid on February 26, 1998 to holders of record of Common Shares on
February 12, 1998. The payment of distributions is subject to the discretion
of the Board and depends upon the financial condition and operating results of
ATLANTIC. ATLANTIC's $350 million unsecured line of credit agreement contains
covenants which provide that ATLANTIC's distributions for the preceding four
quarters may not exceed 95% of funds from operations (as defined in the loan
agreement) for the preceding four quarters.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed ATLANTIC's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather
than a dividend and reduce the shareholder's basis in the Common Shares. To
the extent that a distribution exceeds both current and accumulated earnings
and profits and the shareholder's basis in the Common Shares, it will
generally be treated as a gain from the sale or exchange of that shareholder's
Common Shares. ATLANTIC annually notifies shareholders of the taxability of
distributions paid during the preceding year. The following summarizes the
taxability of cash distributions paid in 1996 and 1995 on the Common Shares
and the estimated taxability for 1997.
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997(1) 1996(2) 1995
-------- -------- -------
<S> <C> <C> <C>
Per Common Share:
Ordinary income..................................... $ 1.14 $ 0.78 $ 0.92
Return of capital(3)................................ 0.42 0.87 0.68
------- ------- -------
Total(4).......................................... $ 1.56 $ 1.65 $ 1.60
======= ======= =======
</TABLE>
- --------
(1) Does not include the Security Capital warrants distributed in September
1997 that were valued at $6.88 per warrant or $0.49 per Common Share for
federal income tax purposes, all of which is taxable as ordinary income.
(2) Does not include the securities distributed in the Homestead Distribution
that were valued at $1.91 per Common Share for federal income tax
purposes, of which $0.90 was taxable as ordinary income and $1.01 was
treated as a return of capital.
(3) Under federal income tax rules, ATLANTIC's earnings and profits are first
allocated to its preferred stock which increases the portion of the Common
Shares distribution classified as return of capital. The portion of
distributions characterized as return of capital results primarily from
the excess of distributions over earnings primarily because noncash
charges such as depreciation are added to earnings in determining
distribution levels. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
(4) ATLANTIC's tax return for the year ended December 31, 1997 has not been
filed, and the taxability information for 1997 is based upon the best
available data. ATLANTIC's tax returns for prior years have not been
examined by the Internal Revenue Service and, therefore, the taxability of
distributions is subject to change.
ATLANTIC paid dividends of $0.7845 per share on its Series A Cumulative
Redeemable Preferred Stock, par value $0.01 per share, ("Series A Preferred
Shares"), in 1997, all of which was treated as ordinary income for federal
income tax purposes. Pursuant to the terms of the Series A Preferred Shares.
ATLANTIC is restricted from declaring or paying any distribution with respect
to its Common Shares unless all cumulative dividends with respect to the
Series A Preferred Shares have been paid and sufficient funds have been set
aside for Series A Preferred Share dividends that have been declared.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data relating to the
historical financial condition and results of operations of ATLANTIC as of and
for the years ended December 31, 1997, 1996, 1995 and 1994, and as of and for
the period from inception (October 26, 1993) through December 31, 1993
(amounts in thousands, except per share data). Such selected financial data is
qualified in its entirety by, and should be read in conjunction with, "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto incorporated by
reference herein. Unless otherwise indicated, all Common Share and per Common
Share amounts have been adjusted to give effect to ATLANTIC's one-for-two
reverse Common Share split, which was effective on September 10, 1996.
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993(1)
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income...................... $168,459 $137,729 $103,634 $55,071 $ 156
Homestead Convertible Mortgages in-
terest income..................... 4,453 -- -- -- --
Total revenues..................... 173,549 138,156 103,879 55,220 159
Property management fees paid to
affiliate......................... 3,848 4,208 3,475 1,536 --
Property management fees paid to
third parties..................... 629 971 591 661 --
REIT management fee paid to affili-
ate............................... 8,548 10,445 6,923 3,671 12
General and administrative ex-
penses............................ 2,362 673 646 266 1
Earnings before extraordinary
item.............................. 52,723 42,569 19,639 9,926 38
Extraordinary item--loss on early
extinguishment of debt............ -- 3,940 -- -- --
Preferred share dividends paid..... 1,569 -- -- -- --
Net earnings attributable to Common
Shares............................ 51,154 38,629 19,639 9,926 38
Common Share cash distributions
paid.............................. $ 65,976 $ 53,064 $ 35,119 $14,648 $ --
PER SHARE DATA:
Basic and diluted earnings before
extraordinary item................ $ 1.21 $ 1.33 $ 0.89 $ 0.81 $0.13
Basic and diluted net earnings at-
tributable to Common Shares....... $ 1.21 $ 1.21 $ 0.89 $ 0.81 $0.13
Weighted-average Common Shares out-
standing--basic................... 42,449 32,028 21,944 12,227 286
Weighted-average Common Shares
outstanding
--diluted......................... 42,450 32,028 21,944 12,227 286
Common Share cash distributions
paid.............................. $ 1.56 $ 1.65 $ 1.60 $ 1.20 $ --
Series A Preferred Shares cash div-
idends paid....................... $ 0.785 $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at cost.... $1,364,572 $1,157,235 $888,928 $631,260 $31,005
Homestead Convertible Mort-
gages........................ 122,482 -- -- -- --
Total assets.................. 1,441,411 1,135,065 885,824 637,846 31,850
Lines of credit(2)............ 164,743 228,000 190,000 153,000 --
Notes payable................. 150,000 -- -- -- --
Mortgages payable............. 170,525 155,790 118,524 107,347 --
Total liabilities............. 550,430 436,423 328,886 271,216 178
Total shareholders' equity.... $ 890,981 $ 698,642 $556,938 $366,630 $31,672
Number of Common Shares out-
standing..................... 47,761 37,892 27,763 18,567 1,582
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings attributable
to Common Shares........ $ 51,154 $ 38,629 $ 19,639 $ 9,926 $ 38
Add (deduct):
Real estate deprecia-
tion.................. 26,963 20,824 15,925 8,770 28
Amortization related to
Homestead Convertible
Mortgages............. (486) -- -- -- --
Gain on disposition of
real estate........... (1,608) (6,732) -- -- --
Gain on sale of Home-
stead Assets.......... -- (2,839) -- --
Provision for possible
loss on investments... 200 2,500 -- --
Extraordinary item--
loss on early
extinguishment of
debt.................. -- 3,940 -- --
--------- --------- --------- --------- --------
Funds from opera-
tions(3)................ $ 76,223 $ 56,322 $ 35,564 $ 18,696 $ 66
--------- --------- --------- --------- --------
Net cash provided (used)
by operating
activities.............. $ 83,122 $ 54,356 $ 39,732 $ 23,564 $ (492)
Net cash used by invest-
ing activities.......... (295,606) (287,418) (235,149) (390,077) (31,005)
Net cash provided by fi-
nancing activities...... 209,418 230,907 195,649 372,638 31,634
</TABLE>
- --------
(1) For the period from inception (October 26, 1993) to December 31, 1993.
(2) At March 18, 1998, ATLANTIC had $187.0 million of outstanding borrowings
under its $350 million unsecured line of credit and $24.9 million of
outstanding borrowings under its $50 million unsecured line of credit.
(3) Funds from operations represents net earnings computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from real estate transactions, provisions for possible losses,
extraordinary items, non-cash interest income from Homestead Convertible
Mortgages and real estate depreciation. Funds from operations should not
be considered as an alternative to net earnings 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. ATLANTIC believes that
funds from operations is helpful to a reader as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides a
reader with an indication of the ability of ATLANTIC to incur and service
debt, to make capital expenditures and to fund other cash needs. On
January 1, 1996, ATLANTIC adopted the National Association of Real Estate
Investment Trusts' ("NAREIT") revised definition of funds from operations.
Under this more conservative definition, loan cost amortization is not
added back to net earnings in determining funds from operations. For
comparability, funds from operations for the periods prior to January 1,
1996 give effect to the revised definition. The funds from operations
measure presented by ATLANTIC, while consistent with the NAREIT
definition, will not be comparable to similarly titled measures of other
REITs which do not compute funds from operations in a manner consistent
with ATLANTIC. Funds from operations is not intended to represent cash
made available to shareholders. Cash distributions paid to shareholders is
presented in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with ATLANTIC's
financial statements and the notes thereto included in Item 14 of this report.
The statements contained in this discussion and elsewhere in this report
that are not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
current expectations, estimates and projections about the industry and markets
in which ATLANTIC operates, management's beliefs and assumptions made by
management. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain
29
<PAGE>
risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. ATLANTIC
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. ATLANTIC's
operating results depend primarily on income from multifamily communities,
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 communities. Capital and credit market conditions which
affect ATLANTIC's cost of capital also influence operating results. See "--
Real Estate Investments--Current Development Activity" and "--Real Estate
Investments--1997 Acquisition Activity" for a discussion of risks associated
with ATLANTIC's investment activity.
OVERVIEW
ATLANTIC's results of operations, financial position and liquidity have been
influenced by its operations of and investments in real estate, which consist
entirely of multifamily communities. Detailed information about ATLANTIC's
real estate investments at December 31, 1997 and its real estate investment
activity during the year then ended is provided under "--Real Estate
Investments". A description of the transaction whereby ATLANTIC became an
internally managed REIT is included under "--Results of Operations--Merger
Transaction--Terms of Transactions". The financial impact of this transaction
is discussed under "--Results of Operations--Merger Transaction--Effect on
Future Operations".
30
<PAGE>
REAL ESTATE INVESTMENTS
Operating Communities
The following table summarizes ATLANTIC's investment activity with respect
to operating communities for 1997, 1996 and 1995 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
OPERATING COMMUNITIES AT END OF YEAR:
Communities.................................. 77(1) 70 58
Units........................................ 21,693 19,241 15,823
Total expected investment(2)................. $1,134,014 $959,861 $783,448
Cost per unit................................ $ 52.3 $ 49.9 $ 49.5
INVESTMENT ACTIVITY DURING YEAR:
DEVELOPMENTS COMPLETED:
Communities.................................. 7 3 2
Units........................................ 2,124 1,046 468
Total expected investment(2)................. $ 132,153 $ 56,370 $ 25,462
Cost per unit................................ $ 62.2 $ 53.9 $ 54.4
ACQUISITIONS(3):
Communities.................................. 6 13 15
Units........................................ 1,220 3,556 3,961
Total expected investment(2)................. $ 59,918 $171,731 $182,242
Cost per unit................................ $ 49.1 $ 48.3 $ 46.0
DISPOSITIONS(4):
Communities.................................. 5(5) 4 2
Units........................................ 1,396 1,184 596
Proceeds..................................... $ 66,502 $ 64,150 $ 30,934
Gain......................................... $ 1,608 $ 6,732 --
</TABLE>
- --------
(1) In 1997, ATLANTIC combined phases of two communities that previously have
been reflected separately.
(2) Represents cost, plus budgeted capital expenditures.
(3) Acquisitions in 1997 are described under "--1997 Acquisition Activity".
(4) Dispositions for each year are discussed under "--Results of Operations--
Gains on Disposition of Real Estate and Valuation of Long-Lived
Investments".
(5) Includes a community under construction that was disposed of prior to
completion.
Communities Under Development
ATLANTIC believes that development of multifamily communities from the
ground up which are built for long-term ownership and designed to meet broad
renter preferences and demographic trends will provide a greater source of
long-term cash flow growth in the future. While ATLANTIC's development
activity is dilutive to net earnings and funds from operations in the short
term ($0.095 per Common Share in 1997), this activity is expected to add
significantly to ATLANTIC's long-term performance as the developments reach
stabilization in 1998 and subsequent years as shown in the table under "--
Current Development Activity".
During the construction period, the reduction to interest expense resulting
from the capitalization of interest on units under construction is less than
the operating income which could be earned on those expenditures if the
community were complete and earning a stabilized return, thus resulting in
dilution. Essentially, the return on investment during the construction period
is equivalent to ATLANTIC's cost of funds.
The lease-up phase commences when units are placed in service. During the
lease-up phase, ATLANTIC's policy is to expense operating expenses (including
pre-opening marketing expenses) and interest expense, both
31
<PAGE>
of which are capitalized during the construction period. The operating
expenses and the interest expense on such completed units will typically
exceed rental revenues, due to less than break-even occupancy, thus resulting
in dilution in the form of a "lease-up" deficit. These deficits are typically
experienced for a period of two to four months after "first units" are placed
in service.
Development dilution begins to decline as occupancy increases and revenues
from completed units exceed the operating expenses and interest expense
associated with such completed units. However, the net operating income
generated during this pre-stabilized period is less than the net operating
income that would be earned if the community were stabilized. The time
required to achieve stabilization generally ranges from six to twelve months
after completion of construction. ATLANTIC's portfolio of communities under
construction at December 31, 1997 are expected to be stabilized by the first
quarter of 2000.
ATLANTIC's development activity for the years indicated is summarized below
(dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
STARTS DURING YEAR:
Communities....................................... 15 9 6
Units............................................. 3,892 2,815 2,214
Total expected investment(1)...................... $264,710 $164,442 $143,822
Cost per unit..................................... $ 68.0 $ 58.4 $ 65.0
COMPLETIONS DURING YEAR:
Communities....................................... 7 3 2
Units............................................. 2,124 1,046 468
Total expected investment(2)...................... $132,153 $ 56,370 $ 25,462
Cost per unit..................................... $ 62.2 $ 53.9 $ 54.4
STABILIZATIONS DURING YEAR:
Communities....................................... 5 3 --
Units............................................. 1,892 804 --
Total expected investment(2)...................... $109,534 $ 43,004 --
Cost per unit..................................... $ 57.9 $ 53.5 --
UNDER CONSTRUCTION AT YEAR-END(3):
Communities....................................... 21 14 8
Units............................................. 5,847 4,727 2,958
Total expected investment(1)...................... $382,873 $290,486 $176,740
Cost per unit..................................... $ 65.5 $ 61.5 $ 59.7
Investment to date................................ $217,065 $194,587 $ 94,094
</TABLE>
- --------
(1) Represents total 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.
(2) Represents cost, plus budgeted capital expenditures.
(3) Developments under construction at December 31, 1997 are discussed under
"--Current Development Activity".
32
<PAGE>
Current Development Activity
ATLANTIC's 21 communities under construction at December 31, 1997 are
located in nine metropolitan areas. The communities are at various stages of
completion as presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
DATE OF EXPECTED
TOTAL START FIRST STABILIZATION
NUMBER INVESTMENT EXPECTED DATE UNITS DATE %
OF COST TO INVESTMENT (QUARTER/ (QUARTER/ (QUARTER/ LEASED
UNITS DATE (1) YEAR) YEAR)(2) YEAR) (3)
------ ---------- ---------- --------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENTS UNDER
CONSTRUCTION AND IN
LEASE-UP(4):
Atlanta, Georgia:
Cameron Landing........ 368 $ 14,136 $ 22,407 1Q/97 4Q/97 3Q/99 75.0%
Birmingham, Alabama:
Cameron at the Summit
I..................... 372 21,305 21,849 2Q/96 2Q/97 4Q/98 88.4
Charlotte, North
Carolina:
Waterford Square II.... 286 15,788 16,689 2Q/96 2Q/97 4Q/98 67.7
Jacksonville, Florida:
Cameron Lakes II....... 253 14,131 15,859 4Q/96 2Q/97 3Q/98 80.8
Nashville, Tennessee:
Cameron Overlook....... 452 23,302 23,970 2Q/96 2Q/97 4Q/98 88.9
Richmond, Virginia:
Cameron at Wyndham..... 312 19,037 21,035 3Q/96 4Q/97 1Q/99 42.7
Cameron Crossing I..... 280 18,318 18,761 1Q/96 2Q/97 2Q/98 88.9
----- -------- -------- ----
Total in Lease-up...... 2,323 126,017 140,570 81.3%
----- -------- -------- ----
OTHER DEVELOPMENTS
UNDER CONSTRUCTION:
Atlanta, Georgia:
Cameron at Barrett
Creek................. 332 6,372 23,183 4Q/97 4Q/98 1Q/00 N/A
Cameron at North
Point................. 264 6,542 20,317 4Q/97 4Q/98 1Q/00 N/A
Cameron Bridge......... 224 4,576 16,484 4Q/97 4Q/98 4Q/99 N/A
Charlotte, North
Carolina:
Cameron Matthews(5).... 212 8,128 12,170 2Q/97 1Q/98 4Q/98 N/A
Orlando, Florida:
Cameron Promenade...... 212 5,348 14,053 3Q/97 3Q/98 2Q/99 N/A
Wellington II.......... 120 4,471 9,098 3Q/97 2Q/98 1Q/99 N/A
Raleigh, North
Carolina:
Cameron at Southpoint.. 288 3,610 17,382 3Q/97 4Q/98 4Q/99 N/A
Cameron Woods.......... 328 3,687 19,807 3Q/97 3Q/98 4Q/99 N/A
Richmond Virginia:
Cameron at Virginia
Center................ 264 11,546 17,314 2Q/97 2Q/98 2Q/99 N/A
Cameron Crossing II.... 144 3,755 9,913 2Q/97 3Q/98 1Q/99 N/A
Southeast Florida:
Cameron Gardens........ 300 5,454 21,467 4Q/97 4Q/98 1Q/00 N/A
Cameron Palms.......... 340 6,065 24,583 4Q/97 4Q/98 1Q/00 N/A
Cameron Park I......... 196 3,390 14,517 4Q/97 4Q/98 3Q/99 N/A
Cameron Waterways(5)... 300 18,104 22,015 1Q/97 1Q/98 2Q/99 N/A
----- -------- --------
Total Other............ 3,524 91,048 242,303
----- -------- --------
Total Developments
Under Construction.... 5,847 $217,065 $382,873
===== ======== ========
</TABLE>
- --------
(1) Represents total 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.
(2) Represents the date the first completed units were made available for
leasing (or are expected to be made available for leasing). ATLANTIC
begins leasing completed units prior to completion of the entire
community.
(3) The percentage leased is based on total units completed and available for
lease at December 31, 1997.
(4) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
(5) This community's first units were delivered in January 1998.
33
<PAGE>
There are risks associated with ATLANTIC's development and construction
activities which include: development and acquisition opportunities explored
by ATLANTIC may be abandoned; third-party developers constructing ATLANTIC's
communities may not perform as contracted resulting in additional costs to
ATLANTIC to complete the community; occupancy rates and rents at a newly
completed community are dependent on a number of factors, including market and
general economic conditions, and may not be sufficient to make the community
profitable; financing may not be available on favorable terms to allow
ATLANTIC to develop communities as planned; and construction and lease-up may
not be completed on schedule, resulting in increased debt service expense and
construction costs. Development activities are also subject to risks relating
to the inability to obtain, or delays in obtaining, all necessary land-use,
building, occupancy and other required governmental permits and
authorizations; however, ATLANTIC obtains many approvals prior to the initial
land acquisition. The occurrence of any of the events described above could
adversely affect ATLANTIC's ability to achieve its projected yields on
communities under development or redevelopment.
1997 Acquisition Activity
ATLANTIC completed the acquisition of $59.9 million of operating
communities, representing a total of 1,220 units, in 1997. These acquisitions
are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
TOTAL
EXPECTED ACQUISITION
UNITS INVESTMENT(1) DATE
----- ------------- -----------
<S> <C> <C> <C>
Columbus, Ohio:
Arbors of Dublin.............................. 288 $14,625 10/22/97
Ft. Lauderdale/West Palm Beach Florida:
Cameron at Hidden Harbor...................... 200 10,939 12/02/97
Nashville, Tennessee:
Shadowbluff................................... 220 8,484 08/26/97
Raleigh, North Carolina:
Bryn Athyn.................................... 172 9,306 09/19/97
Cameron Lake II............................... 172 9,230 12/04/97
Tampa, Florida:
Cameron at Palm Harbor........................ 168 7,334 10/17/97
----- -------
Total....................................... 1,220 $59,918
===== =======
</TABLE>
- --------
(1) Represents cost, plus budgeted capital expenditures.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates with respect to the cost of
improvements to bring an acquired community up to standards established for
the market position intended for that community will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
Although ATLANTIC undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after ATLANTIC begins operating the community, which
could significantly increase ATLANTIC's total investment.
RESULTS OF OPERATIONS
Net earnings attributable to Common Shares for the years ended December 31,
1997, 1996 and 1995 were $51.1 million, $38.6 million and $19.6 million,
respectively. Net earnings attributable to Common Shares increased $12.5
million in 1997 over 1996 and $19.0 million in 1996 over 1995.
Property Operations
At December 31, 1997, ATLANTIC had 21,693 operating multifamily units as
compared to 19,241 operating multifamily units at December 31, 1996 and 15,823
operating multifamily units at December 31, 1995.
34
<PAGE>
This increased number of communities in operation resulted in increases in
rental income ($30.7 million in 1997 over 1996 and $34.1 million in 1996 over
1995), rental expenses and property management fees ($7.3 million in 1997 over
1996 and $10.1 million in 1996 over 1995), real estate taxes ($2.4 million in
1997 over 1996 and $2.7 million in 1996 over 1995), and depreciation ($6.2
million in 1997 over 1996 and $4.9 million in 1996 over 1995).
During the period prior to a community being stabilized (see "Item 1.
Business--ATLANTIC's Operating System--Acquisitions"), management begins
implementing expense controls, reconfiguring the resident mix, supervising
renovations and implementing a strategy to increase rental income. The full
benefits of the changes are not reflected until the communities are
stabilized. Of ATLANTIC's total operating multifamily communities, based on
total expected investment, 22.7% were classified as pre-stabilized at December
31, 1997 as compared to 26.7% at December 31, 1996 and 25.7% at December 31,
1995.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional operating communities in its target market,
ATLANTIC anticipates increases in rental income and property-level expenses in
future periods.
Communities Fully Operating Throughout Both Periods
Operating Summary
ATLANTIC had 45 "same store" communities that were fully operational
throughout 1996 and 1997 and 34 "same store" communities that were fully
operational throughout 1995 and 1996. The operating performance of these same
store communities for the periods indicated was as follows:
<TABLE>
<CAPTION>
SAME STORE SAME STORE
COMMUNITIES AS COMMUNITIES AS
OF JANUARY 1, 1996 OF JANUARY 1, 1995
------------------ ------------------
<S> <C> <C>
Communities............................. 45 34
Units................................... 12,251 9,458
Total expected investment (in
millions)(1)........................... $ 629.8 $496.5
% of ATLANTIC's operating portfolio..... 55.5% 51.7%
<CAPTION>
1997 COMPARED 1996 COMPARED
TO 1996 TO 1995
------------------ ------------------
<S> <C> <C>
Collections growth(2)................... 1.95% 2.76%
Operating expense reduction, as
adjusted(3)............................ (0.47)% (0.97)%
Net operating income growth, as
adjusted(4)............................ 3.49% 4.88%
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Average physical occupancy.............. 95.24% 95.32%
Actual operating expense ratio(5)....... 39.53% 39.68%
Actual average rental rate per unit..... $ 694 $ 693
Recurring capital expenditures per
unit................................... $ 209 $ 209
</TABLE>
- --------
(1) Represents cost, plus budgeted capital expenditures.
(2) Collections represent actual rent and other income collected, net of
vacancies, bad debts and concessions.
(3) Operating expense, as adjusted, represents operating expenses (excluding
depreciation and interest expense) as adjusted to remove the accounting
differences which result from capitalizing certain costs during the period
of pre-stabilization and expensing those costs once the community has
reached stabilization.
(4) Net operating income, as adjusted, represents total collected revenues
less operating expense, as adjusted.
(5) Actual operating expense ratio represents actual operating expenses
(excluding depreciation and interest expense) as a percentage of total
collected revenues.
35
<PAGE>
ATLANTIC's operating results are a function of rental collections and
operating expenses. Rental collections are a function of rental rates and
occupancy levels achieved. ATLANTIC's operating personnel continually monitor
rental rates and occupancy levels in an effort to maximize rental collections.
ATLANTIC experienced a small increase in same store community occupancy in
1997 over 1996 (95.24% compared to 94.97%). ATLANTIC's same store average
rental rate of $694 per unit for 1997 was 1.6% higher than the 1996 same store
average rental rate of $683. Consequently, same store rental collections for
1997 increased by 1.95% over 1996. ATLANTIC expects that rental collections
will continue to grow in 1998 at a pace slightly ahead of the growth
experienced in 1997.
ATLANTIC's operating expenses as a percentage of rental revenues for
ATLANTIC's same store communities have generally remained flat (ranging
between 39.5% and 40.8%), primarily due to ATLANTIC's efforts aimed at
reducing resident turnover, thereby reducing the costs associated with re-
leasing vacated units. ATLANTIC expects operating expenses as a percentage of
rental revenues in 1998 to remain at a level consistent with the level
achieved over the past two years. The expected trends in rental rates,
occupancy and operating expenses are expected to have a positive impact on
ATLANTIC's future operating results.
Market Analysis
The following table presents occupancy levels and collections growth for the
45 same store communities by market:
<TABLE>
<CAPTION>
COLLECTIONS TOTAL
AVERAGE AVERAGE GROWTH SAME STORE ATLANTIC
PHYSICAL PHYSICAL 1997 COMMUNITIES PORTFOLIO
OCCUPANCY OCCUPANCY COMPARED TO % BY % BY
1997 1996 1996 MARKET MARKET(1)
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Mid-Atlantic:
Charlotte, North
Carolina............... 95.11% 95.92% (4.47)% 2.45% 5.79%
Columbus, Ohio(2)....... -- -- -- -- 0.96
Greenville, South
Carolina(2)............ -- -- -- -- 0.74
Memphis, Tennessee(2)... -- -- -- -- 1.65
Nashville, Tennessee.... 94.30 95.11 (0.31) 5.49 4.42
Raleigh, North
Carolina............... 96.68 95.72 1.97 2.55 10.50
Richmond, Virginia...... 96.05 95.29 4.41 4.73 6.38
Washington, D.C......... 95.91 94.86 2.63 7.51 6.31
----- ----- ----- ------ ------
Total Mid-Atlantic.... 95.47% 95.23% 1.44% 22.73% 36.75%
----- ----- ----- ------ ------
Southeast:
Atlanta, Georgia........ 94.86% 94.42% 1.47% 44.07% 28.99%
Birmingham, Alabama..... 95.39 94.90 (1.85) 4.53 4.76
----- ----- ----- ------ ------
Total Southeast....... 94.91% 94.47% 1.18% 48.60% 33.75%
----- ----- ----- ------ ------
Florida:
Ft. Lauderdale/West Palm
Beach, Florida......... 95.53% 95.10% 4.84% 7.46% 13.39%
Jacksonville, Florida... 94.22 97.04 (2.34) 1.95 5.34
Orlando, Florida........ 95.73 95.25 5.29 6.64 4.28
Tampa/Ft.
Myers/Sarasota,
Florida................ 95.66 95.75 2.65 12.62 6.49
----- ----- ----- ------ ------
Total Florida......... 95.56% 95.55% 3.50% 28.67% 29.50%
----- ----- ----- ------ ------
Totals................ 95.24% 94.97% 1.95% 100.00% 100.00%
===== ===== ===== ====== ======
</TABLE>
- --------
(1) Represents percentage of operating communities and communities under
construction in each market.
(2) ATLANTIC's communities in these markets were acquired subsequent to
January 1, 1996; therefore, there are no communities for the same store
comparison.
36
<PAGE>
While ATLANTIC's same store communities have experienced an overall increase
in collections of 1.95% for 1997 as compared to 1996, certain of its primary
target market cities have experienced collections decreases. Management
believes that the decreases experienced in Charlotte, Nashville, Birmingham
and Jacksonville are caused by temporary supply imbalances and that these
cities continue to provide opportunities for long-term growth in cash flow. In
Atlanta, which represents 44.07% of the same store communities, same store
collections grew 1.47% in 1997 over 1996. This small increase was expected
since ATLANTIC experienced strong occupancies and rental rates in Atlanta in
1996 associated with the Summer Olympics. In the fourth quarter of 1997,
Atlanta's same store collections grew 2.71% over the fourth quarter of 1996.
Management believes that this trend will continue and that the Atlanta's same
store communities will generate collections growth at or above this level in
1998.
Homestead Transaction
Overview
On October 17, 1996, ATLANTIC sold its moderate-priced, purpose-built,
extended-stay lodging facilities known as Homestead Village(R) properties (the
"Homestead Assets") to Homestead. In addition, ATLANTIC entered into a funding
commitment agreement (the "Funding Agreement") to provide secured financing of
up to $111.1 million to Homestead for purposes of completing the development
and construction of the properties sold in the transaction. ATLANTIC will
receive Homestead Convertible Mortgages with a principal amount of up to $98.0
million in exchange for full funding of up to $111.1 million under the Funding
Agreement. The difference represents a mortgage note premium that is being
amortized as a reduction to interest income over the term of the Homestead
Convertible Mortgages.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the Homestead Assets and 2,818,517
warrants, each to purchase one share of Homestead common stock at $10.00 per
share, in exchange for entering into the Funding Agreement. The common stock
and warrants were distributed to ATLANTIC's shareholders.
ATLANTIC recognized a gain on the sale of the Homestead Assets of $2.8
million, net of costs associated with the transaction.
Interest Income
ATLANTIC began funding under the Funding Agreement in 1997 and funded $106.0
million of the $111.1 million commitment. At December 31, 1997, ATLANTIC had
Homestead Convertible Mortgages with a fair value of $122.5 million (principal
amount of $93.5 million) and recognized interest income related to these
mortgage notes of $4.5 million in 1997. In future years, interest income will
be greater than the 1997 level because ATLANTIC will fund the remaining $5.1
million commitment and the full amount of Homestead Convertible Mortgages will
be outstanding for the entire year.
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9.0% per annum, (ii) the
amortization of the original issue premium which reduces income, (iii) the
amortization of the discount on the conversion feature which increases income
and (iv) the amortization of the deferred commitment fee which increases
income. ATLANTIC uses the effective interest method to calculate the
amortization of all items associated with the Homestead Convertible Mortgages.
The effective interest rate on the funded amount is 8.46% per annum for
purposes of calculating net earnings. The effective interest rate on the
funded amount is 7.09% per annum for purposes of calculating funds from
operations because the amortization of the discount on the conversion feature
and the amortization of the deferred commitment fee are deducted from net
earnings in calculating funds from operations.
37
<PAGE>
Interest Expense
The following summarizes ATLANTIC's interest expense (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Mortgages payable............................. $ 11,062 $ 9,484 $ 7,662
Notes payable................................. 4,103 -- --
Lines of credit............................... 15,296 16,947 15,784
Capitalized interest.......................... (10,169) (10,250) (4,404)
-------- -------- --------
Total interest expense...................... $ 20,292 $ 16,181 $ 19,042
======== ======== ========
</TABLE>
Mortgage interest expense increased $1.6 million in 1997 as compared to 1996
and $1.8 million in 1996 as compared to 1995. These increases are the result
of additional weighted-average mortgage debt outstanding.
In 1997, ATLANTIC recognized $4.1 million of interest expense on the
unsecured senior notes issued in August 1997. ATLANTIC will recognize a full
year of interest expense on these notes in 1998.
Interest expense on line of credit borrowings decreased $1.7 million in 1997
from 1996 and increased $1.2 million in 1996 over 1995. The decrease in 1997
was partially due to a lower weighted-average daily interest rate (7.20% in
1997 as compared to 7.39% in 1996) offset by a slightly higher average
outstanding balance ($207.7 million in 1997 as compared to $204.3 million in
1996). Interest expense on line of credit borrowings is also affected by
amortization of issuance costs and other loan-related costs. This loan cost
amortization was lower in 1997 than in 1996 because ATLANTIC expensed $3.9
million of capitalized loan costs in December 1996 when the secured line of
credit was extinguished. See "--Extraordinary Item--Loss on Early
Extinguishment of Debt" below. The increase in 1996 was primarily a function
of an increase in the average outstanding balance ($204.3 million in 1996 as
compared to $178.3 million in 1995) partially offset by a lower weighted-
average daily interest rate (7.39% in 1996 as compared to 7.92% in 1995).
Amortization of loan costs in 1996 was slightly higher than the 1995 level.
Interest expense recognized on borrowings is offset by the interest
capitalized with respect to ATLANTIC's development activities. Capitalized
interest decreased $0.1 million in 1997 from 1996 and increased by $5.8
million in 1996 over 1995. Capitalized interest levels are reflective of
ATLANTIC's cost of funds and the level of development activity in each year.
Merger Transaction
Terms of Transaction
On September 9, 1997, ATLANTIC acquired the operations and business of
Security Capital (Atlantic) Incorporated (the "REIT Manager") and SCG Realty
Services Atlantic Incorporated (the "Property Manager"), in exchange for
2,306,591 Common Shares (the "Merger"). The REIT Manager and Property Manager
provided management services to ATLANTIC and were wholly owned subsidiaries of
ATLANTIC's principal shareholder, Security Capital. The Common Shares issued
to Security Capital were valued as of August 6, 1997, the record date for
determining ATLANTIC's shareholders entitled to vote on the Merger, at $54.6
million. A per Common Share price of $23.675 (the average market price of
Common Shares over the five-day period prior to August 6, 1997) was used to
determine the number of Common Shares issued. As a result of the Merger,
ATLANTIC has become an internally managed REIT.
Because ATLANTIC, the REIT Manager and Property Manager were under the
common control of Security Capital when the Merger was consummated, the
difference between the market value as of September 8, 1997 of the Common
Shares issued to Security Capital and the value of the net tangible assets of
the REIT Manager and Property Manager acquired by ATLANTIC of $50.9 million
has been accounted for as a distribution to Security Capital. This
distribution is reflected as a deduction from additional paid-in capital.
38
<PAGE>
As part of the Merger, ATLANTIC's common shareholders (other than Security
Capital) as of September 16, 1997 received warrants from Security Capital to
purchase 1,675,940 shares of Security Capital's Class B common stock (0.071116
warrants for each Common Share held). Each warrant can be exercised for one
share of Security Capital's Class B common stock at an exercise price of
$28.00 per share through September 18, 1998. Security Capital issued these
warrants as an incentive to ATLANTIC's shareholders to vote to approve the
Merger and to raise additional equity capital at a relatively low cost, in
addition to other benefits.
Effect on Future Operations
As a result of the Merger, ATLANTIC terminated its management agreements
with the REIT Manager and Property Manager (which covered approximately 97% of
ATLANTIC's operating communities at the time of the Merger). Consequently,
ATLANTIC did not incur the costs associated with these agreements after
September 8, 1997. However, after the Merger was completed, ATLANTIC did
incur, and will continue to incur, certain of the operating costs of the
businesses acquired, primarily the personnel costs associated with the
employees of the REIT Manager and Property Manager who are now employees of
ATLANTIC. In addition, ATLANTIC purchased, and will continue to purchase,
certain administrative services from Security Capital under the ASA. The fees
payable under the ASA are equal to Security Capital's direct cost plus an
overhead factor of 20%. For the initial term of the agreement (September 9,
1997 through December 31, 1998), the fees payable to Security Capital will not
exceed approximately $5.2 million, but may be less than that amount as any
cost savings will accrue to ATLANTIC. For the period from September 9, 1997 to
December 31, 1997, ATLANTIC's costs under the ASA were limited to $1.5 million
and ATLANTIC actually incurred $0.7 million of costs for that period. For
1998, ATLANTIC's costs under the ASA cannot exceed $3.7 million.
Costs related to the management function, including charges under the ASA,
incurred subsequent to the Merger are collectively referred to as "management
costs". Management costs related to property operations are reflected as
rental expenses in arriving at net operating income. Certain qualifying
management costs related to the acquisition and development of communities
have been capitalized as a cost of the respective communities ($1.5 million
for the period from September 9, 1997 through December 31, 1997). Management
costs that have not been capitalized and are not classified as rental expenses
are reflected as general and administrative expenses.
REIT Management Fee Paid to Affiliate
The fee paid by ATLANTIC to the REIT Manager decreased by $1.9 million in
1997 from 1996 and increased by $3.5 million in 1996 over 1995. The decrease
in 1997 was due to the termination of the agreement with the REIT Manager as a
result of the Merger. See "--Merger Transaction". Because this fee fluctuated
with the level of ATLANTIC's cash flow calculated before the fee, the increase
in 1996 over 1995 was expected based upon the increase in ATLANTIC's cash flow
in 1996 over 1995.
General and Administrative
General and administrative expense increased by $1.7 million in 1997 over
1996, primarily due to costs incurred after the Merger as discussed under "--
Merger Transaction". General and administrative expense is expected to
increase in 1998 because the effects of the Merger will be reflected for an
entire year.
Gains on Disposition of Real Estate and Valuation of Long-Lived Investments
ATLANTIC's strategy is to build its asset base through the development and
acquisition of multifamily communities 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. ATLANTIC's "asset optimization
program" is based on market research and is aimed at optimizing its portfolio
composition. Under this program, ATLANTIC may from time to time dispose of
assets that no longer meet its long-term investment objectives and redeploy
the proceeds therefrom, preferably through tax-deferred exchanges, into assets
with better prospects
39
<PAGE>
for growth. As a result of this asset optimization program, ATLANTIC disposed
of five operating communities aggregating 1,396 units in 1997. An aggregate
gain of $1.6 million was recognized on proceeds of $66.5 million. The five
communities that were disposed of in 1997 accounted for $2.6 million, $3.4
million and $3.2 million of net operating income during 1997, 1996 and 1995,
respectively.
ATLANTIC disposed of four communities in 1996 aggregating 1,184 units. An
aggregate gain of $6.7 million was recognized on proceeds of $64.2 million.
These four communities accounted for $3.6 million and $5.2 million of net
operating income during 1996 and 1995, respectively.
In 1995, ATLANTIC disposed of two communities aggregating 596 units. The
proceeds from these dispositions were not materially different from the book
value of the assets on the date of disposition. These two communities
accounted for $2.4 million of net operating income during 1995.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
December 31, 1997, such investments are carried at cost, which is not in
excess of fair market value and no provisions for possible losses have been
made. ATLANTIC recognized provisions for possible losses of $0.2 million in
1997 and $2.5 million in 1996 associated with a community that was sold in
1997.
Extraordinary Item--Loss on Early Extinguishment of Debt
In December 1996, ATLANTIC replaced its existing secured line of credit with
an unsecured line of credit. Such early extinguishment of debt resulted in the
write-off of unamortized loan costs of $3.9 million and is reflected as an
extraordinary item in the statement of earnings for the year ended December
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Overview
ATLANTIC considers its liquidity and ability to generate cash from
operations and financings to be adequate and expects it to continue to be
adequate to meet its development, acquisition, operating and debt service
needs as well as its commitment to fund the remaining amount under the Funding
Agreement and its shareholder distribution requirements.
ATLANTIC expects to finance future activities with cash on hand and
borrowings under its unsecured lines of credit prior to arranging long-term
financing. The unsecured lines of credit will facilitate an efficient response
to market opportunities while minimizing the amount of cash invested in short-
term investments at lower yields. At December 31, 1997, ATLANTIC had $210.3
million available for borrowing under these unsecured lines of credit ($188.1
million available at March 18, 1998). Another source of future liquidity and
financial flexibility is ATLANTIC's shelf-registered securities ($492.6
million available as of December 31, 1997) which can be issued in the form of
unsecured long-term debt, preferred stock or Common Shares on an as-needed
basis, subject to ATLANTIC's ability to effect an offering on satisfactory
terms. ATLANTIC believes that its current conservative ratio of long-term debt
to total long-term undepreciated book capitalization (which was 25.1% at
December 31, 1997) provides considerable flexibility to prudently increase its
capital base by utilizing long-term debt as a financing tool in the future,
while remaining within the framework of the restrictive covenants in
ATLANTIC's current debt agreements. Long-term undepreciated book
capitalization is defined as the sum of long-term debt and shareholders'
equity after adding back accumulated depreciation.
Operating Activities
Cash provided by operating activities was $83.1 million in 1997, an increase
of $28.7 million from the 1996 level of $54.4 million. Cash provided by
operating activities in 1996 increased by $14.6 million from the 1995 level.
These increases are primarily the result of the increased number of
communities in operation in each year.
40
<PAGE>
ATLANTIC's policy is to expense, rather than capitalize, repairs and
maintenance including carpet and appliance replacements, 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.
Investing and Financing Activities
Cash generated from financing activities, before payment of distributions on
Common Shares, has historically been sufficient to meet ATLANTIC's needs for
investing activities. ATLANTIC's strategy has been to fund its current
investment activities through line of credit borrowings, which are
subsequently repaid with proceeds from sales of debt and equity securities.
ATLANTIC's investment activities used approximately $295.6 million, $287.4
million and $235.1 million of cash for 1997, 1996 and 1995, respectively.
ATLANTIC's financing activities provided net cash flow of $209.4 million,
$230.9 million and $195.6 million for 1997, 1996 and 1995, respectively. Cash
distributions paid on Common Shares were $66.0 million, $53.1 million and
$35.1 million for 1997, 1996 and 1995, respectively, which have been
substantially funded by cash generated from operating activities.
1995 Investing and Financing Activities
In 1995, ATLANTIC acquired operating communities aggregating 3,961 units and
disposed of two communities aggregating 596 units. Also in 1995, ATLANTIC
began construction on 2,214 units and completed construction on its first two
internally developed communities consisting of 468 units. See the tables of
investment activity under "--Real Estate Investments".
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 Common Shares generated the largest source of capital
in 1995. ATLANTIC sold $205.8 million of Common Shares, net of Common Share
repurchases, through two private placements. In connection with the
acquisition of certain communities in 1995, ATLANTIC assumed $24.7 million in
mortgage debt. Additional borrowings on the line of credit during 1995
aggregated $37.0 million.
1996 Investing and Financing Activities
In 1996, ATLANTIC acquired operating communities aggregating 3,556 units and
disposed of four communities aggregating 1,184 units. Also in 1996, ATLANTIC
began construction on 2,815 multifamily units and completed construction on
three internally developed multifamily communities consisting of 1,046 units.
See the tables of investment activity under "--Real Estate Investments".
During 1996, ATLANTIC's net additional investment in real estate was $268.3
million, bringing its total real estate investment at December 31, 1996 to
$1.16 billion. In 1996, sales of Common Shares were again ATLANTIC's largest
source of capital. ATLANTIC raised net proceeds of $119.1 million from a
private placement of Common Shares and ATLANTIC's initial public offering of
Common Shares, completed on October 18, 1996, generated net proceeds of $110.0
million.
In connection with the acquisition of certain communities in 1996, ATLANTIC
assumed $17.9 million in mortgage debt. Additional borrowings on the line of
credit during 1996 aggregated $38.0 million.
1997 Investing and Financing Activities
During 1997, ATLANTIC's net investment in real estate increased by $207.3
million, of which $200.2 million represented development expenditures,
bringing its total real estate investment at December 31, 1997 to $1.36
billion. ATLANTIC commenced construction on 3,892 units and completed
construction of seven communities aggregating 2,124 units, bringing the total
of completed internally developed communities to 12 aggregating 3,638 units.
In 1997, ATLANTIC acquired six operating communities aggregating 1,220 units
and
41
<PAGE>
disposed of five communities aggregating 1,396 units. See the tables of
investment activity under "--Real Estate Investments".
Also during 1997, ATLANTIC funded $106.0 million under the Funding Agreement
with Homestead in exchange for Homestead Convertible Mortgages. See "--Results
of Operations--Homestead Transaction" and "--Results of Operations--Homestead
Convertible Mortgages".
Sales of equity securities and senior unsecured debt securities were the
primary source of capital in 1997. ATLANTIC's combined net proceeds from sales
of equity and debt securities were approximately $342.8 million. In connection
with the acquisition of certain communities, ATLANTIC assumed $16.3 million of
mortgage debt. In 1997 ATLANTIC reduced its short-term borrowings from $228.0
million outstanding at December 31, 1996 to $167.4 million outstanding at
December 31, 1997.
Homestead Convertible Mortgages
At December 31, 1997, ATLANTIC had funded $106.0 million of its total $111.1
million commitment under the Funding Agreement and expects the remaining $5.1
million commitment to be funded in 1998. Upon expected full funding, ATLANTIC
will own Homestead Convertible Mortgages with a principal amount of $98.0
million. The Homestead Convertible Mortgages are convertible into Homestead
common stock on a basis of one share of Homestead common stock for every
$11.50 of principal amount outstanding. Assuming full funding and full
conversion of the outstanding mortgage notes and based on the Homestead common
stock closing price on December 31, 1997, ATLANTIC's ownership would result in
the following incremental value per ATLANTIC Common Share (in thousands,
except per share amounts):
<TABLE>
<S> <C>
Homestead common stock price at December 31, 1997................. $15.0625
Conversion price.................................................. 11.5000
--------
Incremental value per share of Homestead common stock (at full
funding)......................................................... $ 3.5625
Shares of Homestead common stock upon conversion.................. 8,522
--------
Total incremental value from conversion........................... $ 30,360
ATLANTIC Common Shares outstanding at December 31, 1997........... 47,761
--------
Assumed incremental value per ATLANTIC Common Share as of December
31, 1997......................................................... $ 0.64
========
</TABLE>
The Homestead Convertible Mortgages, which are not callable until 2001,
provide ATLANTIC with another source of future liquidity and financial
flexibility. Management intends to monitor its investment in the Homestead
Convertible Mortgages and evaluate opportunities to utilize this financial
resource.
42
<PAGE>
Commitments
ATLANTIC had communities in various stages of development at December 31,
1997. These developments are shown below and are subject to a number of
conditions. ATLANTIC cannot predict with certainty that any of them will be
consummated.
<TABLE>
<CAPTION>
CONTRACTUALLY
TOTAL COMMITTED
NUMBER EXPECTED UNFUNDED UNFUNDED
OF INVESTMENT(1) AMOUNT AMOUNT
UNITS (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Communities under
construction:
In lease-up............ 2,323 $140.6 $ 14.6 $ 14.6
Other.................. 3,524 242.3 151.2 151.2
----- ------ ------ ------
5,847 382.9 165.8 165.8
----- ------ ------ ------
Communities in
planning(2):
Owned.................. 928 66.9 56.2 --
Under control.......... 1,864 127.5 125.7 --
----- ------ ------ ------
2,792 194.4 181.9 --
----- ------ ------ ------
Totals............... 8,639 $577.3 $347.7 $165.8
===== ====== ====== ======
</TABLE>
- --------
(1) For operating communities, represents cost, plus budgeted capital
expenditures. For communities under construction and in planning,
represents total budgeted development cost, which includes cost of land,
fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through a contingent contract or letter of intent) during
a contractually agreed-upon time period to acquire land for future
development of multifamily communities, but does not currently own the
land.
ATLANTIC occasionally utilizes derivative financial investments as hedges to
manage interest rate risk on anticipated future transactions. ATLANTIC does
not use derivative financial instruments for trading purposes. ATLANTIC
entered into an interest rate contract with a notional amount of $100.0
million in October 1997 in anticipation of a 1998 debt offering. The fair
value of this contract was an unrealized loss of approximately $5.6 million at
December 31, 1997, based on quoted market prices and estimates obtained from
brokers. Upon completion of the offering, ATLANTIC will defer the loss
associated with the contract which will then be amortized as an increase to
interest expense over the term of the debt issued.
Impact of Year 2000
ATLANTIC has undertaken a review of all of its computer systems and
applications to determine if these programs are Year 2000 compliant and if
not, the efforts that will be necessary to bring the programs into compliance.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations.
ATLANTIC has not identified any computer system or application for which a
failure to be Year 2000 compliant would result in a material adverse impact on
ATLANTIC's business activities or results of operations. However, the
preliminary results of this review indicate that certain of ATLANTIC's
accounting and financial reporting applications are not Year 2000 compliant.
In order to enhance operating efficiencies, ATLANTIC has already undertaken a
project that will replace these core financial systems with computer software
that will better serve ATLANTIC in the future. This new software, that is
expected to be fully operational by the first quarter of 1999, is Year 2000
compliant.
43
<PAGE>
ATLANTIC is currently evaluating Year 2000 modifications to other existing
software programs. The cost of these modifications is not expected to be
material and all conversions and modifications are expected to be completed in
a timely manner.
Lines of Credit
On November 24, 1997, ATLANTIC renegotiated its $350 million unsecured line
of credit agreement with Morgan Guaranty Trust Company of New York ("MGT"), as
agent for a group of lenders. Under the new agreement, borrowings on the
unsecured line of credit bear interest at prime or, at ATLANTIC's option,
LIBOR plus 0.75%. Under a competitive bid option contained in the new line of
credit agreement, ATLANTIC may be able to borrow at a lower interest rate
spread over LIBOR, depending on market conditions. This option is available on
up to $175 million of borrowings. ATLANTIC pays an annual facility fee of
0.15% on the total line of credit available of $350 million. The line of
credit matures in November 1999 and may be extended for one year with the
approval of MGT and the other participating lenders.
All debt incurrences under the unsecured line of credit are subject to
certain covenants as more fully described in the loan agreement. Specifically,
distributions for the preceding four quarters may not exceed 95% of ATLANTIC's
funds from operations (as defined in the loan agreement) for the preceding
four quarters. ATLANTIC is in compliance with all such covenants.
On June 30, 1997, ATLANTIC entered into a $25 million unsecured borrowing
agreement (increased to $50 million on January 20, 1998) with Chase Bank of
Texas, N.A. This line of credit, which allows for same day borrowings and more
efficient cash management, matures on January 19, 1999 and bears interest at
an overnight rate that depends on the availability of funds at the time the
borrowing is made. In 1997, the interest rate on these borrowings ranged from
6.31% to 7.38% with a weighted-average daily interest rate of 6.69%.
As of March 18, 1998, $187.0 million of borrowings were outstanding under
the $350 million unsecured line of credit and $24.9 million of borrowings were
outstanding under the $50 million unsecured line of credit.
Mortgage Debt
At December 31, 1997, ATLANTIC had $170.5 million of mortgage debt
consisting of $49.9 million of fixed-rate conventional mortgage debt and
$120.6 million of mortgages that secure ten tax-exempt bond issues. This long-
term mortgage debt, which is substantially fully amortizing, has a weighted-
average all-in interest rate of 6.98%, and an average term to maturity of 21.3
years. The use of mortgage debt to acquire certain communities provides
ATLANTIC with favorable and conservative financial leverage on its investment
in these communities.
All of ATLANTIC's tax-exempt bond issues are included in a credit
enhancement agreement with FNMA. This agreement allowed ATLANTIC to receive a
favorable interest rate on the bond issues and required ATLANTIC to enter into
swap agreements to mitigate the interest rate exposure on the nine bond issues
with variable interest rates. ATLANTIC makes monthly principal payments on all
of the bond issues into a principal reserve account based upon a 30-year
amortization. The notional amount of the swap agreements is equal to the
principal amount of the variable rate bond issues less the balance in the
principal reserve fund associated with the variable rate bond issues. ATLANTIC
pays interest on the notional amount at an all-in, fixed rate of 6.61%. The
swap agreements mature from August 2002 through August 2006. ATLANTIC paid
$1.8 million, $1.8 million and $0.6 million more in interest than it received
under these swap agreements during 1997, 1996 and 1995, respectively.
Distributions
ATLANTIC's current distribution policy is to pay quarterly cash
distributions to shareholders based upon what it considers to be a reasonable
percentage of cash flow. Because depreciation is a non-cash expense, cash
44
<PAGE>
flow typically will be greater than earnings from operations and net earnings.
Therefore, quarterly cash distributions will be higher than quarterly
earnings, resulting in a reduction to shareholders' equity.
Cash distributions paid on Common Shares in 1997, 1996 and 1995 were $1.56
per Common Share, $1.65 per Common Share and $1.60 per Common Share,
respectively. Additionally in 1996, ATLANTIC made the Homestead Distribution,
which was valued at $58.2 million for book purposes.
ATLANTIC announces the following year's projected annual distribution level
after the Board's annual budget review and approval in December of each year.
At its December 4, 1997 meeting, the Board announced a projected annual
distribution level of $1.60 per Common Share for 1998 and declared a
distribution of $0.40 per Common Share for the first quarter of 1998, which
was paid on February 26, 1998. The payment of distributions is subject to the
discretion of the Board and is dependent upon the financial condition and
operating results of ATLANTIC.
Funds from Operations
Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) from real estate
transactions, provisions for possible losses, extraordinary items, non-cash
interest income from Homestead Convertible Mortgages and real estate
depreciation. Funds from operations should not be considered as an alternative
to net earnings 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.
ATLANTIC believes that funds from operations is helpful to a reader as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities, it
provides a reader with an indication of the ability of ATLANTIC to incur and
service debt, to make capital expenditures and to fund other cash needs. On
January 1, 1996, ATLANTIC adopted NAREIT's revised definition of funds from
operations. Under this more conservative definition, loan cost amortization is
not added back to net earnings in determining funds from operations. The funds
from operations measure presented by ATLANTIC, while consistent with the
NAREIT definition, will not be comparable to similarly titled measures of
other REITs which do not compute funds from operations in a manner consistent
with ATLANTIC. Funds from operations is not intended to represent cash made
available to shareholders.
To provide a more meaningful comparison to 1997 results, ATLANTIC believes
that funds from operations for 1996 and 1995 should be adjusted to reflect the
effects of the sale of the Homestead Assets in 1996. Accordingly, the table
below also presents pro forma funds from operations, which have been
calculated as if the sale of the Homestead Assets had occurred on January 1,
1995. However, the 1996 and 1995 pro forma funds from operations information
does not give effect to or adjust for any other events and is not necessarily
indicative of what actual funds from operations would have been if the
Homestead transaction had occurred on January 1, 1995.
45
<PAGE>
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings............................... $ 51,154 $ 38,629 $ 19,639
Add (Deduct)
Real estate depreciation................. 26,963 20,824 15,925
Gain on disposition of real estate....... (1,608) (6,732) --
Gain on sale of Homestead Assets......... -- (2,839) --
Provision for possible loss on
investments............................. 200 2,500 --
Extraordinary item-loss on early
extinguishment of debt.................. -- 3,940 --
Amortization related to Homestead
Convertible Mortgages................... (486) -- --
---------- ---------- ----------
Funds from operations...................... 76,223 56,322 35,564
---------- ---------- ----------
Add (deduct) pro forma adjustments relating
to the sale of Homestead:
Reduction in rental income(1)............ -- (424) --
Reduction in rental expenses(1).......... -- 173 --
Increase in interest expense(2).......... -- (2,739) (3,448)
Other, net............................... -- 34 59
REIT management fee effect(3)............ -- 475 542
---------- ---------- ----------
Total pro forma adjustments............ -- (2,481) (2,847)
---------- ---------- ----------
Pro forma funds from operations............ 76,223 53,841 32,717
Cash distributions paid.................... (65,976) (53,064) (35,119)
---------- ---------- ----------
Excess (deficit) of pro forma funds from
operations over cash distributions........ $ 10,247 $ 777 $ (2,402)
========== ========== ==========
Diluted weighted-average Common Shares
outstanding (as adjusted for reverse
Common Share split)....................... 42,450 32,028 21,944
========== ========== ==========
</TABLE>
- --------
(1) Represents the reduction in rental income and rental expenses that would
have occurred had the Homestead property that commenced operations in 1996
been sold as of January 1, 1995.
(2) Represents the increase in interest expense due to (i) the reduction in
capitalized interest that would have resulted from the sale of Homestead
Village(R) properties under development and (ii) the increased borrowings
necessary to fund the cash payment to Homestead upon closing of the
Homestead transaction, as if these two items had occurred on January 1,
1995.
(3) Represents the decrease in REIT management fee that would have resulted
from the pro forma adjustments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ATLANTIC's Balance Sheets as of December 31, 1997 and 1996, its Statements
of Earnings, Shareholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1997 and Schedule III--Real Estate and
Accumulated Depreciation, together with the report of Ernst & Young LLP,
independent auditors, are included under Item 14 of this report and are
incorporated herein by reference. Selected quarterly financial data is
presented in Note 10 of Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
Not applicable.
46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding ATLANTIC's executive officers, see "Item 1.
Business--Directors and Officers of ATLANTIC". The other information required
by this Item 10 is incorporated herein by reference to the description under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in ATLANTIC's definitive proxy statement for its 1998
annual meeting of shareholders (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the description under the captions
"Election of Directors" and "Executive Compensation" in the 1998 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the description under the captions
"Principal Shareholders" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Financial Statements and Schedule on page 48 of this
report, which is incorporated herein by reference.
2. Financial Statement Schedules:
Schedule III.
All other schedules have been omitted since the required information is
presented in the financial statements and the related notes or is not
applicable.
3. Exhibits:
See Index to Exhibits on pages 84 and 85 of this report, which is
incorporated herein by reference.
(b) Reports on Form 8-K: The following report on Form 8-K was filed during
the last quarter of the period covered by this report:
Not Applicable.
(c) Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed in the Index
to Exhibits on pages 84 and 85 of this report, which is incorporated herein by
reference.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS............................................ 49
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1997 and 1996......................... 50
Statements of Earnings for the years ended December 31, 1997, 1996 and
1995................................................................... 51
Statements of Shareholders' Equity for the years ended December 1995,
1996 and 1997.......................................................... 52
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995................................................................... 53
Notes to Financial Statements........................................... 54
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1997............................................................... 75
</TABLE>
48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1997 and 1996, and the related statements of
earnings, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audit also included the accompanying
Schedule III, Real Estate and Depreciation. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. Also,
in our opinion, the related 1997 financial statement schedule, 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
Dallas, Texas
January 27, 1998
49
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
------
Real estate............................................ $1,364,572 $1,157,235
Less accumulated depreciation.......................... 65,626 41,166
---------- ----------
1,298,946 1,116,069
Homestead Convertible Mortgages........................ 122,482 --
---------- ----------
Net investments...................................... 1,421,428 1,116,069
Cash and cash equivalents--unrestricted................ 1,273 4,339
Cash and cash equivalents--restricted tax-deferred
exchange proceeds..................................... -- 1,672
Other assets........................................... 18,710 12,985
---------- ----------
Total assets....................................... $1,441,411 $1,135,065
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit...................................... $ 164,743 $ 228,000
Notes payable........................................ 150,000 --
Mortgages payable.................................... 170,525 155,790
Distributions payable................................ 19,104 14,778
Accounts payable..................................... 22,774 20,076
Accrued expense and other liabilities................ 23,284 17,779
---------- ----------
Total liabilities.................................. 550,430 436,423
---------- ----------
Shareholders' equity (250,000,000 total shares
authorized):
Series A Preferred Shares (2,000,000 shares issued
and outstanding at December 31,1997; stated
liquidation preference of $25 per share)............ 50,000 --
Common Shares (47,760,580 issued and outstanding at
December 31, 1997 and 37,891,580 issued and
outstanding at December 31, 1996)................... 478 379
Additional paid-in capital........................... 904,668 747,640
Employee stock purchase notes........................ (12,347) --
Unrealized gains on Homestead Convertible Mortgages.. 16,707 --
Distributions in excess of net earnings.............. (68,525) (49,377)
---------- ----------
Total shareholders' equity......................... 890,981 698,642
---------- ----------
Total liabilities and shareholders' equity......... $1,441,411 $1,135,065
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental income..................................... $168,459 $137,729 $103,634
Homestead Convertible Mortgages interest income... 4,453 -- --
Other interest income............................. 637 427 245
-------- -------- --------
173,549 138,156 103,879
-------- -------- --------
Expenses:
Rental expenses:
Paid to affiliate............................... 274 -- --
Paid to third parties........................... 44,488 36,808 27,814
Real estate taxes................................. 14,693 12,293 9,570
Property management fees:
Paid to affiliate............................... 3,848 4,208 3,475
Paid to third parties........................... 629 971 591
Depreciation...................................... 26,994 20,824 15,925
Interest.......................................... 20,292 16,181 19,042
REIT management fee paid to affiliate............. 8,548 10,445 6,923
General and administrative expenses:
Paid to affiliate............................... 316 -- --
Paid to third parties........................... 2,046 673 646
Provision for possible loss on investments........ 200 2,500 --
Other............................................. 106 255 254
-------- -------- --------
122,434 105,158 84,240
-------- -------- --------
Earnings from operations............................ 51,115 32,998 19,639
Gain on disposition of real estate................ 1,608 6,732 --
Gain on sale of Homestead Assets.................. -- 2,839 --
-------- -------- --------
Earnings before extraordinary item.................. 52,723 42,569 19,639
Extraordinary item--loss on early extinguishment
of debt.......................................... -- 3,940 --
-------- -------- --------
Net earnings........................................ 52,723 38,629 19,639
Less preferred share dividends.................... 1,569 -- --
-------- -------- --------
Net earnings attributable to Common Shares.......... $ 51,154 $ 38,629 $ 19,639
======== ======== ========
Per Common Share amounts:
Basic and diluted earnings before extraordinary
item............................................. $ 1.21 $ 1.33 $ 0.89
======== ======== ========
Basic and diluted net earnings attributable to
Common Shares.................................... $ 1.21 $ 1.21 $ 0.89
======== ======== ========
Weighted-average Common Shares outstanding--
basic............................................ 42,449 32,028 21,944
======== ======== ========
Weighted-average Common Shares outstanding--
diluted.......................................... 42,450 32,028 21,944
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES, $0.01 PAR VALUE
--------------------------
SERIES A
PREFERRED UNREALIZED
SHARES EMPLOYEE GAIN ON DISTRIBUTIONS
AT AGGREGATE COMMON ADDITIONAL STOCK HOMESTEAD IN EXCESS
LIQUIDATION SHARES AT PAID-IN PURCHASE CONVERTIBLE OF NET
PREFERENCE PAR VALUE CAPITAL NOTES MORTGAGES EARNINGS TOTAL
------------- ---------- ---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994................... $ -- $ 186 $371,128 $ -- $ -- $ (4,684) $366,630
Net earnings........... -- -- -- -- -- 19,639 19,639
Common Shares issued in
private offerings..... -- 130 289,578 -- -- -- 289,708
Common Shares
repurchased........... -- (38) (83,882) -- -- -- (83,920)
Common Share
distributions paid.... -- -- -- -- -- (35,119) (35,119)
------------- --------- -------- -------- -------- -------- --------
Balances at December 31,
1995................... -- 278 576,824 -- -- (20,164) 556,938
Net earnings........... -- -- -- -- -- 38,629 38,629
Common Shares issued in
private offerings..... -- 52 119,125 -- -- -- 119,177
Common Shares issued in
initial public
offering.............. -- 49 109,919 -- -- -- 109,968
Common Share
distributions paid.... -- -- -- -- -- (53,064) (53,064)
Homestead
Distribution.......... -- -- (58,228) -- -- -- (58,228)
Common Share
distributions
accrued............... -- -- -- -- -- (14,778) (14,778)
------------- --------- -------- -------- -------- -------- --------
Balances at December 31,
1996................... -- 379 747,640 -- -- (49,377) 698,642
--------
Net earnings........... -- -- -- -- -- 52,723 52,723
Preferred share
dividends paid........ -- -- -- -- -- (1,569) (1,569)
Other comprehensive
income--unrealized
holding gains on
Homestead Convertible
Mortgages............. -- -- -- -- 16,707 -- 16,707
--------
Comprehensive income
attributable to Common
Shares................ 67,861
--------
Common Shares issued in
public offering....... -- 70 145,966 -- -- -- 146,036
Common Shares issued
through employee stock
purchase plan......... -- 6 13,277 (12,614) -- -- 669
Common Shares issued in
Merger................ -- 23 51,731 -- -- -- 51,754
Distribution to
Security Capital in
Merger (includes costs
of the Merger of
$919)................. -- -- (51,795) -- -- -- (51,795)
Common Shares
repurchased........... -- -- (208) -- -- -- (208)
Preferred shares issued
in public offering.... 50,000 -- (1,943) -- -- -- 48,057
Principal payments on
employee stock
purchase notes........ -- -- -- 66 -- -- 66
Retirements of employee
stock purchase notes.. -- -- -- 201 -- -- 201
Common Share
distributions paid.... -- -- -- -- -- (51,198) (51,198)
Common Share
distributions
accrued............... -- -- -- -- -- (19,104) (19,104)
------------- --------- -------- -------- -------- -------- --------
Balances at December 31,
1997................... $ 50,000 $ 478 $904,668 $(12,347) $ 16,707 $(68,525) $890,981
============= ========= ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net earnings................................... $ 52,723 $ 38,629 $ 19,639
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization................ 27,342 22,492 17,496
Provision for possible loss on investments... 200 2,500 --
Gain on disposition of real estate........... (1,608) (6,732) --
Gain on sale of Homestead Assets............. -- (2,839) --
Extraordinary item--loss on early
extinguishment of debt...................... -- 3,940 --
Increase (decrease) in accounts payable...... 1,830 (374) 937
Increase in accrued expenses and other
liabilities................................. 5,740 1,993 3,053
Increase in other assets..................... (3,105) (5,253) (1,393)
-------- -------- --------
Net cash flow provided by operating
activities................................ 83,122 54,356 39,732
-------- -------- --------
Investing activities:
Real estate investments........................ (256,683) (331,440) (259,008)
Proceeds from disposition of real estate....... 65,405 63,544 23,859
Cash payment to Homestead...................... -- (16,595) --
Tax-deferred exchange proceeds held in escrow.. 1,672 (1,672) --
Funding of Homestead Convertible Mortgages..... (106,000) -- --
Other.......................................... -- (1,255) --
-------- -------- --------
Net cash flow used by investing
activities................................ (295,606) (287,418) (235,149)
-------- -------- --------
Financial activities:
Proceeds from sale of shares................... 194,762 229,145 289,708
Repurchase of Common Shares.................... (7) -- (83,920)
Proceeds from lines of credit.................. 465,901 246,000 270,000
Payments on lines of credit.................... (529,158) (208,000) (233,000)
Proceeds from notes payable.................... 150,000 -- --
Distributions paid on Common Shares............ (65,976) (53,064) (35,119)
Distributions paid on Series A Preferred
Shares........................................ (1,569) -- --
Proceeds from mortgage debt.................... -- 20,500 --
Debt issuance and other transaction costs
incurred...................................... (3,051) (2,573) (5,019)
Regularly scheduled mortgage principal
payments...................................... (1,550) (1,101) (623)
Mortgage debt principal payments at maturity... -- -- (6,378)
Principal payments on employee stock purchase
notes......................................... 66 -- --
-------- -------- --------
Net cash flow provided by financing
activities................................ 209,418 230,907 195,649
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... (3,066) (2,155) 232
Cash and cash equivalents, beginning of year... 4,339 6,494 6,262
-------- -------- --------
Cash and cash equivalents, end of year......... $ 1,273 $ 4,339 $ 6,494
======== ======== ========
</TABLE>
See Note 11 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 communities in the south-Atlantic, mid-Atlantic and midwestern
regions of the United States.
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 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 reported 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 estimated fair
market value. Costs directly related to the acquisition, renovation or
development of real estate are capitalized. Costs incurred in connection with
the pursuit of unsuccessful acquisitions are expensed at the time the pursuit
is abandoned.
Depreciation is computed over the economic useful lives of depreciable
property on a straight-line basis. Communities are depreciated principally
over 20-40 years for buildings and improvements and 2-10 years for furnishings
and other depreciable assets.
Capitalization Policy
Renovations and improvements are capitalized and depreciated over their
economic useful lives. Repairs and maintenance, including carpet and appliance
replacements, and make-ready expenses (expenses incurred in preparing a vacant
multifamily unit for the next resident) are expensed as incurred to the extent
they are not acquisition-related renovation costs identified during ATLANTIC's
pre-acquisition due diligence. ATLANTIC capitalizes certain qualifying
management costs related to the acquisition, development and renovation of
multifamily communities.
Cost of Raising Capital
Costs incurred in connection with the issuance of shares are deducted from
shareholders' equity. Costs incurred in connection with the incurrence or
renewal of debt are capitalized, included with other assets and amortized over
the term of the related loan or renewal term.
54
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting.
Gains on sales of real estate are recorded when criteria set forth by
generally accepted accounting principles have been met. A provision for
possible loss is made when collection of receivables is considered doubtful.
Rental Expenses
Rental expenses include utilities, repairs and maintenance, make-ready costs
(including carpet and appliance replacement), property insurance, marketing,
landscaping, on-site personnel and other administrative costs.
Federal Income Taxes
ATLANTIC has elected 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.
Comprehensive Income
ATLANTIC adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, in the fourth quarter of 1997. SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, its adoption had no impact on ATLANTIC's
net earnings or shareholders' equity. In 1997, ATLANTIC had one item of other
comprehensive income, the unrealized gain on the convertible mortgage notes
discussed in Note 3. This unrealized gain has been recognized in shareholders'
equity. ATLANTIC had no items of other comprehensive income in 1995 or 1996.
In accordance with SFAS No. 130, ATLANTIC's statement of shareholders' equity
for 1997 displays comprehensive income and its components.
Interest Rate Contracts
ATLANTIC utilizes various interest rate contracts to hedge interest rate
risk on anticipated debt offerings. These anticipatory hedges are designated
and effective as hedges of identified debt issuances which have a high
probability of occurring. Gains and losses resulting from changes in the
market value of these contracts are deferred and amortized into interest
expense over the term of the related debt issuance.
Per Common Share Data
ATLANTIC adopted SFAS No. 128, Earnings per Share in the fourth quarter of
1997. SFAS No. 128 replaces the presentation of primary and fully diluted
earnings per share with a presentation of basic and diluted earnings per
share. The adoption of SFAS No. 128 did not result in a restatement of
previously reported earnings per Common Share data.
The weighted-average number of shares of common stock, par value $0.01 per
share ("Common Shares"), outstanding during the year is used to calculate
basic earnings per Common Share. Diluted earnings per Common Share for 1996
and 1997 is computed based on the weighted-average Common Shares outstanding
plus the Common Shares that would be outstanding assuming the exercise of
dilutive options as of the date the options were granted (3,000 options
assumed to be exercised as of October 14, 1996 and 3,000 options assumed to be
exercised as of May 29, 1997). All other outstanding options are antidilutive.
There were no outstanding options in 1995. See Note 8 for a discussion of all
of ATLANTIC's outstanding options. Because the amount of dilutive options is
immaterial to the total weighted-average Common Shares outstanding, basic
earnings per Common Share and diluted earnings per Common Share are the same.
55
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Common Share and per Common Share amounts included in the financial
statements have been restated to reflect the reverse Common Share split
discussed in Note 7.
NOTE 2 REAL ESTATE
Investment in Real Estate
ATLANTIC's real estate, which consists entirely of multifamily communities,
at cost, was as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
-------------------- --------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating communities:
Acquired.................... $ 921,214 18,055 $ 878,029 17,727
Developed................... 211,297 3,638 74,741 1,514
---------- ------ ---------- ------
1,132,511 21,693 952,770 19,241
Communities under
construction................. 217,065(1) 5,847(1) 194,587 4,727
Communities in planning(2):
Owned....................... 10,709(3) 928(4) 7,795(3) 868(4)
Under control............... -- (5) 1,864(4) -- (5) 2,228(4)
---------- ------ ---------- ------
10,709 2,792 7,795 3,096
Land held for future
development(6)............... 4,287 -- 2,083 --
---------- ------ ---------- ------
Total..................... $1,364,572(7) 30,332 $1,157,235(7) 27,064
========== ====== ========== ======
</TABLE>
- --------
(1) At December 31, 1997 includes communities which were leasing completed
units of $126.0 million (2,323 units) and communities with no completed
units of $91.1 million (3,524 units). Unfunded commitments for all
communities under construction were $165.8 million at December 31, 1997
which will result in a total completed construction cost of $382.9
million.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through a contingent contract or letter of intent) during
a contractually agreed-upon time period to acquire land for future
development of multifamily communities, but does not currently own the
land.
(3) Costs for owned communities in planning are primarily for land
acquisitions.
(4) Unit information is based on management's estimates and is unaudited.
(5) ATLANTIC's investment at December 31, 1997 and 1996 in communities in
planning and under control for future development was $1.8 million and
$1.4 million, respectively. These amounts are classified as other assets.
(6) Construction is not anticipated to commence within 12 months.
(7) Communities located in Atlanta, Georgia aggregated 28.5% and 30.7% at
December 31, 1997 and 1996, respectively, of ATLANTIC's real estate, at
cost.
56
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The changes in real estate, at cost, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Balances at January 1.................... $1,157,235 $ 888,928 $631,260
Acquisitions and renovation
expenditures............................ 70,771 179,752 187,267
Development expenditures, including land
acquisitions............................ 200,208 179,783 101,335
Recurring capital expenditures........... 2,857 2,783 --
Dispositions............................. (66,299) (59,988) (30,934)
Provision for possible loss on
investments............................. (200) (2,500) --
Sale of Homestead Assets................. -- (31,523) --
---------- ---------- --------
Balances at December 31.................. $1,364,572 $1,157,235 $888,928
========== ========== ========
</TABLE>
Gains from Dispositions 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 no longer meet ATLANTIC's investment
criteria and redeploy the proceeds therefrom, preferably through tax-deferred
exchanges, into assets with better prospects for long-term growth.
As a result of this asset optimization strategy, ATLANTIC disposed of five
communities aggregating 1,396 units in 1997. A gain of $1.6 million was
recognized on aggregate proceeds of $66.5 million from these dispositions.
These five communities accounted for $2.6 million, $3.4 million and $3.2
million of net operating income during 1997, 1996 and 1995, respectively.
ATLANTIC disposed of four communities in 1996 aggregating 1,184 units. A
gain of $6.7 million was recognized on aggregate proceeds of $64.2 million.
These four communities accounted for $3.6 million and $5.2 million of net
operating income during 1996 and 1995, respectively.
In 1995, ATLANTIC disposed of two communities aggregating 596 units. The
proceeds from these dispositions were not materially different from the book
value of the assets on the date of disposition. These two communities
accounted for $2.4 million of net operating income during 1995.
Valuation of Real Estate
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which was adopted by ATLANTIC effective
January 1, 1996, establishes accounting standards for the review of long-lived
assets to be held and used for impairment whenever the carrying amount of an
asset may not be recoverable. SFAS No. 121 also requires that certain long-
lived assets to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. ATLANTIC periodically evaluates its long-lived
investments held and used for impairment and a provision for possible loss is
made, if required. ATLANTIC recognized a provision for possible loss of $0.2
million in 1997 and $2.5 million in 1996 associated with a community that was
disposed of in 1997. At December 31, 1997, ATLANTIC's investments are carried
at cost, which is not in excess of fair market value.
Third-Party Owner/Developer
ATLANTIC entered into a presale agreement in 1995 to acquire a community
developed by a third-party owner/developer. This development was funded
through a development loan from ATLANTIC. The activities of
57
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the third-party owner/developer were consolidated with ATLANTIC's activities.
During 1997, the community covered by this agreement was completed and
acquired by ATLANTIC as repayment of the development loan. As of December 31,
1997 there were no other development loans outstanding.
NOTE 3 HOMESTEAD TRANSACTION AND HOMESTEAD CONVERTIBLE MORTGAGES
General
On October 17, 1996, ATLANTIC sold its moderate-priced, purpose-built,
extended-stay lodging facilities known as Homestead Village(R) properties to
Homestead Village Incorporated ("Homestead"). In the transaction, ATLANTIC
sold one operating property and 25 properties under construction or in
planning (or the rights to acquire such properties) and paid $16.6 million in
cash (the "Homestead Assets") and received 4,201,220 shares of common stock of
Homestead. In addition, ATLANTIC entered into a funding commitment agreement
(the "Funding Agreement") to provide secured financing to Homestead for
purposes of completing the development and construction of the properties sold
in the transaction. ATLANTIC will receive up to $98.0 million of convertible
mortgage notes from Homestead ("Homestead Convertible Mortgages") in exchange
for fully funding the $111.1 million required under the Funding Agreement.
ATLANTIC received 2,818,517 warrants, each to purchase one share of Homestead
common stock at $10 per share, in exchange for entering into the Funding
Agreement. ATLANTIC realized a gain on the transaction of $2.8 million, net of
expenses.
On November 12, 1996, ATLANTIC distributed the Homestead common stock and
warrants to holders of record of Common Shares on October 29, 1996 (the
"Homestead Distribution"). The Homestead Distribution consisted of 0.110875
shares of Homestead common stock and 0.074384 Homestead warrants per Common
Share.
Carrying Value
At December 31, 1997, ATLANTIC holds Homestead Convertible Mortgages with a
principal amount of $93.5 million, as a result of funding $106.0 million of
its commitment to Homestead. The difference between the face amount and the
amount funded has been recorded as an original issue premium that is being
amortized over the term of the Homestead Convertible Mortgages. The value
attributed to the conversion feature of the Homestead Convertible Mortgages
issued ($6.9 million assuming full funding) has been recorded along with an
offsetting discount (deferred credit) in the Homestead Convertible Mortgages'
balance. This deferred credit is being amortized over the term of the
Homestead Convertible Mortgages. Furthermore, the carrying value of the
Homestead Convertible Mortgages has been adjusted to fair value ($122.5
million at December 31, 1997). A fair value adjustment of $16.7 million has
been recognized as an unrealized gain and is reflected as a component of
comprehensive income in the statement of shareholders' equity. The amount of
the adjustment is based upon the conversion value of the Homestead Convertible
Mortgages and is calculated using the closing price of Homestead common stock
on December 31, 1997 of $15.0625 per share.
The Homestead Convertible Mortgages:
(i) bear interest at 9.0% per annum which is due in interest only
payments on a semi-annual basis,
(ii) are convertible at ATLANTIC's option into one share of Homestead
common stock for every $11.50 of principal outstanding
(approximately 8.5 million shares upon full funding),
(iii) are not callable until 2001 and
(iv) mature October 2006.
The individual Homestead Village(R) properties sold by ATLANTIC serve as
collateral individually and in the aggregate under cross-collateral
provisions.
58
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997 the carrying value of the Homestead Convertible
Mortgages consisted of the following components (in thousands):
<TABLE>
<S> <C>
Principal amount................................................... $ 93,513
Original issue premium............................................. 12,487
--------
Amount funded...................................................... 106,000
Amortization of original issue premium............................. (476)
Initial value of conversion feature................................ 6,587
Unamortized discount on conversion feature......................... (6,336)
Fair value adjustment.............................................. 16,707
--------
Carrying value (fair value)........................................ $122,482
========
</TABLE>
Deferred Commitment Fee
ATLANTIC recognized a deferred commitment fee related to the $6.5 million of
warrants received from Homestead in return for entering into the Funding
Agreement. This commitment fee, which is a component of other liabilities in
the balance sheet, is being amortized over the term of the Homestead
Convertible Mortgages.
Interest Income Recognized
The aggregate income recognized on the Homestead Convertible Mortgages
consists of:
(i) the interest income recognized at 9.0% per annum,
(ii) the amortization of the original issue premium which reduces income,
(iii) the amortization of the discount on the conversion feature which
increases income, and
(iv) the amortization of the deferred commitment fee which increases
income.
ATLANTIC uses the effective interest method to calculate the amortization of
all items associated with the Homestead Convertible Mortgages. The effective
interest rate on the funded amount is 8.46% per annum for purposes of
calculating net earnings.
NOTE 4 BORROWINGS
Lines of Credit
On November 24, 1997, ATLANTIC renegotiated its $350 million unsecured line
of credit with Morgan Guaranty Trust Company of New York ("MGT"), as agent for
a group of lenders. Under the new agreement, borrowings on the unsecured line
of credit bear interest at prime or, at ATLANTIC's option, LIBOR plus 0.75%.
Under a competitive bid option contained in the new line of credit agreement,
ATLANTIC may be able to borrow at a lower interest rate spread over LIBOR,
depending on market conditions. This option is available on up to $175 million
of borrowings. ATLANTIC pays an annual facility fee of 0.15% on the total line
of credit available of $350 million. The line of credit matures November 1999
and may be extended for one year with the approval of MGT and the other
participating lenders. At December 31, 1997, there were $153.5 million of
borrowings outstanding under this line of credit.
The unsecured line of credit replaced a previous secured line of credit
which was extinguished in December 1996. Accordingly, ATLANTIC expensed all
previously unamortized costs associated with the secured line of credit at
that time. These costs aggregated $3.9 million and are reflected as an
extraordinary item in ATLANTIC's 1996 statement of earnings.
59
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All debt incurrences under the unsecured line of credit are subject to
certain covenants. Specifically, distributions for the preceding four
quarters, excluding the Homestead Distribution, may not exceed 95% (97% for
distributions made before December 31, 1996) of ATLANTIC's funds from
operations (as defined in the loan agreement) for the preceding four quarters.
ATLANTIC is in compliance with all such covenants.
On June 30, 1997, ATLANTIC entered into a $25 million unsecured borrowing
agreement (increased to $50 million on January 20, 1998) with Chase Bank of
Texas, N.A. This loan, which allows for same day borrowings and more efficient
cash management, matures on January 19, 1999 and bears interest at an
overnight rate that depends on the availability of funds at the time the
borrowing is made. The interest rate on these borrowings has ranged from 6.31%
to 7.38% with a weighted-average daily interest rate of 6.69%. At December 31,
1997, there were $11.2 million of borrowings outstanding under this agreement.
A summary of borrowings on ATLANTIC's lines of credit is as follows (dollar
amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total lines of credit........................ $375,000 $350,000 $300,000
Borrowings outstanding at December 31........ 164,743 228,000 190,000
Weighted-average daily borrowings............ 207,672 204,265 178,318
Maximum borrowings outstanding at any month
end......................................... 295,250 234,000 252,000
Weighted-average daily interest rate......... 7.20% 7.39% 7.92%
Weighted-average interest rate at December
31.......................................... 7.41% 7.24% 7.73%
</TABLE>
Notes Payable
On August 20, 1997, ATLANTIC completed an offering of $100 million of 7.25%
unsecured senior notes due 2009 (the "2009 Notes") and $50 million of 7.86%
unsecured senior notes due 2017 (the "2017 Notes" and together with the 2009
Notes, "the Notes"). The Notes are fully amortizing, rank equally with all
other unsecured and unsubordinated indebtedness of ATLANTIC from time to time
outstanding and bear interest at the stated rates. Interest is payable
semiannually in arrears and principal installments are due annually beginning
in 2002 for the 2009 Notes and in 2013 for the 2017 Notes. The Notes are
redeemable at any time at ATLANTIC's option and are governed by the terms and
provisions of an indenture agreement. Net proceeds from the offering were
approximately $148.6 million, net of costs.
60
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1997 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
STATED PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
COMMUNITY RATE DATE DATE BALANCE
- --------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge................ 7.000% 09/10/98(1) Fully amortizing $ 5,686
Country Place Village I...... 7.750% 11/01/00 (2) 1,968
Cameron Hidden Harbor........ 7.930% 05/12/01 (3) 5,504
Country Oaks................. 7.655% 07/01/02 (4) 5,873
Cameron at Hickory Grove..... 8.000% 07/10/03 (5) 5,928
Shadowbluff.................. 8.050% 12/01/05 (6) 5,503
Cameron Palm Harbor.......... 8.040% 11/01/06 (7) 5,252
Cameron Villas I............. 8.750% 04/01/24 Fully amortizing 6,278
Cameron on the Cahaba II..... 7.125% 03/01/29 Fully amortizing 7,955
--------
49,947
--------
Tax exempt fixed rate or
variable rate subject
to swap agreements(8):
Cameron Station.............. 6.000% 05/01/07 Interest only 14,500
Azalea Park.................. (9) 06/01/25 Interest only 15,500
Cameron Brook................ (9) 06/01/25 Interest only 19,500
Cameron Cove................. (9) 06/01/25 Interest only 8,500
Clairmont Crest.............. (9) 06/01/25 Interest only 11,600
Forestwood................... (9) 06/01/25 Interest only 11,485
Foxbridge on the Bay......... (9) 06/01/25 Interest only 10,400
The Greens................... (9) 06/01/25 Interest only 10,400
Parrot's Landing I........... (9) 06/01/25 Interest only 15,835
WintersCreek................. (9) 06/01/25 Interest only 5,000
Less amounts held in
principal reserve fund(10).. (2,142)
--------
120,578
--------
$170,525
========
Total annual weighted-average
interest rate(11)........... 6.98%
========
</TABLE>
- --------
(1) This loan is callable at the option of the mortgage lender on September 10,
1998 and at subsequent five-year intervals through September 10, 2013.
(2) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
(3) Interest and principal payments due monthly; balloon payment of $4,869,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(5) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(6) Interest and principal payments due monthly; balloon payment of $4,926,000
due at maturity.
(7) Interest and principal payments due monthly; balloon payment of $4,661,000
due at maturity.
(8) These communities, 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
61
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
entity that is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(9) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA"). The swap agreements are discussed in Note 13.
(10) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the underlying tax-exempt bond issues. This credit enhancement agreement
requires ATLANTIC to make monthly payments into a principal reserve
account based on a 30-year amortization.
(11) This rate includes annual fees associated with the mortgage agreements,
swap agreements and the credit enhancement agreement and amortization of
capitalized costs associated with the mortgage agreements and the credit
enhancement agreement. See Note 13.
Real estate with an aggregate undepreciated cost at December 31, 1997 of
$78.4 million and $205.8 million serves as collateral for the conventional
mortgages payable and the tax-exempt mortgages payable, respectively.
Additionally, ATLANTIC has a letter of credit in the amount of $2.5 million
that serves as collateral for the tax-exempt mortgages payable.
The changes in mortgages payable were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balances at January 1........................ $155,790 $118,524 $107,347
Mortgage debt assumed........................ 16,285 17,867 24,678
Proceeds from mortgage debt.................. -- 20,500 --
Regularly scheduled principal payments....... (1,550) (1,101) (623)
Reduction upon disposition of multifamily
community................................... -- -- (6,500)
Principal payments at maturity............... -- -- (6,378)
-------- -------- --------
Balances at December 31...................... $170,525 $155,790 $118,524
======== ======== ========
</TABLE>
ATLANTIC is in compliance with all debt covenants required by the mortgage
agreements.
Long-term Debt Maturities
Approximate principal payments due on notes payable and mortgages payable
during each of the years in the five-year period ending December 31, 2002 and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................... $ 7,407
1999............................................... 1,870
2000............................................... 3,871
2001............................................... 6,898
2002............................................... 22,605
Thereafter......................................... 277,874
--------
$320,525
========
</TABLE>
Interest Expense
During 1997, 1996 and 1995, the total interest paid in cash on all
outstanding debt was $26.8 million, $24.7 million, and $20.6 million
respectively. Interest capitalized as part of the cost of real estate projects
under development was $10.2 million, $10.3 million and $4.4 million for 1997,
1996 and 1995, respectively.
62
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Amortization of loan costs, which is included in interest expense, was $0.4
million, $1.7 million and $1.6 million for 1997, 1996 and 1995, respectively.
NOTE 5 DISTRIBUTIONS AND DIVIDENDS
ATLANTIC made total cash distributions of $1.56 per Common Share in 1997,
$1.65 per Common Share in 1996 and $1.60 per Common Share in 1995. On December
4, 1997, ATLANTIC's Board of Directors (the "Board") declared a distribution
of $0.40 per Common Share for the first quarter of 1998. The distribution is
payable on February 26, 1998 to holders of record of Common Shares on February
12, 1998.
For federal income tax purposes, the following summarizes the taxability of
cash distributions paid for 1995 and 1996 and the estimated taxability for
1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Per Common Share:
Ordinary income.................................... $ 1.14 $ 0.78 $ 0.92
Return of capital.................................. 0.42 0.87 0.68
------- ------- -------
Total............................................ $ 1.56 $ 1.65 $ 1.60
======= ======= =======
</TABLE>
As part of the merger transaction discussed below, ATLANTIC's common
shareholders (other than Security Capital) as of September 16, 1997 received
warrants from Security Capital to purchase 1,675,940 shares of Security
Capital's Class B common stock (0.071116 warrants for each Common Share held).
Each warrant can be exercised for one share of Security Capital's Class B
common stock at an exercise price of $28.00 per share through September 18,
1998. Security Capital issued these warrants, in part, as an incentive to
ATLANTIC's shareholders to vote to approve the merger transaction. The
warrants were valued at $6.88 per warrant for federal income tax purposes, all
of which is taxable as ordinary income.
In addition, ATLANTIC made the Homestead Distribution (discussed in Note 3)
in November 1996. The Homestead Distribution was recorded at $58.2 million
based on the estimated fair value of the net assets sold to Homestead. The
securities distributed to each ATLANTIC shareholder in the Homestead
Distribution were valued at $1.91 per Common Share for federal income tax
purposes, of which $0.90 was taxable as ordinary income and $1.01 was treated
as a return of capital.
ATLANTIC paid dividends of $0.7845 per share on its Series A Cumulative
Redeemable Preferred Stock ("Series A Preferred Shares") in 1997, all of which
was treated as ordinary income for federal income tax purposes. Pursuant to
the terms of the preferred shares, ATLANTIC is restricted from declaring or
paying any distribution with respect to its Common Shares unless all
cumulative dividends with respect to the Series A Preferred Shares have been
paid and sufficient funds have been set aside for Series A Preferred Share
dividends that have been declared.
ATLANTIC's tax return for the year ended December 31, 1997 has not been
filed, and the taxability information for 1997 is based on the best available
data. ATLANTIC's tax returns for prior years have not been examined by the
Internal Revenue Service and, therefore, the taxability of distributions and
dividends is subject to change.
63
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 MERGER TRANSACTION
Terms of Transaction
On September 9, 1997, ATLANTIC acquired the operations and business of
Security Capital (Atlantic) Incorporated (the "REIT Manager") and SCG Realty
Services Atlantic Incorporated ("SCG Realty Services"), ATLANTIC's property
manager, in exchange for 2,306,591 Common Shares (the "Merger"). The REIT
Manager and SCG Realty Services were wholly owned subsidiaries of ATLANTIC's
principal shareholder, Security Capital Group Incorporated ("Security
Capital"). The Common Shares issued to Security Capital were valued as of
August 6, 1997, the record date for determining ATLANTIC's shareholders
entitled to vote on the Merger, at $54.6 million. A per Common Share price of
$23.675 (the average market price of Common Shares over the five-day period
prior to the August 6, 1997) was used to determine the number of Common Shares
issued. As a result of the Merger, ATLANTIC has become an internally managed
REIT.
Because ATLANTIC, the REIT Manager and SCG Realty Services were under the
common control of Security Capital when the Merger was consummated, the
difference between the market value as of September 8, 1997 of the Common
Shares issued to Security Capital and the value of the net tangible assets of
the REIT Manager and SCG Realty Services acquired by ATLANTIC of $50.9 million
has been accounted for as a distribution to Security Capital. This
distribution is reflected as a deduction from additional paid-in capital.
Effect on Future Operations
As a result of the Merger, ATLANTIC terminated its REIT management agreement
with the REIT Manager and its property management agreements with SCG Realty
Services (which covered approximately 97% of ATLANTIC's operating
communities). Consequently, ATLANTIC did not incur the costs associated with
these agreements after September 8, 1997. However, after the Merger was
completed, ATLANTIC did incur, and will continue to incur, certain of the
operating costs of the businesses acquired, primarily the personnel costs
associated with the employees of the REIT Manager and SCG Realty Services who
are now employees of ATLANTIC. In addition, ATLANTIC purchased, and will
continue to purchase, certain administrative services from Security Capital
under an Administrative Services Agreement ("ASA"). The fees payable under the
ASA are equal to Security Capital's direct cost plus an overhead factor of
20%. For the initial term of the agreement (September 9, 1997 through December
31, 1998), the fees payable to Security Capital will not exceed approximately
$5.2 million, but may be less than that amount as any cost savings will accrue
to ATLANTIC. For the period September 9, 1997 through December 31, 1997,
ATLANTIC's costs under the ASA were limited to $1.5 million and ATLANTIC
actually incurred $0.7 million of costs for that period. For 1998, ATLANTIC's
costs under the ASA cannot exceed $3.7 million.
Costs related to the management function, including charges under the ASA,
incurred subsequent to the Merger are collectively referred to as "management
costs". Management costs related to property operations are reflected as
rental expenses in arriving at net operating income. Certain qualifying
management costs related to the acquisition and development of multifamily
communities have been capitalized ($1.5 million for the period from September
9, 1997 through December 31, 1997). Management costs that have not been
capitalized and are not classified as rental expenses are reflected as general
and administrative expenses.
NOTE 7 SHAREHOLDERS' EQUITY
Shares Authorized
At December 31, 1997, 250,000,000 shares were authorized. The Board may
classify or reclassify any unissued shares of ATLANTIC's stock from time to
time by setting or changing the preferences, conversion or
64
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption of such shares.
Reverse Common Share Split
On September 10, 1996, ATLANTIC completed a one-for-two reverse split of its
Common Shares. A transfer from the Common Shares account to additional paid-in
capital was made to reflect the reduced number of Common Shares outstanding
after the split. All references in the accompanying financial statements to
the number of Common Shares and per Common Share amounts have been restated to
reflect the reverse split.
Series A Preferred Shares
On August 20, 1997, ATLANTIC completed an offering of 2,000,000 shares of
Series A Preferred Shares. These shares have a par value of $0.01 per share
and a stated liquidation preference of $25.00 per share. Holders of the Series
A Preferred Shares are entitled to receive cumulative preferential cash
distributions at a rate of 8.625% per annum. The Series A Preferred Shares are
redeemable on or after August 20, 2002 by ATLANTIC for cash at a stated
redemption price, plus all accrued and unpaid distributions. Subject to
certain exceptions, the holders of Series A Preferred Shares have no voting
rights. The Series A Preferred Shares are not convertible into or exchangeable
for any other property or securities of ATLANTIC. Proceeds from the offering
were approximately $48.1 million, net of costs.
Completed Common Equity Offerings
In May 1997, ATLANTIC completed an underwritten public offering of 4,077,200
Common Shares at a price of $21.50 per share. The proceeds from the sale of
these Common Shares, net of underwriters' commissions and other expenses, were
approximately $82.2 million.
In connection with the Merger discussed in Note 6, ATLANTIC completed a
fully subscribed rights offering pursuant to which 2,552,770 Common Shares
were sold at $22.375 per share. Holders of Common Shares received one right
for each Common Share held on August 6, 1997 and eight rights were needed to
purchase one Common Share. The rights were offered to allow holders of Common
Shares (other than Security Capital) the opportunity to maintain their
relative ownership in ATLANTIC after the Merger by purchasing additional
Common Shares at a price below the price at which Security Capital received
Common Shares in the Merger. Proceeds from the offering were approximately
$56.5 million, net of costs.
In November 1997, ATLANTIC sold 350,000 Common Shares at a price of $21.0625
per share in a registered offering. Proceeds from the offering were
approximately $7.4 million, net of costs.
From inception through May 1996, ATLANTIC raised capital through various
private offerings. ATLANTIC sold a total of 31,701,580 Common Shares during
this period at prices ranging from $20 to $23.136 per Common Share. In
addition, ATLANTIC exchanged 5,000,000 Common Shares at a price of $20 per
Common Shares as partial consideration for the acquisition of a pool of
communities 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 granted the seller certain rights to require
Security Capital to purchase the 5,000,000 Common Shares owned by the seller
at pre-agreed prices. In consideration for Security Capital purchasing Common
Shares in ATLANTIC's private offerings, ATLANTIC assumed Security Capital's
obligation with respect to 3,750,000 Common Shares and repurchased these
Common Shares from the seller. The remaining 1,250,000 Common Shares were
acquired directly from the seller by Security Capital.
65
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In October 1996, ATLANTIC completed an initial public offering of 4,940,000
Common Shares at a price of $24.00 per share. After ATLANTIC made the
Homestead Distribution discussed in Note 3, the New York Stock Exchange
adjusted ATLANTIC's trading price information by $2.75 per Common Share.
Accordingly, ATLANTIC's initial public offering price, as adjusted for the
Homestead Distribution, was $21.25 per Common Share. The Common Shares,
excluding the 416,666 Common Shares sold to Security Capital, were sold
through an underwritten offering. The proceeds from the sale of these
4,940,000 Common Shares, net of costs, were approximately $110.0 million.
Shelf Registration
In November 1997, a $500 million shelf registration statement was declared
effective by with the Securities and Exchange Commission. These securities can
be issued in the form of senior unsecured debt, preferred shares and Common
Shares on an as-needed basis, subject to ATLANTIC's ability to effect an
offering on satisfactory terms. As of December 31, 1997, $492.6 million of
securities were available for issuance under the shelf registration.
Ownership Restrictions and Significant Shareholder
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 shares of stock may
be owned by five or fewer individuals at any time during the last half of
ATLANTIC's taxable year. Therefore, ATLANTIC's Charter restricts beneficial
ownership (or ownership generally attributed to a person under the REIT tax
rules) of ATLANTIC's outstanding shares of stock by a single person, or
persons acting as a group, to 9.8% of ATLANTIC's outstanding shares of stock.
This provision assists ATLANTIC in protecting and preserving its REIT status
and protects the interest of shareholders in takeover transactions by
preventing the acquisition of a substantial block of shares unless the
acquirer makes a cash tender offer for all outstanding shares.
Shares of stock 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, 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 has exempted Security Capital from the ownership restrictions
described above. Security Capital owned 49.9% of the outstanding Common Shares
as of December 31, 1997. For tax purposes, Security Capital's ownership is
attributed to its shareholders.
Purchase Rights
On March 12, 1996, the Board declared and paid a dividend of one preferred
share purchase right ("Purchase Right") for each Common Share outstanding at
the close of business on March 12, 1996 to the holders of Common Shares on
that date. Holders of additional Common Shares issued 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 additional Common Share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC two one-hundredths of a share of non-redeemable Series
A Junior Participating Preferred Stock of ATLANTIC, par value $0.01 per share
(the "Participating Preferred Shares"), at a price of $40 per one one-
hundredth of a Participating Preferred Share, subject to adjustment. ATLANTIC
has designated an amount of shares equal to two one-hundredths of the total
number of Common Shares outstanding at any point in time as Participating
66
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Shares. Purchase Rights are exercisable when a person or group of
persons (other than certain affiliates of ATLANTIC) acquires beneficial
ownership of 20% or more of the outstanding Common Shares, commences or
announces a tender offer or exchange offer which would result in the
beneficial ownership by a person or group of persons (other than certain
affiliates of ATLANTIC) of 25% or more of the outstanding Common Shares or
files or announces the intention to file with any regulatory authority an
application seeking approval of any transaction which would result in the
beneficial ownership by a person (other than certain affiliates of ATLANTIC)
of 25% or more of the outstanding Common Shares. Under certain circumstances,
each Purchase Right entitles the holder to purchase at the Purchase Right's
then current exercise price, a number of 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. As of December 31, 1997 and 1996, ATLANTIC had no Participating
Preferred Shares outstanding and the events required to exercise the Purchase
Rights had not occurred. Therefore, the Purchase Rights dividend had no value
and was not recorded in the financial statements.
NOTE 8 LONG-TERM COMPENSATION
On September 8, 1997, ATLANTIC's common shareholders approved a long-term
incentive plan (the "Incentive Plan") which includes an employee stock
purchase plan and a stock option plan. No more than 3,000,000 Common Shares in
the aggregate may be awarded under the Incentive Plan and no individual may be
awarded more than 500,000 Common Shares in any one-year period. The Incentive
Plan has a ten-year term.
Additionally, ATLANTIC has authorized 100,000 Common Shares for issuance
under the Share Option Plan for Outside Directors (the "Outside Directors
Plan") and 115,000 Common Shares for issuance under the 401(K) Savings Plan
and Trust, which became effective on January 1, 1998 and provides for matching
employer contributions in Common Shares at 50% of the employee's contribution
up to 6%.
Employee Stock Purchase Plan
Under the employee stock purchase plan, certain employees of ATLANTIC
purchased 592,020 Common Shares at a price of $22.4375 per share on September
8, 1997. ATLANTIC financed 95% of the total purchase price through ten-year,
recourse notes from the participants aggregating $12,614,000. The notes, which
have been recorded as a deduction in shareholders' equity, bear interest at
the lower of 6% per annum or the dividend yield of a Common Share determined
based on the fair market value of a Common Share on the purchase date. The
notes are secured by the Common Shares purchased. For each Common Share
purchased, participants were granted two options, each to purchase one Common
Share at a price of $22.4375 per share. Proceeds from this sale of Common
Shares, net of the notes received, were $0.7 million. The change in the notes
from employees during 1997 is summarized as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997.......................................... $ --
Notes issued........................................................ 12,614
Principal payments received......................................... (66)
Retirements......................................................... (201)
-------
Balance at December 31, 1997........................................ $12,347
=======
</TABLE>
Of the notes outstanding at December 31, 1997, $10,575,000 were due from
officers of ATLANTIC.
67
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
ATLANTIC has granted stock options under the Incentive Plan and the Outside
Directors Plan. Stock options outstanding at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER EXERCISE EXPIRATION AVERAGE
OF OPTIONS PRICE (1) DATE REMAINING LIFE
---------- --------- ----------------- --------------
<S> <C> <C> <C> <C>
Outside Directors
Plan(2)................ 3,000 $21.2500 October 14, 2001 3.8 years
Outside Directors
Plan(2)................ 3,000 $21.8750 May 29, 2002 4.4 years
Employee stock purchase
plan(3)................ 1,164,878 $22.4375 September 8, 2007 9.7 years
Stock option plan(4).... 90,346 $22.4375 September 8, 2007 9.7 years
Stock option
plan(4)(5)............. 2,366 $21.1250 December 4, 2007 9.9 years
---------
Total................. 1,263,590
=========
</TABLE>
- --------
(1) Exercise price was equal to market price on the date of grant.
(2) Options are fully exercisable.
(3) Vesting at various rates over periods from two to ten years.
(4) The holders under this plan are awarded dividend equivalent units ("DEUs")
each year of the plan based upon a specified grant date. The options
awarded will vest beginning on September 8, 1999 at a rate of 25% per year
through 2002.
(5) These options did not accrue DEUs in 1997 as they were awarded after the
DEU grant date.
The weighted average fair value of options granted in 1997 under the
Incentive Plan was approximately $1.78 per option. A summary of the status of
ATLANTIC's stock option plans as of December 31, 1997 and 1996, and changes
during the years ended on those dates is presented below (ATLANTIC's first
stock option plan was effective in 1996):
<TABLE>
<CAPTION>
WEIGHTED- NUMBER
NUMBER AVERAGE OF
OF EXERCISE OPTIONS
OPTIONS PRICE EXERCISABLE
--------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995................ -- $ -- --
Granted................................... 3,000 21.2500 3,000
--------- -------- -----
Balance at December 31, 1996................ 3,000 21.2500 3,000
Granted................................... 1,283,228 22.4338 3,000
Forfeited................................. (22,638) 22.4375 --
--------- -------- -----
Balance at December 31, 1997................ 1,263,590 $22.4309 6,000
========= ======== =====
</TABLE>
ATLANTIC adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which allows ATLANTIC to continue to account for its various stock option
plans using Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related interpretations. Under APB 25, if
the exercise price of the stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Accordingly, ATLANTIC did not recognize compensation expense in 1997 related
to stock options as the exercise price of all options granted was equal to the
market price on the date of grant. Had compensation cost for these plans been
determined using the option valuation models provided in SFAS No. 123,
ATLANTIC's net earnings attributable to Common Shares and earnings per Common
Share would change as follows:
68
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C> <C>
Net earnings attributable to Common Shares: As reported $51,154 $38,629
Pro forma 51,009 38,624
Basic and diluted earnings per Common Share: As reported $ 1.21 $ 1.21
Pro forma 1.20 1.21
</TABLE>
The pro forma amounts above were calculated using the Black-Scholes model
and the following assumptions:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Risk-free interest rate....................................... 6.35%
Dividend yield................................................ 7.99%
Volatility.................................................... 17.55%
Weighted average option life.................................. 9.66 years
</TABLE>
Dividend Equivalent Units ("DEUs")
On December 31, 1997 ATLANTIC awarded 1,186 DEUs in the form of Common
Shares to the holders of 90,346 stock options at a rate of one Common Share
per DEU. The DEUs are awarded on December 31st of each year of the ten-year
stock option plan and are vested to the same extent the underlying stock
options are vested. The DEUs were valued at $23,700 on the award date based
upon the market price of the Common Shares on that date. ATLANTIC recognizes
the value of the DEUs awarded as compensation expense over the underlying
vesting period.
NOTE 9 REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
REIT Management Agreement
ATLANTIC had an agreement with the REIT Manager to provide management
services to ATLANTIC. This agreement was terminated on September 9, 1997 in
connection with the Merger discussed in Note 6. This agreement required
ATLANTIC to pay an annual fee of 16% of cash flow, as defined, payable
monthly. Cash flow was 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 interest payments like a 20-year level-payment, fully
amortizing mortgage and (iii) distributions actually paid with respect to any
non-convertible preferred stock. Cash flow did not include: (i) realized gains
or losses from dispositions of investments, (ii) interest income from cash
equivalent investments and the Homestead Convertible Mortgages, (iii)
provisions for possible losses on investments and (iv) extraordinary items.
The REIT Manager also received a fee of 0.20% per year on the average daily
balance of cash equivalent investments. ATLANTIC was required to 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 paid all of its own salary and other overhead
expenses. ATLANTIC did not have any employee expense; however, it did pay all
of the third-party costs related to its normal operations, including legal,
accounting, travel, architectural, engineering, shareholder relations,
independent Director fees and similar expenses, property
69
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
management and similar fees paid on behalf of ATLANTIC, and travel expenses
incurred in seeking financing, community acquisitions, community dispositions
and similar activities on behalf of ATLANTIC and in attending ATLANTIC Board,
committee and shareholder meetings.
Property Management Agreement
Prior to the Merger, SCG Realty Services provided property management
services to ATLANTIC on 97% of ATLANTIC's operating communities. The property
management fees paid by ATLANTIC were based upon a percentage of revenues and
were at rates prevailing in the markets in which ATLANTIC operated. The
property management agreements were terminated on September 9, 1997 in
connection with the Merger discussed in Note 6.
NOTE 10 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per Common Share
amounts) for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1997:
Rental income.............. $39,715 $41,107 $42,943 $44,694 $168,459
======= ======= ======= ======= ========
Earnings from operations... $10,178 $11,571 $12,973 $16,393 $ 51,115
Gain on disposition of real
estate.................... -- 259 -- 1,349 1,608
Less preferred share
dividends................. -- -- 491 1,078 1,569
------- ------- ------- ------- --------
Net earnings attributable
to Common Shares.......... $10,178 $11,830 $12,482 $16,664 $ 51,154
======= ======= ======= ======= ========
Basic and diluted net
earnings attributable to
Common Shares per Common
Share..................... $ 0.27 $ 0.29 $ 0.29 $ 0.35 $ 1.21
======= ======= ======= ======= ========
Weighted-average Common
Shares outstanding:
Basic..................... 37,892 41,228 42,998 47,568 42,449
======= ======= ======= ======= ========
Diluted................... 37,892 41,228 42,998 47,568 42,450
======= ======= ======= ======= ========
1996:
Rental income.............. $30,809 $32,876 $35,959 $38,085 $137,729
======= ======= ======= ======= ========
Earnings from operations... $ 6,650 $ 9,085 $ 9,538 $ 7,725 $ 32,998
Gain on disposition of real
estate.................... -- 662 1,593 4,477 6,732
Gain on sale of Homestead
Assets.................... -- -- -- 2,839 2,839
------- ------- ------- ------- --------
Earnings before
extraordinary item........ 6,650 9,747 11,131 $15,041 $ 42,569
Extraordinary item -- loss
on early extinguishment of
debt...................... -- -- -- 3,940 3,940
------- ------- ------- ------- --------
Net earnings............... $ 6,650 $ 9,747 $11,131 $11,101 $ 38,629
======= ======= ======= ======= ========
Basic and diluted earnings
before extraordinary item
per Common Share.......... $ 0.24 $ 0.32 $ 0.34 $ 0.41 $ 1.33
======= ======= ======= ======= ========
Basic and diluted net
earnings per
Common Shares............. $ 0.24 $ 0.32 $ 0.34 $ 0.30 $ 1.21
======= ======= ======= ======= ========
Basic and diluted weighted-
average
Common Shares
outstanding............... 27,777 30,393 32,952 36,925 32,028
======= ======= ======= ======= ========
</TABLE>
70
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total of the four quarterly amounts of net earnings per Common Share may
not equal the total for the year. These differences result from the use of a
weighted average to compute the average number of Common Shares outstanding.
NOTE 11 SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31,
1997, 1996 and 1995 are as follows:
(a) In connection with the Merger discussed in Note 6, ATLANTIC issued
2,306,591 Common Shares valued at $51,754,000 to Security Capital in
exchange for the operations and business of the REIT Manager and SCG Realty
Services and $878,000 of non-real estate assets. ATLANTIC recognized a
distribution to Security Capital of $50,876,000 as a result of the Merger.
(b) In 1997, ATLANTIC recognized an unrealized gain on the Homestead
Convertible Mortgages of $16,707,000.
(c) ATLANTIC received notes from employees aggregating $12,614,000 for
the purchase of Common Shares under an employee stock purchase plan in
1997. ATLANTIC retired $201,000 of these notes in 1997 and acquired the
related Common Shares from participants who terminated their employment
with ATLANTIC as discussed in Note 8.
(d) ATLANTIC declared a distribution in December 1997 for the first
quarter of 1998 in the amount of $19,104,000 and declared a distribution in
December 1996 for the first quarter of 1997 in the amount of $14,778,000.
(e) In connection with the acquisition of communities, ATLANTIC assumed
mortgage debt of $16,285,000, $17,867,000 and $24,678,000 in 1997, 1996 and
1995, respectively.
(f) As discussed in Note 3, in 1996, ATLANTIC received Homestead common
stock valued at $51,717,000 upon the sale of the Homestead Assets (assets
with a net book value of $31,028,000 and cash of $16,595,000). A gain of
$2,839,000, net of expenses of $1,255,000, was recognized on the
transaction.
(g) As discussed in Note 3, in 1996, ATLANTIC received warrants to
purchase Homestead common stock valued at $6,511,000 in exchange for
entering into the Funding Agreement. The value of the warrants has been
recognized as deferred revenue.
(h) ATLANTIC made a $58,228,000 non-cash distribution to its shareholders
in November 1996 consisting of the Homestead common stock and warrants.
(i) ATLANTIC was relieved of mortgage debt of $6,500,000 in 1995 due to
the disposition of the community that secured the debt.
NOTE 12 FINANCIAL INSTRUMENTS
Derivative Financial Instruments
ATLANTIC occasionally utilizes derivative financial instruments as hedges to
manage interest rate risk on anticipated future transactions. ATLANTIC does
not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market risk and
credit risk. Market risk is defined as the potential for loss in the value of
the derivative due to adverse changes in market prices (interest rates).
Through hedging, ATLANTIC can effectively manage the risk of increases in
interest rates on future debt issuances. Credit risk is the risk that the
counterparty to a derivative contract will fail to perform or meet their
financial obligation under the contract.
71
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC does not obtain collateral support to financial instruments subject
to credit risk but monitors the credit standing of counterparties. As of
December 31, 1997, the counterparties to all outstanding contracts were
financial institutions with AAA or A+ credit ratings. ATLANTIC does not
anticipate non-performance by any of the counterparties to its derivative
contracts. Should a counterparty fail to perform, however, ATLANTIC could
incur a financial loss to the extent of any positive fair market value of
derivative instruments.
The following table summarizes the activity in interest rate contracts for
the year ended December 31, 1997 (in millions):
<TABLE>
<CAPTION>
INTEREST RATE SWAP AGREEMENTS
INTEREST ----------------------------------
RATE FUTURE TAX-EXEMPT SHORT-TERM
CONTRACTS BOND ISSUES BORROWINGS
----------- --------------- ---------------
<S> <C> <C> <C>
Notional amounts at
December 31, 1996......... $ -- $ 107.2 $ 100.0
New contracts.............. 250.0 (1) -- 100.0
Matured contracts.......... (150.0) -- (100.0)
Contractual reductions..... -- (0.9) --
------- -------------- ---------------
Notional amounts at
December 31, 1997......... $ 100.0 (1) $ 106.3 $ 100.0
======= ============== ===============
</TABLE>
- --------
(1) Includes one contract with a notional amount of $150 million which was
settled in August 1997 at a gain of $0.2 million and one contract entered
into in anticipation of a 1998 debt offering with a notional amount of
$100 million which provides for an interest rate of 6.309%.
Interest Rate Swap Agreements
ATLANTIC entered into interest rate swap agreements on its variable interest
rate mortgages and $100 million of short-term borrowings to mitigate its
variable interest rate exposure. Under the swap agreements ATLANTIC pays a
fixed rate of interest to a swap counterparty pursuant to one agreement and
receives a variable rate of interest from a swap counterparty pursuant to
another agreement. The amounts received from the variable rate agreement are
structured such that these amounts will closely approximate the amount of
variable interest due on the underlying borrowings. The difference between the
variable amount received and the fixed amount paid represents either the cost
or the benefit of the interest rate swap agreement and is recorded as an
increase or decrease to the variable interest expense associated with the
underlying borrowings.
ATLANTIC has a one-year swap agreement with MGT covering $100 million of
borrowings that expires on February 5, 1998. The agreement provides for
ATLANTIC to pay a fixed rate of interest of 5.95%, exclusive of any credit
spread. A similar swap agreement providing for a fixed rate of interest of
5.96%, exclusive of any credit spread, on $100 million of borrowings was in
effect for one year prior to the start of the current agreement. ATLANTIC does
not intend to enter into any other swap agreement related to its line of
credit borrowings after the current agreement expires. ATLANTIC paid $0.3
million more in interest than it received under these swap agreements during
both 1997 and 1996.
All of ATLANTIC's tax-exempt bond issues are included in a credit
enhancement agreement with FNMA. The agreement allowed ATLANTIC to receive a
favorable interest rate on the bond issues and required ATLANTIC to enter into
swap agreements to mitigate the interest rate exposure on the nine bond issues
with variable interest rates. ATLANTIC makes monthly principal payments on all
of the bond issues into a principal reserve account based upon a 30-year
amortization. The notional amount of the swap agreements is equal to the
principal amount of the variable rate bond issues less the balance in the
principal reserve fund associated with the variable rate bond issues. ATLANTIC
pays interest on the notional amount at an all-in, fixed rate of 6.61% as
summarized below:
72
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT FIXED
(IN MILLIONS) MATURITY DATE INTEREST RATE(1) ISSUER
- ------------- ------------- ---------------- -----------------------------------------
<S> <C> <C> <C>
$ 22.7 August 2002 6.49% General Re Financial Products Corporation
63.4 August 2005 6.72% Morgan Guaranty Trust Company of New York
4.9 March 2006 6.21% Morgan Guaranty Trust Company of New York
15.3 August 2006 6.49% Morgan Stanley Derivative Products Inc.
- ------ -----
$106.3 6.61%
====== =====
</TABLE>
- --------
(1) Includes the fixed interest rate provided by the swap agreements, annual
fees associated with the swap agreements and credit enhancement agreement
and amortization of capitalized costs associated with the credit
enhancement agreement.
ATLANTIC paid $1.8 million, $1.8 million and $0.6 million more in interest
than it received under these swap agreements during 1997, 1996 and 1995,
respectively.
Fair Value
The following disclosure of estimated fair value of financial instruments
was determined by ATLANTIC based on available market information and valuation
methodologies believed to be appropriate for these purposes. Considerable
judgement and a high degree of subjectivity are involved in developing these
estimates and, accordingly, they are not necessarily indicative of amounts
that ATLANTIC could realize upon disposition. As of December 31, 1997 and
1996, the carrying amount of certain financial instruments employed by
ATLANTIC, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses were representative of their fair value because
of the short-term maturity of these instruments. Similarly, the carrying value
of the lines of credit balances approximates fair value as of those dates
since the interest rate fluctuates based on published market rates. As
discussed in Note 3, the Homestead Convertible Mortgages outstanding at
December 31, 1997 are reflected at fair value in the balance sheet.
73
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997 and 1996, the fair value of ATLANTIC's notes payable
and mortgages payable has been estimated based on quoted market prices for the
same or similar issues or by discounting the future cash flows using rates
currently available for debt with similar terms and maturities. As of December
31, 1997 and 1996, the fair value of all derivative financial instruments are
amounts at which they could be settled, based on estimates obtained from
brokers. The following table reflects the carrying amount and estimated fair
value of ATLANTIC's financial instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996
------------------- -------------------
CARRYING CARRYING
AMOUNT FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance sheet financial
instruments:
Notes payable................. $150,000 $157,118 (1) $ -- $ --
Mortgages payable
Conventional................ 49,947 51,815 (1) 34,168 33,323 (1)
Tax exempt.................. 120,578 121,615 (2) 121,622 121,954 (2)
Derivative financial
instruments:
Interest rate contract........ -- (5,648) -- --
Interest rate swaps:
Tax-exempt bond issues...... -- (6,259)(2) -- (3,996)(2)
Short-term borrowings....... -- (15)(3) -- (263)
</TABLE>
- --------
(1) The increase in the fair value of the notes payable and conventional
mortgages payable over the carrying value is a result of a net reduction
in the interest rates available to ATLANTIC at December 31, 1997 from the
interest rates in effect at the dates of issuance. The notes payable and
certain of the mortgages payable contain pre-payment penalties or yield
maintenance provisions that would make the cost of refinancing exceed the
benefit of the lower rates.
(2) As discussed above, in order for ATLANTIC to receive the favorable
interest rates under the credit enhancement agreement, ATLANTIC was
required by FNMA to enter into interest rate swap agreements to mitigate
the variable interest rate exposure.
(3) This swap agreement expired on February 5, 1998 and was not replaced.
NOTE 13 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 community 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
communities that is likely to have a material adverse effect on its business,
financial position or results of operations.
74
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO ATLANTIC CAPITALIZED DECEMBER 31, 1997
----------------------------SUBSEQUENT -------------------------------------- ACCUMU-
ENCUM- BUILDINGS AND TO BUILDINGS AND TOTALS LATED DE-
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A) PRECIATION
- ----------------------- ------- ----------- --------------------------- ---------- --------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $15,500 $ 3,717 $ 21,076 $1,313 $ 3,717 $ 22,389 $ 26,106 $1,392
Balmoral
Village......... -- 2,871 16,270 391 2,871 16,661 19,532 517
Cameron
Ashford......... -- 3,672 20,841 518 3,672 21,359 25,031 2,147
Cameron
Briarcliff...... (b) 2,105 11,953 275 2,105 12,228 14,333 1,242
Cameron Brook... 19,500 3,318 18,784 514 3,318 19,298 22,616 1,800
Cameron Creek
I............... -- 3,627 20,589 849 3,627 21,438 25,065 2,135
Cameron Crest... -- 3,525 20,009 461 3,525 20,470 23,995 1,975
Cameron
Dunwoody........ -- 2,486 14,114 408 2,486 14,522 17,008 1,455
Cameron Forest.. -- 884 5,008 472 884 5,480 6,364 302
Cameron Place... -- 1,124 6,372 723 1,124 7,095 8,219 391
Cameron
Pointe.......... -- 2,172 12,306 557 2,172 12,863 15,035 538
Cameron
Station......... 14,500 2,338 13,246 757 2,338 14,003 16,341 740
Cameron
Woodlands....... -- 3,785 21,471 836 3,785 22,307 26,092 1,366
Clairmont
Crest........... 11,600 1,603 9,102 419 1,603 9,521 11,124 887
The Greens...... 10,400 2,004 11,354 468 2,004 11,822 13,826 1,122
Lake Ridge at
Dunwoody........ -- 2,001 11,359 4,110 2,001 15,469 17,470 1,797
Morgan's
Landing......... -- 1,168 6,646 895 1,168 7,541 8,709 826
Old Salem....... -- 1,053 6,144 1,159 1,053 7,303 8,356 685
Trolley
Square.......... -- 2,031 11,528 445 2,031 11,973 14,004 1,266
Vinings
Landing......... -- 1,363 7,902 781 1,363 8,683 10,046 853
WintersCreek.... 5,000 1,133 6,434 367 1,133 6,801 7,934 437
BIRMINGHAM,
ALABAMA:
Cameron on the
Cahaba I........ -- 1,020 5,784 402 1,020 6,186 7,206 452
Cameron on the
Cahaba II....... 7,955 1,688 9,580 611 1,688 10,191 11,879 742
Colony Woods I.. -- 1,560 8,845 580 1,560 9,425 10,985 1,023
Morning Sun
Villas.......... -- 1,260 7,309 894 1,260 8,203 9,463 778
CHARLOTTE, NORTH
CAROLINA:
Cameron at
Hickory Grove... 5,928 1,203 6,808 453 1,203 7,261 8,464 330
Cameron Oaks.... -- 2,255 12,800 389 2,255 13,189 15,444 1,351
COLUMBUS, OHIO:
Arbors of
Dublin.......... -- 2,192 12,419 14 2,192 12,433 14,625 55
<CAPTION>
CON-
STRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... 1987 1995
Balmoral
Village......... 1990 1996
Cameron
Ashford......... 1990 1994
Cameron
Briarcliff...... 1989 1994
Cameron Brook... 1988 1994
Cameron Creek
I............... 1988 1994
Cameron Crest... 1988 1994
Cameron
Dunwoody........ 1989 1994
Cameron Forest.. 1981 1995
Cameron Place... 1979 1995
Cameron
Pointe.......... 1987 1996
Cameron
Station......... (c) 1995
Cameron
Woodlands....... (d) 1995
Clairmont
Crest........... 1987 1994
The Greens...... 1986 1994
Lake Ridge at
Dunwoody........ 1979 1993
Morgan's
Landing......... 1983 1993
Old Salem....... 1968 1994
Trolley
Square.......... 1989 1994
Vinings
Landing......... 1978 1994
WintersCreek.... 1984 1995
BIRMINGHAM,
ALABAMA:
Cameron on the
Cahaba I........ 1987 1995
Cameron on the
Cahaba II....... 1990 1995
Colony Woods I.. 1991 1994
Morning Sun
Villas.......... 1985 1994
CHARLOTTE, NORTH
CAROLINA:
Cameron at
Hickory Grove... 1988 1996
Cameron Oaks.... 1989 1994
COLUMBUS, OHIO:
Arbors of
Dublin.......... 1988 1997
</TABLE>
75
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL WHICH CARRIED AT
COST TO ATLANTIC DECEMBER 31, 1997
----------------------- -------------------------------
COSTS
CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A)
- ----------------------- ------- ------ ------------- ------------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron at
Bayberry Lake... $ -- $2,508 $14,210 $ 595 $2,508 $14,805 $17,313
Cameron at
Meadow Lakes.... -- 1,285 7,293 392 1,285 7,685 8,970
Cameron at the
Villages........ (b) 2,852 16,194 723 2,852 16,917 19,769
Cameron Cove.... 8,500 1,367 7,773 304 1,367 8,077 9,444
Cameron Hidden
Harbor.......... 5,504 1,641 9,297 1 1,641 9,298 10,939
Cameron View.... -- 1,225 6,961 603 1,225 7,564 8,789
Park Place at
Turtle Run...... -- 2,208 12,223 1,516 2,208 13,739 15,947
Parrot's Landing
I............... 15,835 2,691 15,276 1,105 2,691 16,381 19,072
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 505 2,031 12,045 14,076
Greenville, South
Carolina:
Cameron Court... -- 1,602 9,369 277 1,602 9,646 11,248
Jacksonville,
Florida:
Bay Club........ -- 1,789 10,160 350 1,789 10,510 12,299
Memphis,
Tennessee:
Arbors at
Century Center.. -- 2,382 13,496 550 2,382 14,046 16,428
Country Oaks.... 5,873 1,246 7,061 369 1,246 7,430 8,676
Nashville,
Tennessee:
Arbor Creek..... -- --(e) 17,671 622 --(e) 18,293 18,293
Enclave at
Brentwood....... -- 2,263 12,847 1,166 2,263 14,013 16,276
Shadowbluff..... 5,503 1,211 6,860 413 1,211 7,273 8,484
Orlando, Florida:
Camden Springs.. -- 2,477 14,072 1,010 2,477 15,082 17,559
Cameron Villas
I............... 6,278 1,087 6,317 746 1,087 7,063 8,150
Cameron Villas
II.............. (b) 255 1,454 121 255 1,575 1,830
Kingston
Village......... -- 876 4,973 329 876 5,302 6,178
Wellington I.... (b) 1,155 6,565 355 1,155 6,920 8,075
<CAPTION>
-----------
ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL DEPRECIATION YEAR ACQUIRED
- ----------------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron at
Bayberry Lake... $ 617 1988 1996
Cameron at
Meadow Lakes.... 491 1983 1995
Cameron at the
Villages........ 1,601 1987 1994
Cameron Cove.... 775 1986 1994
Cameron Hidden
Harbor.......... 21 1986 1997
Cameron View.... 479 1987 1995
Park Place at
Turtle Run...... 589 1989 1996
Parrot's Landing
I............... 1,537 1986 1994
Ft. Myers,
Florida:
Forestwood...... 1,150 1986 1994
Greenville, South
Carolina:
Cameron Court... 459 1991 1996
Jacksonville,
Florida:
Bay Club........ 1,072 1990 1994
Memphis,
Tennessee:
Arbors at
Century Center.. 452 1988 1996
Country Oaks.... 260 1985 1996
Nashville,
Tennessee:
Arbor Creek..... 1,755 1986 1994
Enclave at
Brentwood....... 1,000 1988 1995
Shadowbluff..... 61 1986 1997
Orlando, Florida:
Camden Springs.. 1,468 1986 1994
Cameron Villas
I............... 670 1982 1994
Cameron Villas
II.............. 99 1981 1995
Kingston
Village......... 338 1982 1995
Wellington I.... 659 1988 1994
</TABLE>
(see notes following table)
76
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL WHICH CARRIED AT
COST TO ATLANTIC DECEMBER 31, 1997
---------------------- -------------------------------
COSTS
CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS
MLTIFAMILY COMMUNITIESU BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A)
- ----------------------- -------- -------- ------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Raleigh, North
Carolina:
Bryn Athyn........ $ -- $ 1,357 $ 7,687 $ 262 $ 1,357 $ 7,949 $ 9,306
Cameron Lake I.... -- 1,385 7,848 541 1,385 8,389 9,774
Cameron Lake II... -- 1,382 7,833 15 1,382 7,848 9,230
Cameron Ridge..... 5,686 1,503 8,519 376 1,503 8,895 10,398
Cameron Square.... -- 2,314 13,143 610 2,314 13,753 16,067
Emerald Forest.... -- 2,202 12,478 450 2,202 12,928 15,130
Richmond, Virginia:
Cameron at
Gayton............ (b) 1,486 8,452 271 1,486 8,723 10,209
Cameron at
Wellesley......... -- 2,878 16,339 388 2,878 16,727 19,605
Sarasota, Florida:
Camden at Palmer
Ranch............. -- 3,534 20,057 844 3,534 20,901 24,435
Tampa/St.
Petersburg,
Florida:
Camden Downs...... -- 1,840 10,447 387 1,840 10,834 12,674
Cameron Bayshore.. -- 1,607 9,105 867 1,607 9,972 11,579
Cameron Lakes..... -- 1,126 6,418 1,165 1,126 7,583 8,709
Cameron Palm
Harbor............ 5,252 1,097 6,225 12 1,097 6,237 7,334
Country Place
Village I......... 1,968 567 3,219 313 567 3,532 4,099
Country Place
Village II........ -- 644 3,658 204 644 3,862 4,506
Foxbridge on the
Bay............... 10,400 1,591 9,036 384 1,591 9,420 11,011
Washington, D.C.:
Camden at Kendall
Ridge............. -- 1,708 9,698 390 1,708 10,088 11,796
Cameron at
Saybrooke......... -- 2,802 15,906 773 2,802 16,679 19,481
Sheffield Forest.. -- 2,269 12,859 841 2,269 13,700 15,969
West Springfield
Terrace........... -- 2,417 13,695 703 2,417 14,398 16,815
Less amounts held
in principal
reserve fund(f).... (2,142) -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- --------
Total Operating
Communities
Acquired........ $170,525 $129,018 $750,287 $41,909 $129,018 $792,196 $921,214
-------- -------- -------- ------- -------- -------- --------
<CAPTION>
-----------
ACCUMULATED CONSTRUCTION YEAR
MLTIFAMILY COMMUNITIESU DEPRECIATION YEAR ACQUIRED
- ----------------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Raleigh, North
Carolina:
Bryn Athyn........ $ 52 1985 1997
Cameron Lake I.... 256 1985 1996
Cameron Lake II... 17 1982 1997
Cameron Ridge..... 274 1985 1996
Cameron Square.... 1,335 1987 1994
Emerald Forest.... 343 1986 1996
Richmond, Virginia:
Cameron at
Gayton............ 702 1987 1994
Cameron at
Wellesley......... 1,715 1989 1994
Sarasota, Florida:
Camden at Palmer
Ranch............. 2,038 1988 1994
Tampa/St.
Petersburg,
Florida:
Camden Downs...... 1,081 1988 1994
Cameron Bayshore.. 258 1984 1996
Cameron Lakes..... 581 1986 1995
Cameron Palm
Harbor............ 28 1988 1997
Country Place
Village I......... 219 1982 1995
Country Place
Village II........ 246 1983 1995
Foxbridge on the
Bay............... 924 1986 1994
Washington, D.C.:
Camden at Kendall
Ridge............. 1,046 1990 1994
Cameron at
Saybrooke......... 1,655 1990 1994
Sheffield Forest.. 749 1987 1995
West Springfield
Terrace........... 476 1978 1996
Less amounts held
in principal
reserve fund(f).... --
------------
Total Operating
Communities
Acquired........ $58,152
------------
</TABLE>
(see notes following table)
77
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO ATLANTIC CAPITALIZED DECEMBER 31, 1997
-----------------------------SUBSEQUENT --------------------------------- ACCUMU- CON-
ENCUM- BUILDINGS AND TO BUILDINGS AND TOTALS LATED DE- STRUCTION
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A) PRECIATION YEAR
- ----------------------- -------- ------------ --------------------------- -------- ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Communities
Developed:
Atlanta, Georgia:
Cameron Creek
II.............. $ -- $ 2,730 $ -- $ 17,459 $ 2,850 $ 17,339 $ 20,189 $ 470 1997
Birmingham,
Alabama:
Colony Woods
II.............. -- 1,254 -- 9,501 1,551 9,204 10,755 734 1995
Charlotte, North
Carolina:
Waterford
Hills........... -- 1,508 -- 12,022 1,943 11,587 13,530 863 1995
Waterford Square
I............... -- 1,890 -- 19,607 2,968 18,529 21,497 1,091 1996
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1,328 -- 8,873 1,405 8,796 10,201 123 1997
Jacksonville,
Florida:
Cameron
Deerwood........ -- 2,331 -- 15,394 2,466 15,259 17,725 306 1997
Cameron Lakes
I............... -- 1,759 -- 14,946 2,867 13,838 16,705 790 1996
Cameron
Timberlin Parc
I............... -- 2,167 -- 15,059 2,282 14,944 17,226 268 1997
Raleigh, North
Carolina:
Cameron Brooke.. -- 1,353 -- 12,126 1,423 12,056 13,479 183 1997
Waterford
Forest.......... 2,371 -- 19,164 3,112 18,423 21,535 641 1997
Waterford
Point........... -- 985 -- 15,968 1,493 15,460 16,953 1,083 1996
Washington, D.C.:
Cameron at
Milestone....... -- 5,477 -- 26,025 6,127 25,375 31,502 619 1997
-------- ------------ ------------ -------- -------- -------- ---------- -------
Total Operating
Communities
Developed....... $ -- $ 25,153 $ -- $186,144 $ 30,487 $180,810 $ 211,297 $ 7,171
-------- ------------ ------------ -------- -------- -------- ---------- -------
Total Operating
Communities..... $170,525 $ 154,171 $ 750,287 $228,053 $159,505 $973,006 $1,132,511 $65,323
-------- ------------ ------------ -------- -------- -------- ---------- -------
Communities Under
Construction:
Atlanta, Georgia:
Cameron at
Barrett Creek... $ -- $ 4,157 $ -- $ 2,215 $ 4,158 $ 2,214 $ 6,372 $ -- --
Cameron at North
Point........... -- 2,881 -- 3,661 2,909 3,633 6,542 -- --
Cameron Bridge.. -- 2,640 -- 1,936 2,641 1,935 4,576 -- --
Cameron
Landing......... -- 1,508 -- 12,628 2,223 11,913 14,136 -- -- (g)
Birmingham,
Alabama:
Cameron at the
Summit I........ -- 2,774 -- 18,531 2,778 18,527 21,305 63 -- (g)
<CAPTION>
YEAR
MUTIFAMILY COMMUNITIESL ACQUIRED
- ----------------------- --------
<S> <C>
Communities
Developed:
Atlanta, Georgia:
Cameron Creek
II.............. 1994
Birmingham,
Alabama:
Colony Woods
II.............. 1994
Charlotte, North
Carolina:
Waterford
Hills........... 1993
Waterford Square
I............... 1994
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. 1994
Jacksonville,
Florida:
Cameron
Deerwood........ 1996
Cameron Lakes
I............... 1995
Cameron
Timberlin Parc
I............... 1995
Raleigh, North
Carolina:
Cameron Brooke.. 1995
Waterford
Forest.......... 1995
Waterford
Point........... 1994
Washington, D.C.:
Cameron at
Milestone....... 1995
Total Operating
Communities
Developed.......
Total Operating
Communities.....
Communities Under
Construction:
Atlanta, Georgia:
Cameron at
Barrett Creek... 1997
Cameron at North
Point........... 1997
Cameron Bridge.. 1997
Cameron
Landing......... 1996
Birmingham,
Alabama:
Cameron at the
Summit I........ 1996
</TABLE>
(see notes following table)
78
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO ATLANTIC CAPITALIZED DECEMBER 31, 1997
------------------------------SUBSEQUENT ------------------------------------- ACCUMU-
ENCUM- BUILDINGS AND TO BUILDINGS AND TOTALS LATED DE-
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A) PRECIATION
- ----------------------- ------- ------------- --------------------------- ---------- -------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte, North
Carolina:
Cameron
Matthews........ $-- $ 1,415 $ -- $ 6,713 $ 1,420 $ 6,708 $ 8,128 $--
Waterford Square
II.............. -- 2,014 -- 13,774 2,065 13,723 15,788 53
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Gardens......... -- 3,709 -- 1,745 3,753 1,701 5,454 --
Cameron Palms... -- 3,985 -- 2,080 4,100 1,965 6,065 --
Cameron Park I.. -- 1,763 -- 1,627 1,778 1,612 3,390 --
Cameron
Waterways....... -- 3,622 -- 14,482 3,687 14,417 18,104 --
Jacksonville,
Florida:
Cameron Lakes
II.............. -- 1,340 -- 12,791 1,340 12,791 14,131 36
Nashville,
Tennessee:
Cameron
Overlook........ -- 2,569 -- 20,733 2,657 20,645 23,302 56
Orlando, Florida:
Cameron
Promenade....... -- 1,176 -- 4,172 1,176 4,172 5,348 --
Wellington II... -- 1,055 -- 3,416 1,060 3,411 4,471 --
Raleigh, North
Carolina:
Cameron at
Southpoint...... -- 1,353 -- 2,257 1,354 2,256 3,610 --
Cameron Woods... -- 1,520 -- 2,167 1,526 2,161 3,687 --
Richmond,
Virginia:
Cameron at
Virginia
Center.......... -- 1,662 -- 9,884 1,671 9,875 11,546 --
Cameron at
Wyndham......... -- 2,038 -- 16,999 2,052 16,985 19,037 7
Cameron Crossing
I & II.......... -- 2,752 -- 19,321 2,776 19,297 22,073 88
---- ------------- ---------- -------- ---------- ----------- ----------- ----
Total
Communities
Under
Construction.... $-- $ 45,933 $ -- $171,132 $ 47,124 $ 169,941 $ 217,065 $303
---- ------------- ---------- -------- ---------- ----------- ----------- ----
Communities in
Planning:
Indianapolis,
Indiana:
Cameron at River
Ridge........... -- 1,536 -- 302 1,536 302 1,838 --
Raleigh, North
Carolina:
Cameron Chase... -- 2,872 -- 188 2,872 188 3,060 --
<CAPTION>
CON-
STRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- --------- ---------
<S> <C> <C>
Charlotte, North
Carolina:
Cameron
Matthews........ -- 1997
Waterford Square
II.............. -- (g) 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Gardens......... -- 1997
Cameron Palms... -- 1997
Cameron Park I.. -- 1997
Cameron
Waterways....... -- 1996
Jacksonville,
Florida:
Cameron Lakes
II.............. -- (g) 1996
Nashville,
Tennessee:
Cameron
Overlook........ -- (g) 1996
Orlando, Florida:
Cameron
Promenade....... -- 1997
Wellington II... -- 1997
Raleigh, North
Carolina:
Cameron at
Southpoint...... -- 1997
Cameron Woods... -- 1997
Richmond,
Virginia:
Cameron at
Virginia
Center.......... -- 1997
Cameron at
Wyndham......... -- (g) 1995
Cameron Crossing
I & II.......... -- (g) (h)
Total
Communities
Under
Construction....
Communities in
Planning:
Indianapolis,
Indiana:
Cameron at River
Ridge........... -- 1997
Raleigh, North
Carolina:
Cameron Chase... -- 1997
</TABLE>
(see notes following table)
79
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO ATLANTIC CAPITALIZED DECEMBER 31, 1997
-----------------------------SUBSEQUENT --------------------------------- ACCUMU- CON-
ENCUM- BUILDINGS AND TO BUILDINGS AND TOTALS LATED DE- STRUCTION
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (A) PRECIATION YEAR
- ----------------------- -------- ------------ --------------------------- -------- ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Washington, D.C.:
Cameron at
Governor's
Green........... $ -- $ 5,185 $ -- $ 626 $ 5,210 $ 601 $ 5,811 $ -- --
-------- ------------ ------------ -------- -------- ---------- ---------- -------
Total
Communities in
Planning........ $ -- $ 9,593 $ -- $ 1,116 $ 9,618 $ 1,091 $ 10,709 $ --
-------- ------------ ------------ -------- -------- ---------- ---------- -------
Land Held for
Future
Development:
Birmingham,
Alabama:
Cameron at the
Summit II....... $ -- $ 2,008 $ -- $ 756 $ 2,011 $ 753 $ 2,764 $ -- --
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1,294 -- 229 1,319 204 1,523 -- --
-------- ------------ ------------ -------- -------- ---------- ---------- -------
Total Land Held
for Future
Development..... $ -- $ 3,302 $ -- $ 985 $ 3,330 $ 957 $ 4,287 $ --
-------- ------------ ------------ -------- -------- ---------- ---------- -------
Totals.......... $170,525 $ 212,999 $ 750,287 $401,286 $219,577 $1,144,995 $1,364,572 $65,626
======== ============ ============ ======== ======== ========== ========== =======
<CAPTION>
YEAR
MUTIFAMILY COMMUNITIESL ACQUIRED
- ----------------------- --------
<S> <C>
Washington, D.C.:
Cameron at
Governor's
Green........... 1997
Total
Communities in
Planning........
Land Held for
Future
Development:
Birmingham,
Alabama:
Cameron at the
Summit II....... 1996
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. 1995
Total Land Held
for Future
Development.....
Totals..........
</TABLE>
- ----
(a) For federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1997 was $1,351,277,000.
(b) Pledged as additional collateral under credit enhancement agreement with
the Federal National Mortgage Association.
(c) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(d) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(e) The land associated with this community is leased by ATLANTIC through the
year 2058 under an agreement with the Metropolitan Nashville Airport
Authority.
(f) The Federal National Mortgage Association credit enhancement agreement
requires payments to be made to a principal reserve fund.
(g) This community is leasing completed units.
(h) 19.24 acres purchased in 1995; 9.86 acres purchased in 1996.
80
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTE TO SCHEDULE III
DECEMBER 31, 1997
(IN THOUSANDS)
As summary of activity for ATLANTIC's real estate, at cost and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
REAL ESTATE 1997 1996 1995
----------- ---------- ---------- --------
<S> <C> <C> <C>
Balances at January 1....................... $1,157,235 $ 888,928 $631,260
Acquisitions and renovation expenditures.... 70,771 179,752 187,267
Development expenditures, including land
acquisitions............................... 200,208 179,783 101,335
Recurring capital expenditures.............. 2,857 2,783 --
Dispositions................................ (66,299) (59,988) (30,934)
Provision for possible loss on investments.. (200) (2,500) --
Sale of Homestead Assets.................... -- (31,523) --
---------- ---------- --------
Balances at December 31..................... $1,364,572 $1,157,235 $888,928
========== ========== ========
<CAPTION>
ACCUMULATED DEPRECIATION 1997 1996 1995
------------------------ ---------- ---------- --------
<S> <C> <C> <C>
Balances at January 1....................... $ 41,166 $ 23,561 $ 8,798
Depreciation for the year................... 26,963 20,824 15,925
Accumulated depreciation of real estate
disposed of................................ (2,503) (3,219) (1,162)
---------- ---------- --------
Balances at December 31..................... $ 65,626 $ 41,166 $ 23,561
========== ========== ========
</TABLE>
81
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH OF SECURITY CAPITAL ATLANTIC
INCORPORATED, A MARYLAND CORPORATION, AND THE UNDERSIGNED DIRECTORS AND
OFFICERS OF SECURITY CAPITAL ATLANTIC INCORPORATED HEREBY CONSTITUTES AND
APPOINTS CONSTANCE B. MOORE, WILLIAM KELL, JEFFREY A. KLOPF, MARK W. PEARSON
AND EDWARD J. SCHNEIDMAN ITS, HER OR HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND
AGENTS, FOR IT, HER OR HIM AND IN ITS, HER OR HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, WITH FULL POWER TO ACT ALONE, TO SIGN ANY AND ALL
AMENDMENTS TO THIS REPORT, AND TO FILE EACH SUCH AMENDMENT TO THIS REPORT,
WITH ALL EXHIBITS THERETO, AND ANY AND ALL DOCUMENTS IN CONNECTION THEREWITH,
WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM ANY AND ALL ACTS AND THINGS REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS IT, SHE OR
HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM MAY LAWFULLY DO OR CAUSE TO BE
DONE BY VIRTUE HEREOF.
82
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Security Capital Atlantic
Incorporated
/s/ Constance B. Moore
By: _________________________________
Constance B. Moore Co-Chairman and
Chief Operating Officer
Date: March 19, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
/s/ Constance B. Moore Co-Chairman, Chief March 19, 1998
- ------------------------------------- Operating Officer
CONSTANCE B. MOORE and Director
/s/ James C. Potts Co-Chairman, Chief March 19, 1998
- ------------------------------------- Investment Officer
JAMES C. POTTS and Director
/s/ William Kell Senior Vice March 19, 1998
- ------------------------------------- President and
WILLIAM KELL Controller
(Principal
Financial Officer)
/s/ Ann L. Schumacher Vice President March 19, 1998
- ------------------------------------- (Principal
ANN L. SCHUMACHER Accounting Officer)
/s/ M.A. Garcia III Director March 19, 1998
- -------------------------------------
M.A. GARCIA III
/s/ Ned S. Holmes Director March 19, 1998
- -------------------------------------
NED S. HOLMES
/s/ John M. Richman Director March 19, 1998
- -------------------------------------
JOHN M. RICHMAN
83
<PAGE>
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the
following documents have been previously filed with the Securities and
Exchange Commission and, pursuant to rule 12b-32, are incorporated herein by
reference.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Second Amended and Restated Articles of Incorporation of ATLANTIC
(incorporated by reference to Exhibit 4.1 to ATLANTIC's Form S-11
Registration Statement (File No. 333-07071; (the "ATLANTIC S-11")))
3.2 Articles of Amendment to Second Amended and Restated Articles of
Incorporation of ATLANTIC (incorporated by reference to Exhibit 4.2 to
the ATLANTIC S-11)
3.3 Articles of Amendment to Second Amended and Restated Articles of
Incorporation of ATLANTIC (incorporated by reference to Exhibit 4.3 to
the ATLANTIC S-11)
3.4 Articles Supplementary to Second Amended and Restated Articles of
Incorporation of ATLANTIC relating to ATLANTIC's Series A Junior
Participating Preferred Stock (incorporated by reference to Exhibit 4.4
to ATLANTIC's Form 10-K for the year ended December 31, 1996 (File No.
1-12303, the "ATLANTIC 10-K"))
3.5 Articles Supplementary to Second Amended and Restated Articles of
Incorporation of ATLANTIC relating to ATLANTIC's Series A Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit 4.5 to
ATLANTIC's Form S-11 Registration Statement (File No. 333-30749)
3.6 Second Amended and Restated Bylaws of ATLANTIC (incorporated by
reference to Exhibit 4.4 to the ATLANTIC S-11)
4.1 Rights Agreement, dated as of March 22, 1996, between ATLANTIC and The
First National Bank of Boston, as Rights Agent, including form of
Rights Certificate (incorporated by reference to Exhibit 4.6 to the
ATLANTIC S-11)
4.2 Indenture, dated as of August 14, 1997, between ATLANTIC and State
Street Bank and Trust Company, as Trustee (incorporated by reference to
Exhibit 4.8 to ATLANTIC's Form S-11 Registration Statement (File No.
333-30747))
10.1 Transfer and Registration Rights Agreement, dated as of December 15,
1995, among ATLANTIC and the investors listed on the signature pages
thereto (incorporated by reference to Exhibit 10.1 to the ATLANTIC S-11)
10.2 Supplemental Registration Rights Agreement, dated as of December 15,
1995, among ATLANTIC and the investors listed on the signature pages
thereto (incorporated by reference to Exhibit 10.2 to the ATLANTIC S-11)
10.3 Amended and Restated Revolving Credit Agreement, dated as of November
24, 1997, between ATLANTIC and Morgan Guaranty Trust Company of New
York, as agent bank, including form of Revolving Credit Note
10.4 Form of Indemnification Agreement entered into between ATLANTIC and
each of its Directors (incorporated by reference to Exhibit 10.6 to the
ATLANTIC S-11)
10.5 Security Capital Atlantic Incorporated Share Option Plan for Outside
Directors (incorporated by reference to Exhibit 10.7 to the ATLANTIC S-
11)
10.6 First Amendment to Security Capital Atlantic Incorporated Share Option
Plan for Outside Directors (incorporated by reference to Exhibit 10.8
to the ATLANTIC S-11)
10.7 Security Capital Atlantic Incorporated 1997 Long-Term Incentive Plan
(incorporated by reference to Annex II to Security Capital's Form S-11
Registration Statement (File No. 333-26263))
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.8 Consolidated Amended and Restated Promissory Note, dated as of May 28,
1996, by Atlantic Homestead Village Incorporated in favor of ATLANTIC
(incorporated by reference to Exhibit 4.6 to Homestead Village
Incorporated's Form S-4 Registration Statement (File No. 333-4455; (the
"Homestead S-4")))
10.9 Amended and Restated Promissory Note, dated as of May 28, 1996, by
Atlantic Homestead Village Limited Partnership in favor of ATLANTIC
(incorporated by reference to Exhibit 4.7 to the Homestead S-4)
10.10 Protection of Business Agreement, dated as of October 17, 1996, among
ATLANTIC, PTR, Security Capital and Homestead (incorporated by
reference to Exhibit 10.11 to the ATLANTIC 10-K)
10.11 Investor and Registration Rights Agreement, dated as of October 17,
1996, between Homestead and ATLANTIC (incorporated by reference to
Exhibit 10.12 to the ATLANTIC 10-K)
10.12 Funding Commitment Agreement, dated as of October 17, 1996, between
Homestead and ATLANTIC (incorporated by reference to Exhibit 10.13 to
the ATLANTIC 10-K)
10.13 Amended and Restated Investor Agreement, dated as of September 9, 1997,
between ATLANTIC and Security Capital (incorporated by reference to
Exhibit 10.1 to Security Capital's Form 10-Q for the quarter ended
September 30, 1997 (File No. 1-13355))
10.14 Administrative Services Agreement, dated as of September 9, 1997,
between ATLANTIC and SC Group Incorporated (incorporated by reference
to Exhibit 10.4 to Security Capital's Form 10-Q for the quarter ended
September 30, 1997 (File No. 1-13355))
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
21 Subsidiaries of ATLANTIC
23 Consent of Ernst & Young LLP
24 Power of Attorney pursuant to which amendments to this report may be
filed (included at page 82)
27 Financial Data Schedule
</TABLE>
85
<PAGE>
EXHIBIT 10.3
________________________________________________________________________________
________________________________________________________________________________
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
dated as of November 24, 1997
among
Security Capital Atlantic Incorporated,
The Banks Listed Herein
and
Morgan Guaranty Trust Company of New York,
as Agent
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of
November __, 1997, among SECURITY CAPITAL ATLANTIC INCORPORATED, the BANKS
listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower, Agent, and the Banks entered into the Revolving
Credit Agreement, dated as of December 18, 1996 (the "Initial Closing Date"), as
--------------------
amended by First Amendment to Revolving Credit Agreement, dated as of April 11,
1997, and by Second Amendment to Revolving Credit Agreement (as amended, the
"Existing Credit Agreement"); and
-------------------------
WHEREAS, the parties hereto have agreed to amend and restate the terms
and conditions contained in the Existing Credit Agreement in their entirety as
hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. The Existing Credit Agreement is hereby modified so that all of
the terms and conditions of the aforesaid Existing Credit Agreement shall be
restated in their entirety as set forth herein, and the Borrower agrees to
comply with and be subject to all of the terms, covenants and conditions of this
Agreement.
II. This Agreement shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and assigns, and shall be
deemed to be effective as of the date hereof.
III. Any reference to the Existing Credit Agreement in the Notes, any
other Loan Document or any other document executed in connection with this
Agreement shall be deemed to refer to this Agreement.
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
-----------
the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes
---------------------
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"Adjusted EBITDA" means EBITDA less an amount equal to (i) the Unit
---------------
Amount for each unit for each Real Property Asset which is 100% owned in fee or
leasehold directly or indirectly by the Borrower and its wholly-owned
Subsidiaries and (ii) the Borrower's pro-rata share of the Unit Amount for each
unit for each Real Property Asset which is not 100% owned or leased, directly or
indirectly, by the Borrower and its wholly-owned Subsidiaries. Notwithstanding
anything to the contrary contained herein, the Unit Amount shall not be applied
to any Construction Assets.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
--------------------------------------
Section 2.07(b).
"Adjusted Net Operating Income" means, when used with respect to any
-----------------------------
parcel of real property, Net Operating Income less an amount equal to the Unit
Amount for each unit in the subject property.
"Administrative Questionnaire" means, with respect to each Bank, an
----------------------------
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"Administrative Services Contract" means an administrative services
--------------------------------
contract with Group or an Affiliate.
"Affiliate" of any specified Person means any other Person directly or
---------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. An Affiliate of the Borrower or any
Subsidiary includes, without limitation, (i) any officer or director of such
Person and (ii) any record or beneficial owner of more than 10% of any class of
Equity Interests of such Person; provided that, for purposes of this clause
(ii), so long as Group owns beneficially more
-2-
<PAGE>
than 45% of each class of Equity Interests of the Borrower, an Affiliate of the
Borrower for purposes of clause (ii) shall not include any record or beneficial
owner of less than 20% of any class of Equity Interests of the Borrower. For
purposes of this definition "control" of any Person means the power to direct
the management and policies of such Person, directly or indirectly, whether
through the ownership of Equity Interests, by contract or otherwise, and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means Morgan Guaranty Trust Company of New York in its
-----
capacity as agent for the Banks hereunder, and its successors in such
capacity.
"Agreement" means this Revolving Credit Agreement, as it may be
---------
amended, supplemented or otherwise modified from time to time.
"Applicable Lending Office" means, with respect to any Bank, (i) in
-------------------------
the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case
of its Euro-Dollar Loans, its Euro-Dollar Lending Office, and (iii) in the case
of its Money Market Loans, its Money Market Lending Office.
"Applicable Margin" means, with respect to each Loan, the respective
-----------------
percentages per annum determined, at any time, based on the range into which the
Borrower's Credit Rating then falls, in accordance with the table set forth
below. Any change in the Borrower's Credit Rating causing it to move to a
different range on the table shall effect an immediate change in the Applicable
Margin. In the event that the Borrower receives two (2) Credit Ratings that are
not equivalent, the Applicable Margin shall be determined by the lower of such
two (2) Credit Ratings. In the event that the Borrower receives more than two
(2) Credit Ratings, and such ratings are not equivalent, the Applicable Margin
shall be determined by the lower of the two (2) highest ratings, provided that
each of said two (2) highest ratings shall be Investment Grade Ratings and at
least one of which shall be an Investment Grade Rating from S&P or Moody's.
<TABLE>
<CAPTION>
Applicable
Range of Borrower's Margin for Applicable
Credit Rating Base Rate Margin for Euro
(Applicable Loans Dollar Loans
annum) Ratings) (% per annum) (% per
- ----------- -------- ------------- ------
<S> <C> <C> <C>
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C> <C>
BBB+/Baa1 0.0 0.60
BBB/Baa2 0.0 0.75
BBB-/Baa3 0.0 0.9625
Non-Invest-
ment Grade
or not rated 0.0 1.1875
</TABLE>
"Assignee" has the meaning set forth in Section 9.06(c).
--------
"Available Commitment" means, with respect to each Bank, at any time,
--------------------
the amount obtained by multiplying such Bank's Commitment at such time by a
fraction, the numerator of which is the Total Available Commitments (as the same
may be reduced pursuant to Sections 2.09 and 2.10) at such time and the
denominator of which is $350,000,000.
"Bank" means each bank listed on the signature pages hereof, each
----
Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective
successors and each Designated Lender; provided, however, that the term "Bank"
-------- ------- ----
shall exclude each Designated Lender when used in reference to a Committed Loan,
the Commitments or terms relating to the Committed Loans and the Commitments and
shall further exclude each Designated Lender for all other purposes hereunder
except that any Designated Lender which funds a Money Market Loan shall, subject
to Section 9.06(d), have the rights (including the rights given to a Bank
contained in Section 9.03 and otherwise in Article 9) and obligations of a Bank
associated with holding such Money Market Loan.
"Base Rate" means, for any day, a rate per annum equal to the higher
---------
of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Base Rate Loan" means a Committed Loan which bears interest at the
--------------
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Section 2.06(c) or Article VIII.
"Benefit Arrangement" means at any time an employee benefit plan
-------------------
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
-4-
<PAGE>
"Borrower" means Security Capital Atlantic Incorporated, a Maryland
--------
corporation, and its successors.
"Borrowing" has the meaning set forth in Section 1.03.
---------
"Capital Expenditures" means, for any period, the sum of all
--------------------
expenditures (whether paid in cash or accrued as a liability) by the Borrower
which are capitalized on the balance sheet of the Borrower in conformity with
GAAP.
"Closing Date" means the date on or after the Effective Date on which
------------
the conditions set forth in Section 3.01 shall have been satisfied to the
satisfaction of the Lead Agent.
"Combined Debt Service" means, as of any date of determination, the
---------------------
sum of (i) Debt Service payable in connection with Real Property Assets owned
100% by the Borrower or any wholly-owned Subsidiary, and (ii) Borrower's pro
rata share (such share being based upon the Borrower's percentage ownership
interest) of Debt Service payable in connection with investments in joint
ventures, whether consolidated or unconsolidated of Borrower or its wholly-owned
Subsidiaries.
"Combined Interest Expense" means, as of any date of determination,
-------------------------
the sum of (i) Interest Expense of the Borrower or any wholly-owned Subsidiary,
and (ii) the Borrower's pro rata share (such share being based upon the
Borrower's percentage ownership interest) of Interest Expense with respect to
investments in joint ventures, whether consolidated or unconsolidated of the
Borrower or its wholly-owned Subsidiaries.
"Commitment" means, with respect to each Bank, the amount set forth
----------
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Sections 2.09 and 2.10.
"Commitment Reduction Date" means the last day of each of six
-------------------------
consecutive six-month periods, the first such day being the last day of the six-
month period immediately following the Conversion Date and the last such day
being the third anniversary of the Conversion Date.
"Committed Loan" means a loan made by a Bank pursuant to Section 2.01;
--------------
provided that, if any such loan or loans (or portions thereof) are combined or
- --------
subdivided pursuant to a Notice of Interest Rate Election, the term "Committed
Loan" shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
-5-
<PAGE>
"Consolidated Capital Expenditures" means, for any period, the product
---------------------------------
of (A) the Unit Amount, and (B) the sum of the number of units contained in all
completed properties as of the last day of each month during the applicable
twelve month period, divided by 12, except to the extent that actual capital
expenditures in the aggregate exceed for such period amounts raised by the
Borrower and its Subsidiaries pursuant to (x) equity offerings, (y) borrowings
from third parties (including borrowings pursuant to this Agreement) and (z)
undistributed Funds From Operations, in which case the excess shall also be
deemed to be Consolidated Capital Expenditures.
"Consolidated Subsidiary" means, at any date, any Subsidiary or other
-----------------------
entity which the Borrower owns the majority economic interest in or property of,
the accounts of which would be consolidated with those of the Borrower in its
consolidated financial statements if such statements were prepared as of such
date.
"Consolidated Tangible Net Worth" means, at any date, the consolidated
-------------------------------
stockholders' equity of the Borrower and its Consolidated Subsidiaries, plus any
accumulated depreciation, less their consolidated Intangible Assets, all
determined as of such date. For purposes hereof, "Intangible Assets" means the
-----------------
amount (to the extent reflected in determining such consolidated stockholders'
equity) of (i) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of assets of a going concern business made
within twelve months after the acquisition of such business) subsequent to
September 30, 1997 in the book value of any asset owned by the Borrower or a
Consolidated Subsidiary and (ii) all unamortized debt discount and expense,
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, anticipated future benefit of tax loss carry-forwards, copyrights,
organization expenses and other intangible assets.
"Construction Assets" shall mean, as of any date, the Real Property
-------------------
Assets listed on Exhibit C attached hereto and made a part hereof, subject to
---------
adjustment, each of which is not subject to any Lien, unless the same is being
contested in good faith and the same is discharged, bonded or paid off within
sixty (60) days of the filing of such Lien, on which construction of
improvements has begun (as evidenced by foundation excavation) but have not yet
been substantially completed (as such completion shall be evidenced by (i)
being not less than 90% complete, (ii) the issuance of a permanent certificate
of occupancy or its equivalent, (iii) the commencement of the payment of rent by
tenants of such Real Property Asset and (iv) being more than 85% leased to
tenants).
-6-
<PAGE>
"Conversion Date" has the meaning set forth in Section 2.01(d).
---------------
"Conversion Option" has the meaning set forth in Section 2.01(d).
-----------------
"Credit Rating" means the rating assigned by the Rating Agencies to
-------------
Borrower's senior unsecured long term indebtedness.
"D&P" means Duff & Phelps Credit Rating Co.
---
"Debt" of any Person means, at any date, without duplication, as shown
----
on such Person's balance sheet as prepared in accordance with GAAP (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v) all
Debt secured by a Lien on any asset of such Person, whether or not such Debt is
otherwise an obligation of such Person, (vi) all Debt of others guaranteed by
such Person, (vii) accounts payable, dividends of any kind or character or other
proceeds payable with respect to any stock and accrued expenses which in the
aggregate are in excess of five percent (5%) of the undepreciated value of the
assets of the Borrower determined in accordance with GAAP, (viii) all contingent
obligations of such Person and (ix) all guaranty obligations of such Person,
whether for Debt or otherwise, not shown on such Person's balance sheet.
"Debt Service" shall mean, measured as of the last day of each
------------
calendar quarter, an amount equal to the sum of (i) Interest Expense actually
payable by Borrower for the previous four consecutive quarters including the
quarter then ended, plus (ii) regularly scheduled payments of principal on
such Debt, whether or not paid by Borrower (excluding balloon payments and
scheduled balloon amortization payments) for the previous four consecutive
quarters including the quarter then ended.
"Default" means any condition or event which constitutes an Event of
-------
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Designated Lender" means a special purpose corporation that (i)
-----------------
shall have become a party to this Agreement
-7-
<PAGE>
pursuant to Section 9.06(d), and (ii) is not otherwise a Bank.
"Designated Lender Notes" means promissory notes of the Borrower,
-----------------------
substantially in the form of Exhibit A-1 hereto, evidencing the obligation of
the Borrower to repay Money Market Loans made by Designated Lenders, and
"Designated Lender Note" means any one of such promissory notes issued under
Section 9.06(d) hereof.
"Designating Lender" shall have the meaning set forth in Section
------------------
9.06(d) hereof.
"Designation Agreement" means a designation agreement in
---------------------
substantially the form of Exhibit G attached hereto, entered into by a Bank and
a Designated Lender and accepted by the Lead Agent.
"Domestic Business Day" means any day except a Saturday, Sunday or
---------------------
other day on which commercial banks in New York City and Los Angeles are
authorized by law to close.
"Domestic Lending Office" means, as to each Bank, its office located
-----------------------
at its address set forth in its Administrative Questionnaire (or identified in
its Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent.
"EBITDA" means an amount derived from (i) net earnings plus (ii)
------
depreciation, amortization, interest expense and income taxes plus or minus
(iii) any losses or gains resulting from sales, write-downs, write-ups, write-
offs or other valuation adjustments of assets or liabilities, in each case, as
determined on a consolidated basis in accordance with GAAP.
"Effective Date" means the date this Agreement becomes effective in
--------------
accordance with Section 9.09.
"Eligible Assignee" means (a) a commercial bank, trust company,
-----------------
insurance company, investment bank or pension fund organized under the laws of
the United States of America, or any state thereof, and having total assets in
excess of $5,000,000,000; (b) a savings and loan association or savings bank
organized under the laws of the United States of America, or any state thereof,
and having a tangible net worth of at least $500,000,000; (c) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development ("OECD"), or a political
subdivision of any such country, and having total assets in excess of
$10,000,000,000, pro-
-8-
<PAGE>
vided that such bank is acting through a branch or agency located in the United
States of America; or (d) the central bank of any country which is a member of
the OECD.
"Environmental Claim" means, with respect to any Person, any written
-------------------
notice, claim, demand or similar communication by any other Person alleging
potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damage, property damages, personal injuries,
fines or penalties arising out of, based on or resulting from (i) the presence,
or release into the environment, of any Hazardous Substances at any location,
whether or not owned by such Person or (ii) circumstances forming the basis of
any violation, or alleged violation, of any Environmental Law, in each case as
to which there is a reasonable possibility of an adverse determination with
respect thereto and which, if adversely determined, could have a Material
Adverse Effect.
"Environmental Laws" means any and all federal, state, local and
------------------
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"Equity Interests" means any and all shares of common stock or
----------------
equivalent equity or ownership interests, participations, rights or other
equivalents, however designated (other than warrants or other options which have
not been exercised) in a corporation or in any other Person (including, without
limitation, equivalent general or limited partnership interests in any
partnership).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
-----------
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
-9-
<PAGE>
"Euro-Dollar Business Day" means any Domestic Business Day on which
------------------------
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office,
--------------------------
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Euro-
Dollar Lending Office) or such other office, branch or affiliate of such Bank as
it may hereafter designate as its Euro-Dollar Lending Office by notice to the
Borrower and the Agent.
"Euro-Dollar Loan" means a Committed Loan which bears interest at a
----------------
rate calculated by reference to the London Interbank Offered Rate pursuant to
the applicable Notice of Committed Borrowing or Notice of Interest Rate
Election.
"Euro-Dollar Reference Bank" means the principal London office of
--------------------------
Morgan Guaranty Trust Company of New York.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
------------------------------
2.07(b).
"Event of Default" has the meaning set forth in Section 6.01.
----------------
"Facility Fee" means the respective percentages per annum determined,
------------
at any time, based on the range into which the Borrower's Credit Rating then
falls, in accordance with the table set forth below. Any change in the
Borrower's Credit Rating causing it to move to a different range on the table
shall effect an immediate change in the Facility Fee. In the event that the
Borrower receives two (2) Credit Ratings that are not equivalent, the Facility
Fee shall be determined by the lower of such two (2) Credit Ratings. In the
event that the Borrower receives more than two (2) Credit Ratings, and such
ratings are not equivalent, the Facility Fee shall be determined by the lower of
the two (2) highest ratings, provided that each of said two (2) highest ratings
shall be Investment Grade Ratings and at least one of which shall be an
Investment Grade Rating from S&P or Moody's.
<TABLE>
<CAPTION>
Range of Borrower's
Credit Rating
(Applicable Facility Fee
Ratings) (% per annum)
- ------- ------------
<S> <C>
BBB+/Baa1 0.15
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C>
BBB/Baa2 0.15
BBB-/Baa3 0.1875
Non-Invest-
ment Grade
or not rated 0.1875
</TABLE>
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day; provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Agent.
"Fitch" means Fitch Investors Service Inc.
-----
"Fixed Rate Loans" means Euro-Dollar Loans.
----------------
"Funds From Operations" means an amount derived from (i) net earnings
---------------------
plus (ii) depreciation and amortization plus or minus (iii) any losses or
gains resulting from sales, write-downs, write-ups, write-offs or other
valuation adjustments of assets or liabilities, in each case, as determined on a
consolidated basis in accordance with GAAP.
"GAAP" means generally accepted accounting principles recognized as
----
such in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and Board or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of determination.
"Group" means Security Capital Group Incorporated, a Maryland
-----
corporation, and its successors.
"Gross Asset Value" shall mean the sum of (x) the aggregate book value
-----------------
of the Real Property Assets which are multifamily residential property and are
at least 85% leased to tenants, plus any accumulated depreciation, and (y) 50%
-11-
<PAGE>
of the aggregate book value of the Construction Assets which are multifamily
residential property, all determined in accordance with GAAP as of the
applicable date.
"Guarantee" by any Person means any obligation, contingent or
---------
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Debt or other obligation of the payment thereof
or to protect such obligee against loss in respect thereof (in whole or in
part); provided that the term "Guarantee" shall not include endorsements for
--------
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic or
--------------------
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, asbestos or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Historical Value" means the purchase price of any Property
----------------
(including improvements) and ordinary related purchase transaction costs, plus
the cost of subsequent capital improvements made by the Borrower, less any
provision for losses, all determined in accordance with GAAP. If the Property is
purchased as part of a group of properties, the Historical Value shall be
calculated based upon a reasonable allocation of the aggregate purchase price
by the Borrower for all purposes, consistent with GAAP.
"Homestead Investment" means an Investment in Homestead Village
--------------------
Incorporated ("Homestead"), which Investment when made shall not exceed in the
---------
aggregate (a) 30% of the common stock of Homestead, (b) 30% in warrants of Home-
stead, (c) $115,000,000, determined at cost, in convertible mortgages with
respect to the assets of Homestead, or (d) 20% of the Consolidated Tangible Net
Worth of the Borrower.
"Indemnitee" has the meaning set forth in Section 9.03(b).
----------
"Interest Expense" means, measured as of the last day of any calendar
----------------
quarter, an amount equal to the interest
-12-
<PAGE>
(whether accrued, paid or capitalized) actually payable by Borrower on its Debt
for the previous four consecutive quarters including the quarter then ended,
exclusive of capitalized interest relating to Construction Assets and
development activity.
"Interest Period" means (1) with respect to each Euro-Dollar
---------------
Borrowing, the period commencing (x) on the date of such Borrowing specified in
the applicable Notice of Committed Borrowing or (y) on the date specified in the
applicable Notice of Interest Rate Election and ending in either case 1, 2, 3 or
6 months thereafter, as the Borrower may elect in the applicable notice;
provided that:
- --------
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case such Interest Period shall
end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.10 but does
not end on such date, then (i) the principal amount (if any) of each Euro-
Dollar Loan required to be repaid on such date shall have an Interest
Period ending on such date and (ii) the remainder (if any) of each such
Euro-Dollar Loan shall have an Interest Period determined as set forth
above,
(2) with respect to each Base Rate Borrowing, the period commencing on the
date of such Borrowing and ending 30 days thereafter or any subsequent period of
30 days, in each case commencing on the last day of the preceding Interest
Period; provided that:
--------
(a) any Interest Period (other than an Interest Period
determined pursuant to clause (b)(i) below) which would otherwise end on a
day which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
-13-
<PAGE>
(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.10 but does
not end on such date, then (i) the principal amount (if any) of each Base
Rate Loan required to be repaid on such date shall have an Interest Period
ending on such date and (ii) the remainder (if any) of each such Base Rate
Loan shall have an Interest Period determined as set forth above; and
(3) with respect to each Money Market LIBOR Loan, the period commencing on
the date of borrowing specified in the applicable Notice of Borrowing and ending
1, 2, 3 or 6 months thereafter, as the Borrower may elect in the applicable
Notice of Money Market Borrowing in accordance with Section 2.03; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business
Day of a calendar month;
(c) if any Interest Period includes a date on which a payment of
principal of Loans is required to be made under Section 2.12 but does not
end on such date, then (i) the principal amount (if any) of each Money
Market LIBOR Loan required to be repaid on such date and (ii) the remainder
(if any) of each such Money Market LIBOR Loan shall have an Interest Period
determined as set forth above; and
(d) any Interest Period which would otherwise end after the Maturity
Date shall end on the Maturity Date.
(4) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 14 days)
as the Borrower may elect in accordance with Section 2.03; provided that:
--------
-14-
<PAGE>
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) if any Interest Period includes a date on which a payment of
principal of Loans is required to be made under Section 2.12 but does not
end on such date, then (i) the principal amount (if any) of each Money
Market Absolute Rate Loan required to be repaid on such date and (ii) the
remainder (if any) of each such Money Market Absolute Rate Loan shall have
an Interest Period determined as set forth above; and
(c) any Interest Period which would otherwise end after the Maturity
Date shall end on the Maturity Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
---------------------
amended, or any successor statute.
"Investment" means any investment in any Person, whether by means of
----------
share purchase, capital contribution, loan, time deposit or otherwise, other
than any Permitted Investment.
"Investment Grade Rating" has the meaning set forth in Section 5.25
-----------------------
hereof.
"LIBOR Auction" means a solicitation of Money Market Quotes setting
-------------
forth Money Market Margins based on the London Interbank Offered Rate pursuant
to Section 2.03.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Base Rate Loan, a Euro-Dollar Loan, a Money Market Loan
----
or a Swing Loan and "Loans" means Base Rate Loans, Euro-Dollar Loans, Money
-----
Market Loans or Swing Loans or any combination of the foregoing.
"Loan Documents" means this Agreement, the Notes, each Notice of
--------------
Committed Borrowing and each Notice of Interest Rate Election.
-15-
<PAGE>
"London Interbank Offered Rate" has the meaning set forth in Section
-----------------------------
2.07(c).
"Management Investment" means the acquisition of an one hundred
---------------------
percent (100%) of the ownership interests in the Property Manager and in the
REIT Manager.
"Material Adverse Effect" means a material adverse effect on (i) the
-----------------------
business, operations, properties, assets or financial condition of the Borrower
and its Consolidated Subsidiaries taken as a whole or (ii) the ability of the
Borrower to perform its obligations under the Loan Documents.
"Material Plan" means at any time a Plan or Plans having aggregate
-------------
Unfunded Liabilities in excess of $5,000,000.
"Material Subsidiary" means any Subsidiary of the Borrower to which
-------------------
more than $15,000,000 of Gross Asset Value is attributable.
"Minority Holdings" means partnerships, limited liability companies,
-----------------
corporations and other Persons held or owned by the Borrower which are not
consolidated with the Borrower on the Borrower's financial statements.
"Money Market Absolute Rate" has the meaning set forth in Section
--------------------------
2.03.
"Money Market Absolute Rate Loan" means a loan to be made by a Bank
-------------------------------
pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its Domestic
---------------------------
Lending Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the
Borrower and the Agent; provided that any Bank may from time to time by notice
--------
to the Borrower and the Agent designate separate Money Market Lending Offices
for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute
Rate Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant
-----------------------
to a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 2.03).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
-----------------
Absolute Rate Loan.
-16-
<PAGE>
"Money Market Margin" has the meaning set forth in Section 2.03.
-------------------
"Money Market Quote" means an offer by a Bank to make a Money Market
------------------
Loan in accordance with Section 2.03.
"Moody's" means Moody's Investors Services, Inc. or any successor
-------
thereto.
"Multiemployer Plan" means at any time an employee pension benefit
------------------
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group during
such five year period.
"Net Offering Proceeds" means all cash or other assets received by
---------------------
Borrower as a result of the sale of common shares, preferred shares, partnership
interests, limited liability company interests, convertible securities or other
ownership or equity interests in Borrower or a Consolidated Subsidiary less
customary costs and discounts of issuance paid by Borrower or by a Consolidated
Subsidiary.
"Net Operating Income" means, when used with respect to any parcel of
--------------------
real property, the revenues, less operating expenses recorded in accordance with
GAAP for such property that are related to the ownership, operation or
maintenance of such property, but specifically excluding interest expense and
fees paid pursuant to the Administrative Services Contract and similar general
overhead expenses.
"New Acquisitions" means real property assets (or interests therein)
----------------
acquired by Borrower after November 1, 1997, excluding the Homestead Investment.
"New Manager" means a newly formed, wholly-owned Subsidiary of
-----------
Borrower, into which the REIT Manager and the Property Manager have been merged.
"Non-Recourse Debt" means Debt of the Borrower on a consolidated basis
-----------------
for which the right of recovery of the obligee thereof is limited to recourse
against the Real Property Assets securing such Debt (subject to such limited
exceptions to the non-recourse nature of such Debt such as fraud,
misappropriation, misapplication and environmental indemnities, as are usual and
customary in like transactions at the time of the incurrence of such Debt).
-17-
<PAGE>
"Notes" means promissory notes of the Borrower, substantially in the
-----
form of Exhibit A-1 hereto with respect to the Swing Lender and Exhibit A-2
----------- -----------
hereto with respect to any other Bank, evidencing the obligation of the Borrower
to repay the Loans, together with any Designated Lender Notes, and "Note" means
----
any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing (as
-------------------
defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in
Section 2.03(f)), as the case may be.
"Notice of Interest Rate Election" has the meaning set forth in
--------------------------------
Section 2.05.
"Other Taxes" has the meaning set forth in Section 8.04(b).
-----------
"Outstanding Working Capital Amount" means the aggregate outstanding
----------------------------------
and unpaid principal balance of all Loans used for working capital purposes from
time to time; provided, that any cash flow from the Real Property Assets used by
the Borrower to purchase New Acquisitions, fund the Homestead Investment or for
Development Activity may be applied by the Borrower to reduce the Outstanding
Working Capital Amount; and provided, further, that all payments and prepayments
of principal made hereunder shall be applied first to reduce the Outstanding
Working Capital Amount.
"Parent" means, with respect to any Bank, any Person controlling such
------
Bank.
"Participant" has the meaning set forth in Section 9.06(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permitted Intercompany Debt" means (i) loans from the Borrower to any
---------------------------
Subsidiary, and (ii) loans between Subsidiaries, all of which loans shall be
unsecured loans, which:
(A) are evidenced by a written agreement which provides that payment
of any amounts in respect of such indebtedness shall be made only to the extent
that Net Operating Income is available to pay such amounts after the payment of
all amounts then due and payable on all other indebtedness of the borrower
(subject, however, to the accrual of unpaid amounts under such indebtedness) and
-18-
<PAGE>
further provides that any amounts paid in violation hereof shall be held in
trust by the payee thereof for the benefit of the Banks and disgorged to the
Banks upon demand; and
(B) are evidenced by a written agreement which prohibits such Person
from exercising any remedies, including accelerating any indebtedness and
commencing any action (including the filing of a bankruptcy petition or similar
proceeding) against the borrower for collection of interest, principal or other
charges while any Note or any other amounts due hereunder are outstanding and
prohibits such Person from filing a claim in a bankruptcy or similar proceeding
commenced by the Borrower or, in whole or in part, by one or more Affiliates of
the Borrower and requires that such Affiliate shall vote against any plan
presented in such proceeding which would alter the terms of the Notes or the
Loan Documents (provided that such Person may file a claim in a bankruptcy or
similar proceeding commenced by an independent Person other than itself) unless
such plan is endorsed by the Banks.
"Permitted Investments" means (i) loans, equity investments and
---------------------
capital contributions to Atlantic Development Services Incorporated, (ii) land
and building loans to unaffiliated, third party real estate developers to fund
the costs of the development and construction of improvements on properties
which are subject to purchase contracts with the Borrower, and which loans are
secured by mortgages on such properties, (iii) cash or Temporary Cash
Investments received in an exchange under Section 1031 of the Internal Revenue
Code and (iv) the investment in the ordinary course of the Borrower's business
of undistributed Net Operating Income after payment of Debt Service on all Debt.
"Person" means an individual, a corporation, a partnership, an
------
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than
----
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
-19-
<PAGE>
"Prime Rate" means the rate of interest publicly announced by Morgan
----------
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Property" means any interest in any kind of property or asset,
--------
whether real, personal, tangible or intangible.
"Property Manager" means SCG Realty Services Atlantic Incorporated, a
----------------
Delaware corporation, and its successors, which has been merged into the New
Manager.
"Rating Agencies" means, collectively, S&P, Moody's, D&P and Fitch.
---------------
"Real Property Assets" means as of any time, the real property assets
--------------------
(including interests in participating, convertible or other mortgages in which
Borrower's interest therein is characterized as equity according to GAAP), owned
directly or indirectly by the Borrower at such time, cash received in an
exchange under Section 1031 of the Internal Revenue Code, the Homestead
Investment, as such may be modified from time to time to reflect sales,
conveyances, assignments, acquisitions or other transfers of Real Property
Assets.
"Recourse Debt" shall mean Debt of the Borrower or any Consolidated
--------------
Subsidiary that is not Non-Recourse Debt.
"Refunded Swing Loan" has the meaning set forth in Section
-------------------
2.01(a)(iii).
"Regulation U" means Regulation U of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.
"REIT" has the meaning set forth in Section 4.15.
----
"REIT Manager" means Security Capital (Atlantic) Incorporated, a
------------
Nevada corporation, and its successors, which has been merged into the New
Manager.
"Request to Extend" has the meaning set forth in Section 2.01(c).
-----------------
"Required Banks" means at any time Banks having at least 51% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 51% of the aggregate unpaid
principal amount of the Loans.
-20-
<PAGE>
"Revolver Termination Date" means November 23, 1999 or any subsequent
-------------------------
anniversary of the Closing Date to which the Revolver Termination Date has been
extended pursuant to Section 2.01(c) or any prior anniversary to which the
Revolver Termination Date has been advanced pursuant to Section 2.01(d), or,
if any such day is not a Euro-Dollar Business Day, the next succeeding Euro-
Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case the Revolver Termination Date shall be the next
preceding Euro-Dollar Business Day.
"Revolving Credit Period" means the period from and including the
-----------------------
Closing Date to but excluding the Revolver Termination Date.
"Secured Debt" means Debt of the Borrower and its Consolidated
------------
Subsidiaries secured by a Lien.
"Stabilized" shall mean, with respect to any Real Property Asset, the
----------
earlier of (i) twelve (12) months after substantial completion of construction
or development of any new construction or development Real Property Asset, and
(ii) the date on which the occupancy level is at least eighty-five percent
(85%).
"S&P" means Standard & Poor's Ratings Services, a division of The
---
McGraw-Hill Companies, Inc., or any successor thereto.
"Subsidiary" means any corporation or other entity of which securities
----------
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
"Swing Lender" means Morgan Guaranty Trust Company of New York, in its
------------
capacity as the Swing Lender under the Swing Loan Facility described in Section
2.01(a)(ii), and its successors in such capacity.
"Swing Loan" means a Loan made by the Swing Lender pursuant to Section
----------
2.01(a)(ii).
"Swing Loan Commitment" means $25,000,000 or if less, the aggregate
---------------------
amount of the Commitments.
"Swing Loan Refund Amount" has the meaning set forth in Section
------------------------
2.01(a)(iii).
"Temporary Cash Investment" means any Investment in (i) direct
-------------------------
obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or
-21-
<PAGE>
any agency thereof, (ii) commercial paper rated at least A-1 by S&P or P-1 by
Moody's, (iii) demand and time deposits with, including certificates of deposit
issued by, any office located in the United States of any bank or trust company
which is organized or licensed under the laws of the United States or any state
thereof and has capital, surplus and undivided profits aggregating at least
$1,000,000,000, (iv) cash received in an exchange under Section 1031 of the
Internal Revenue Code or (v) repurchase agreements with respect to securities
described in clause (i) above entered into with an office of a bank or trust
company meeting the criteria specified in clause (iii) above, provided in each
--------
case described in clauses (i) - (v) above that such Investment matures within
one year from the date of acquisition thereof by the Borrower or a Subsidiary,
or (vi) money market funds that invest primarily in Investments of the kind
described in clauses (i) - (v) above.
"Total Asset Value" shall mean the sum of (a) the Borrower's
-----------------
aggregate Net Operating Income (based on the immediately preceding calendar
quarter and annualized, and adjusted to exclude the Net Operating Income from
any Real Property Assets not owned for the full quarter and the Real Property
Assets described in (iii) below) divided by eight and three-fourths percent
(8.75%), plus (b) the total book value of (i) Real Property Assets acquired
during the immediately preceding calendar quarter, (ii) land not yet being
developed and (iii) land (and any improvements being constructed thereon) on
which the construction of new income producing improvements has been commenced
and is continuing and for up to six (6) months after completion of all im
provements thereon, plus (c) the amount of any cash and cash equivalents,
excluding tenant security and other restricted deposits, plus (d) the total book
value of all of the Borrower's other assets not described in (a), (b) or (c)
above, excluding intangibles and equity investments in joint ventures. Total
Asset Value shall be calculated on a consolidated basis in accordance with GAAP.
"Total Available Commitments" means, at any time of determination, the
---------------------------
least of (i) the maximum aggregate principal amount of Loans that could have
been outstanding during the most recent preceding four quarters as to which a
certificate has been delivered pursuant to Section 5.01(c) in order for the
ratio of the sum of (x) the Unencumbered Asset Pool Value and (y) 50% of the
aggregate book value of the Construction Assets which are multifamily
residential property to Unsecured Debt outstanding as of the date of
determination for such period to exceed 1.75:1 and the ratio of the aggregate
amount of the Unencumbered Asset Pool Value to Unsecured Debt outstanding as of
the date of determination to exceed 1.5:1, (ii) the aggregate amount of the Com-
-22-
<PAGE>
mitments at such time less the amount by which Interest Expense payable on
Construction Assets and development activity exceeds EBITDA, if any, or (iii)
$350,000,000 less the amount by which Interest Expense payable on Construction
Assets and development activity exceeds EBITDA, if any. For purposes of clauses
(ii) and (iii) of this definition, Interest Expense shall be calculated based on
what would be included in Interest Expense as defined herein other than the
exclusion for capitalized interest relating to Construction Assets and
development activity.
"Unencumbered Asset Pool" means, as of any date, the Real Property
-----------------------
Assets listed on Exhibit B attached hereto and made a part hereof, subject to
---------
adjustment as set forth herein, each of which is 100% owned in fee (or leasehold
in the case of assets listed as such on Exhibit B) by the Borrower or any
---------
Consolidated Subsidiary of the Borrower and each of which is not subject to any
Lien, unless the same is being contested in good faith and the same is
discharged, bonded or paid off within sixty (60) days of the filing of such
Lien, together with all New Acquisitions or Real Property Assets, excluding the
Homestead Investment, which have become part of the Unencumbered Asset Pool as
of such date in accordance with Section 3.03 and excluding any Real Property
Asset which has been released from the Unencumbered Asset Pool under this
Agreement and the other Loan Documents as of such date in accordance with
Sections 5.23 and 5.24 and all other terms of this Agreement.
"Unencumbered Asset Pool Cash Flow" shall mean, as of any date of
---------------------------------
determination, Adjusted Net Operating Income but only with respect to the
Unencumbered Asset Pool.
"Unencumbered Asset Pool Value" means, with respect to Real Property
-----------------------------
Assets in the Unencumbered Asset Pool, for the period being measured, the lesser
of (a) the aggregate Historical Value of such Real Property Assets; and (b) the
sum of (i) for those Real Property Assets that (1) have been Stabilized for more
than the preceding twelve calendar months or (2) have been Stabilized for one,
two or three full preceding calendar quarters, the sum of the Net Operating
Income for the preceding twelve months in the case of (1) and the Net Operating
Income for the one, two or three preceding Stabilized calendar quarters, as
annualized, in the case of (2) divided by nine and one-fourth percent (9.25%),
plus (ii) the Historical Value of the remaining Real Property Assets, excluding
Construction Assets.
"Unfunded Liabilities" means, with respect to any Plan at any time,
--------------------
the amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
-23-
<PAGE>
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"Unit Amount" means $200 for each period of twelve months (or a pro
-----------
rata portion thereof for any shorter period).
"Unsecured Debt" means Debt which is not secured by a Lien.
--------------
"Unsecured Interest Expense" means Interest Expense of the Borrower,
--------------------------
its Consolidated Subsidiaries and Minority Holdings in connection with Unsecured
Debt of such parties.
"United States" means the United States of America, including the
-------------
States and the District of Columbia, but excluding its territories and
possessions.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent consolidated financial
statements of the Borrower and its Consolidated Subsidiaries delivered to the
Banks; provided that, if the Borrower notifies the Agent that the Borrower
--------
wishes to amend any covenant in Article V to eliminate the effect of any change
in generally accepted accounting principles on the operation of such covenant
(or if the Agent notifies the Borrower that the Required Banks wish to amend
Article V for such purpose), then the Borrower's compliance with such covenant
shall be determined on the basis of generally accepted accounting principles in
effect immediately before the relevant change in generally accepted accounting
principles became effective, until either such notice is withdrawn or such
covenant is amended in a manner satisfactory to the Borrower and the Required
Banks.
SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the
------------------- ---------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II (or
-24-
<PAGE>
a Swing Loan made solely by the Swing Lender) on the same date, all of which
Loans are of the same type (subject to Article VIII) and, except in the case of
Base Rate Loans, for the same Interest Periods. Borrowings are classified for
purposes of this Agreement by reference to the pricing of Loans comprising such
Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-
----
Dollar Loans) or by reference to the provisions of Article II under which
participation therein is determined (i.e., a "Committed Borrowing" is a
----
Borrowing under Section 2.01 in which all Banks participate in proportion to
their Commitments, while a "Money Market Borrowing" is a Borrowing under Section
2.03).
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend.
-------------------
(a) During Revolving Credit Period. (i) During the Revolving Credit
------------------------------
Period, each Bank severally agrees, on the terms and conditions set forth in
this Agreement, to make Committed Loans to the Borrower pursuant to this Section
from time to time in amounts such that the aggregate principal amount of
Committed Loans by such Bank at any one time outstanding shall not exceed the
amount of its Available Commitment. Each Borrowing under this Section 2.01
(a)(i) shall be in an aggregate principal amount of $1,000,000 or any larger
multiple of $250,000 (except that any such Borrowing may be in the aggregate
amount available) and shall be made from the several Banks ratably in proportion
to their respective Commitments. Within the foregoing limits, the Borrower may
borrow under this Section 2.01(a)(i), prepay Loans to the extent permitted by
Section 2.09, and reborrow at any time during the Revolving Credit Period under
this subsection (a).
(ii) Swing Loans. During the Revolving Credit Period, the Swing
-----------
Lender agrees, on the terms and conditions set forth in this Agreement, to make
loans to the Borrower pursuant to this Section 2.01(a)(ii) from time to time in
amounts such that (i) the aggregate principal amount of Swing Loans does not at
any time exceed the Swing Loan Commitment, and (ii) the sum of the aggregate
outstanding principal amount of the Committed Loans, Money Market Loans and
Swing Loans at such time does not exceed the aggregate Available Commitments.
Each Borrowing under this Section 2.01(a)(ii) shall be in an aggregate principal
amount of
-25-
<PAGE>
$1,000,000 or any larger multiple of $250,000 (except that any such Borrowing
may be in the aggregate available amount of Swing Loans determined in accordance
with the immediately preceding sentence). Within the foregoing limits, the
Borrower may borrow under this Section 2.01(a)(ii), repay or, to the extent
permitted by Section 2.11, prepay Swing Loans and reborrow at any time during
the Revolving Credit Period under this Section 2.01(a)(ii).
(iii) Conversion of Swing Loans to Loans. The Swing Lender shall, on
----------------------------------
behalf of the Borrower (which hereby irrevocably directs the Swing Lender to act
on its behalf), on notice given by the Swing Lender no later than 1:00 P.M. (New
York City time), on the Domestic Business Day immediately following the funding
of any Swing Loan, request each Bank to make, and each Bank hereby agrees to
make, a Base Rate Loan, in an amount (with respect to each Bank, its "Swing Loan
----------
Refund Amount") equal to such Bank's ratable share of the aggregate Commitments
- -------------
with respect to the aggregate principal amount of the Swing Loans (the "Refunded
--------
Swing Loans") outstanding on the date of such notice, to repay the Swing Lender.
- -----------
Unless any of the events described in clause (f) or (g) of Section 6.01 with
respect to the Borrower shall have occurred and be continuing (in which case the
procedures of Section 2.01(a)(iv) shall apply), each Bank shall make such Base
Rate Loan available to the Agent at its address specified in or pursuant to
Section 9.01 in immediately available funds, not later than 1:00 P.M. (New York
City time), on the Domestic Business Day immediately following the date of such
notice. The Agent shall pay the proceeds of such Loans to the Swing Lender,
which shall immediately apply such proceeds to repay Refunded Swing Loans.
Effective on the day such Loans are made, the portion of the Swing Loans so paid
shall no longer be outstanding as Swing Loans, shall no longer be due as Swing
Loans under the Note held by the Swing Lender, and shall be due as Base Rate
Loans under the respective Notes issued to the Banks (including the Swing
Lender) in accordance with their ratable share of the aggregate Commitments. The
Borrower authorizes the Swing Lender to charge the Borrower's accounts with the
Agent (up to the amount available in each such account) in order to immediately
pay the amount of such Refunded Swing Loans to the extent amounts received from
the Banks are not sufficient to repay in full such Re funded Swing Loans.
(iv) Purchase of Participations in Swing Loans. If, prior to the time
-----------------------------------------
Loans would have otherwise been made pursuant to Section 2.01(a)(iii), one of
the events described in clause (f) or (g) of Section 6.01 with respect to the
Borrower shall have occurred and be continuing, each Bank shall, on the date
such Loans were to have been made
-26-
<PAGE>
pursuant to the notice referred to in Section 2.01(a)(iii) (the "Refunding
---------
Date"), purchase an undivided participating interest in the Swing Loans in an
- ----
amount equal to such Bank's Swing Loan Refund Amount. On the Refunding Date,
each Bank shall transfer to the Swing Lender, in immediately available funds,
such Bank's Swing Loan Refund Amount, and upon receipt thereof the Swing Lender
shall deliver to such Bank a Swing Loan participation certificate dated the date
of the Swing Lender's receipt of such funds and in the Swing Loan Refund Amount
of such Bank.
(v) Payments on Participated Swing Loans. Whenever, at any time
------------------------------------
after the Swing Lender has received from any Bank such Bank's Swing Loan Refund
Amount pursuant to Section 2.01(a)(iv), the Swing Lender receives any payment on
account of the Swing Loans in which the Banks have purchased participations
pursuant to Section 2.01(a)(iv), the Swing Lender will promptly distribute to
each such Bank its ratable share (determined on the basis of the Swing Loan
Refund Amounts of all of the Banks) of such payment (appropriately adjusted, in
the case of interest payments, to reflect the period of time during which such
Bank's participating interest was outstanding and funded); provided, however,
-------- -------
that in the event that such payment received by the Swing Lender is required to
be returned, such Bank will return to the Swing Lender any portion thereof
previously distributed to it by the Swing Lender.
(vi) Obligations to Refund or Purchase Participations in Swing
---------------------------------------------------------
Loans Absolute. Each Bank's obligation to transfer the amount of a Loan to the
- --------------
Swing Lender as provided in Section 2.01(a)(iii) or to purchase a participating
interest pursuant to Section 2.01(a)(iv) shall be absolute and unconditional and
shall not be affected by any circumstance, including, without limitation, (i)
any set-off, counterclaim, recoupment, defense or other right which such Bank,
the Borrower or any other Person may have against the Swing Lender or any other
Person, other than the Swing Lender's gross negligence or willful misconduct in
connection with making any such Swing Loan, (ii) the occurrence or continuance
of a Default or an Event of Default or the termination or reduction of the
Commitments, (iii) any adverse change in the condition (financial or otherwise)
of the Borrower or any other Person, (iv) any breach of this Agreement by the
Borrower, any other Bank or any other Person, or (v) any other circumstance,
happening or event whatsoever, whether or not similar to any of the foregoing.
(b) After Revolving Credit Period. If the Borrower has elected the
-----------------------------
Conversion Option, each Bank severally agrees, on the terms and conditions set
forth in this Agreement, to maintain its Committed Loans outstanding on the
-27-
<PAGE>
Conversion Date for a maximum term of three years; provided that the principal
--------
amount of such Bank's Committed Loans shall not exceed the principal amount of
its Loans outstanding on the Conversion Date; and provided, further, that the
-------- -------
aggregate principal amount of such Bank's outstanding Committed Loans shall at
no time exceed the amount of its Available Commitment. On and after the
Conversion Date, amounts prepaid or required to be repaid pursuant to Article II
shall not be reborrowed, and amounts repaid pursuant to Section 8.02 shall not
be reborrowed except as provided therein.
(c) Extension of Revolver Termination Date. The Borrower may request
--------------------------------------
a one-year extension of the Revolver Termination Date then in effect by
delivering a written request therefor to the Agent not more than sixteen months
or less than fifteen months prior to such Revolver Termination Date (a
"Request to Extend"). The Agent shall notify the Banks of the receipt of such
-----------------
request and each Bank shall give notice in writing to the Agent not less than
fourteen months prior to the Revolver Termination Date of such Bank's acceptance
or rejection of such request. If all the Banks shall have notified the Agent on
or prior to the date which is fourteen months prior to the Revolver Termination
Date that they accept such request, the Revolver Termination Date shall be
extended for one year. If any Bank shall not have notified the Agent on or prior
to the date which is fourteen months prior to the Revolver Termination Date that
it accepts such request, the Revolver Termination Date shall not be extended.
The Agent shall notify the Borrower whether the Request to Extend has been
accepted or rejected as well as which Bank or Banks rejected the Borrower's
Request to Extend (each such Bank a "Rejecting Bank").
--------------
Notwithstanding the preceding paragraph, within forty (40) days after
notification from the Agent that the Request to Extend has been rejected (a
"Notice of Rejection"), and provided that the aggregate amount of Commitments
-------------------
of the Rejecting Banks do not exceed 20% of the total aggregate amount of
Commitments then outstanding, the Borrower may by written notice to the Agent
and any Rejecting Bank exercise either or a combination of the following
options: (i) require any Rejecting Bank to assign all of its rights and
obligations under this Agreement, the Notes and the other Loan Documents to any
transferee selected by the Borrower and approved by the Agent (a "Transferee"),
----------
or (ii) prepay the entire amount of the outstanding Loan from each such
Rejecting Bank, in which case each such Rejecting Bank's Commitment shall be $0,
in each of clause (i) and (ii) pursuant to the terms and conditions set forth
below. Notwithstanding the foregoing, however, in no event the aggregate of all
Commitments of all Banks (including any
-28-
<PAGE>
Transferee pursuant to clause (i) above) shall be less than $280,000,000.
In the event the Borrower elects the option set forth in clause (i)
above, the assignment shall occur pursuant to the terms of a Transfer
Supplement in substantially the form of Exhibit D hereto, effective no later
---------
than the fortieth (40th) day after the Borrower receives a Notice of Rejection
from the Agent, and otherwise pursuant to Section 9.06(c) hereof. On such
effective date the Transferee shall pay to such Rejecting Bank the principal
amount outstanding of the Loans assigned to it by such Rejecting Bank, together
with accrued interest thereon, as well as the accrued Commitment Fee with
respect to the Commitment of such Rejecting Bank, and, if such effective date is
not the last day of the Interest Period for each of the Loans being assigned,
the Borrower shall reimburse to the Rejecting Bank the losses and expenses
specified in Section 2.13. The Borrower shall also deliver to the Agent on such
effective date (y) an executed copy of such Assignment and Assumption Agreement
and (z) written confirmation from such Transferee that it accepts the Request to
Extend, and, upon such receipt with respect to all Transferees, the Agent shall
notify the Borrower that the Request to Extend has been accepted.
(d) Conversion Option. If the Borrower delivers a Request to Extend
-----------------
as provided in Section 2.01(c), any Bank shall not have notified the Agent on or
prior to the date which is thirty (30) days prior to the Revolver Termination
Date that it accepts such request, and such Bank has not been paid in full to
the extent of its outstanding Commitment or replaced by a Transferee accepting
such extension pursuant to Section 2.01(c), then not later than ten (10) days
after the Agent has notified the Borrower that the Request to Extend has been
rejected, if (x) no Default has then occurred and is continuing, provided that
if the Agent shall have actual notice of such Default, it shall have provided
notice thereof to the Borrower and (y) no Event of Default has then occurred and
is continuing, the Borrower may notify the Agent that it elects both to
terminate the Revolving Credit Period as of the Revolver Termination Date then
in effect (the date of such termination being the "Conversion Date") and
---------------
effective as of the Conversion Date to maintain its Loans then outstanding
pursuant to Section 2.01(b) (the "Conversion Option").
-----------------
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give
-----------------------------
the Agent notice (a "Notice of Committed Borrowing") not later than 12:00 noon
-----------------------------
(New York City time) on (x) the Domestic Business Day before each Base Rate
Borrowing, (y) the third Euro-Dollar Business Day before each
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<PAGE>
Euro-Dollar Borrowing and (z) the date of each Borrowing of a Swing Loan,
specifying:
(a) the date of such Borrowing, which shall be a Domestic Business
Day in the case of a Base Rate Borrowing or Swing Borrowing, or a Euro-Dollar
Business Day in the case of a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to be initially
Base Rate Loans, Swing Loans or Euro-Dollar Loans, provided that, all Swing
Loans shall bear interest based on the Base Rate,
(d) in the case of a Fixed Rate Borrowing, the duration of the
initial Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period, and
(e) if the proceeds of the Loans are to be used for working capital
purposes, and if so, the Outstanding Working Capital Amount both immediately
before and after such Borrowing.
No more than four (4) Swing Loans may be borrowed during any calendar
month.
Notwithstanding the time frame set forth in clause (x) above, in the
event that the Money Market Quotes submitted by the Banks pursuant to Section
2.03(c) below are, in the aggregate, in an amount less than the principal amount
requested by the Borrower in the related Money Market Quote Request, then the
Borrower shall be permitted to give the Lead Agent notice of its intent to make
a Base Rate Borrowing, in the amount of the difference between accepted Money
Market Quotes and the principal amount requested by Borrower in the related
Money Market Quote Request, no later than 12:00 Noon (New York City time) on the
date of such Borrowing.
SECTION 2.03. Money Market Borrowings.
-----------------------
(a) The Money Market Option. In addition to Committed Borrowings
-----------------------
pursuant to Section 2.01, the Borrower may, as set forth in this Section,
request the Banks during the term of the Loans to make offers to make Money
Market Loans to the Borrower, not to exceed, at such time, the lesser of (i) the
Total Available Commitments and (ii) $175,000,000. The Banks may, but shall have
no obligation to, make such offers and the Borrower may, but shall have no
-30-
<PAGE>
obligation to, accept any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
--------------------------
offers to make Money Market Loans under this Section, it shall transmit to the
Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit E hereto so as to be received not later
---------
than 10:30 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day
prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction
or (y) the Domestic Business Day next preceding the date of Borrowing proposed
therein, in the case of an Absolute Rate Auction (or, in either case, such other
time or date as the Borrower and the Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in
the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$20,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the applicable provisions of the definition of Interest Period,
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate, and
(v) whether the Banks will be permitted to designate a Designated
Lender to fund such Money Market Loans.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
----------------------------------
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the
-31-
<PAGE>
form of Exhibit F hereto, which shall constitute an invitation by the Borrower
---------
to each Bank to submit Money Market Quotes offering to make the Money Market
Loans to which such Money Market Quote Request relates in accordance with this
Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank
----------------------------------------------
may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Agent by telex or facsimile transmission at its offices
specified in or pursuant to Section 9.01 not later than (x) 10:00 A.M. (New York
City time) on the third Euro-Dollar Business Day prior to the proposed date of
Borrowing, in the case of a LIBOR Auction or (y) 10:00 A.M. (New York City time)
on the proposed date of Borrowing, in the case of an Absolute Rate Auction;
provided that Money Market Quotes submitted by the Agent (or any affiliate of
- --------
the Agent or its Designated Lender) in the capacity of a Bank may be submitted,
and may only be submitted, if the Agent or such affiliate notifies the Borrower
of the terms of the offer or offers contained therein not later than thirty (30)
minutes prior to the applicable deadline for the other Banks. Subject to
Articles III and VI, any Money Market Quote so made shall be irrevocable except
with the written consent of the Agent given on the instructions of the Borrower.
If, and only if, the Borrower elected in the applicable Money Market Quote
Request to permit the Banks to designate Designated Lenders to fund such Money
Market Loans, such Money Market Loans may be funded by such Bank's Designated
Lender (if any) as provided in Section 9.06(d), however such Bank shall not be
required to specify in its Money Market Quote whether such Money Market Loans
will be funded by such Designated Lender.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit G hereto and shall in any case specify:
- ---------
(1) the proposed date of Borrowing,
(2) the principal amount of the Money Market Loan for which each such
offer is being made, which principal amount (w) may be greater than or
less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a
larger multiple of $500,000, (y) may not exceed the principal amount of
Money Market Loans for which offers were requested and (z) may be subject
to an aggregate limitation as to the principal amount of Money Market Loans
for which offers being made by such quoting Bank may be accepted,
-32-
<PAGE>
(3) in the case of a LIBOR Auction, the margin above or below the
applicable London Interbank Offered Rate (the "Money Market Margin")
-------------------
offered for each such Money Market Loan, expressed as a percentage
(specified to the nearest 1/10,000th of 1%) to be added to or subtracted
from such applicable rate,
(4) in the case of an Absolute Rate Auction, the rate of interest per
annum (specified to the nearest 1/10,000th of 1%) (the "Money Market
------------
Absolute Rate") offered for each such Money Market Loan, and
-------------
(5) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(1) is not substantially in conformity with Exhibit G hereto or
---------
does not specify all of the information required by subsection (d)(ii)
above;
(2) contains qualifying, conditional or similar language;
(3) proposes terms other than or in addition to those set forth
in the applicable Invitation for Money Market Quotes; or
(4) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the
------------------
Borrower (x) with respect to each Money Market Quote submitted in accordance
with subsection (d), of the terms of such Money Market Quote and the identity of
the Bank submitting such Money Market Quote and (y) of any Money Market Quote
that amends, modifies or is otherwise inconsistent with a previous Money Market
Quote submitted by such Bank with respect to the same Money Market Quote
Request. Any such subsequent Money Market Quote shall be disregarded by the
Agent unless such subsequent Money Market Quote is submitted solely to correct a
manifest error in such former Money Market Quote. The Agent's notice to the
Borrower shall specify (A) the aggregate principal amount of Money Market Loans
for which offers have been received for each Interest Period specified in the
related Money Market Quote Request, (B) the respective principal amounts and
Money
-33-
<PAGE>
Market Margins or Money Market Absolute Rates, as the case may be, so offered
and (C) if applicable, limitations on the aggregate principal amount of Money
Market Loans for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 11:00 a.m. (New
---------------------------------
York City time) on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction, the Borrower shall notify
the Agent of its acceptance or non-acceptance of the offers so notified to it
pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of
---------
Money Market Borrowing") shall specify the aggregate principal amount of offers
- ----------------------
for each Interest Period that are accepted. The Borrower may accept any Money
Market Quote in whole or in part: provided that:
--------
1. the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market
Quote Request;
2. the principal amount of each Money Market Borrowing must be
$5,000,000 or a larger multiple of $500,000;
3. acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be;
and
4. the Borrower may not accept any offer that is described in
subsection (d)(3) or that otherwise fails to comply with the requirements
of this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
-------------------
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as possible (in multiples of
$100,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. The Agent shall promptly (and in any event
within one (1) Domestic Business Day after such offers are accepted) notify the
Borrower and each such Bank in writing of any such allocation of Money Market
Loans. Determinations by the Agent of the allocation of Money Market Loans shall
be conclusive in the absence of manifest error.
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<PAGE>
(h) Notification by Lead Agent. Upon receipt of the Borrower's Notice
--------------------------
of Money Market Borrowing in accordance with Section 2.03(f) hereof, the Agent
shall, on the date such Notice of Money Market Borrowing is received by the
Agent, promptly notify each Bank of the principal amount of the Money Market
Borrowing accepted by the Borrower and of such Bank's share (if any) of such
Money Market Borrowing and such Notice of Money Market Borrowing shall not
thereafter be revocable by the Borrower. Any Bank so notified shall fund such
Money Market Borrowing at the times provided in Section 2.04(b). A Bank who is
notified that it has been selected to make a Money Market Loan may designate its
Designated Lender (if any) to fund such Money Market Loan on its behalf, as
described in Section 9.06(d). Any Designated Lender which funds a Money Market
Loan shall on and after the time of such funding become the obligee under such
Money Market Loan and be entitled to receive payment thereof when due. No Bank
shall be relieved of its obligation to fund a Money Market Loan, and no
Designated Lender shall assume such obligation, prior to the time the applicable
Money Market Loan is funded.
(i) Notwithstanding anything to the contrary contained herein, each
Bank shall be required to fund its pro rata share of Committed Loans in
accordance with Section 2.1 hereof despite the fact that any Bank's Commitment
may have been or may be exceeded as a result of such Bank's making of Money
Market Loans.
SECTION 2.04. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Committed Borrowing, the Agent shall
promptly notify each Bank of the contents thereof and of such Bank's share (if
any) of such Borrowing and such Notice of Committed Borrowing shall not
thereafter be revocable by the Borrower.
(b) Not later than 1:00 P.M. (New York City time) on the date of each
Committed Borrowing (including, without limitation, each Swing Borrowing), each
Bank (or, in the case of a Swing Loan, the Swing Lender) participating therein
shall make available its share of such Borrowing, in Federal or other funds
immediately available in New York City, to the Agent at its address referred to
in Section 9.01. Unless the Agent determines that any applicable condition
specified in Article III has not been satisfied, the Agent will make the funds
so received from the Banks available to the Borrower at the Agent's aforesaid
address not later than 1:00 P.M. (New York City time).
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<PAGE>
(c) Unless the Agent shall have received notice from a Bank prior to
the date of any Committed Borrowing that such Bank will not make available to
the Agent such Bank's share of such Borrowing, the Agent may assume that such
Bank has made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section 2.04 and the Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and the Borrower severally agree to
repay to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is repaid to the Agent, at (i) in the
case of the Borrower, a rate per annum equal to the higher of the Federal Funds
Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii)
in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to
the Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.05. Notes.
-----
(a) The Loans of each Bank shall be evidenced by a single Note
payable to the order of such Bank for the account of its Applicable Lending
Office in an amount equal to the aggregate unpaid principal amount of such
Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type, including Swing Loans, be evidenced by a
separate Note in an amount equal to the aggregate unpaid principal amount of
such Loans. Each such Note shall be in substantially the form of Exhibit A-1
-----------
hereto with respect to the Swing Lender and Exhibit A-2 hereto and with respect
-----------
to any other Bank or Exhibit A-3 hereto with respect to any Designated Lender,
-----------
with appropriate modifications to reflect the fact that it evidences solely
Loans of the relevant type. Each reference in this Agreement to the "Note" of
such Bank shall be deemed to refer to and include any or all of such Notes, as
the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.01(a), the
Agent shall forward such Note to such Bank. Each Bank shall record the date,
amount and type of each Loan made by it and the date and amount of each payment
of principal made by the Borrower with respect thereto, and may, if such Bank so
elects in connection with any transfer or enforcement of its Note, endorse on
the
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<PAGE>
schedule forming a part thereof appropriate notations to evidence the foregoing
information with respect to each such Loan then outstanding; provided that the
--------
failure of any Bank to make any such recordation or endorsement shall not affect
the obligations of the Borrower hereunder or under the Notes. Each Bank is
hereby irrevocably authorized by the Borrower so to endorse its Note and to
attach to and make a part of its Note a continuation of any such schedule as and
when required.
SECTION 2.06. Method of Electing Interest Rates. (a) The Loans
---------------------------------
included in each Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue the
type of interest rate borne by all the Loans comprised in such Borrowing
(subject in each case to the provisions of Article VIII and except for any Swing
Loans), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business
Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect
to convert such Loans to Base Rate Loans or elect to continue such
Loans as Euro-Dollar Loans for an additional Interest Period, in each
case effective on the last day of the then current Interest Period
applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of
---------
Interest Rate Election") to the Agent at least three Euro-Dollar Business Days
- ----------------------
before the conversion or continuation selected in such notice is to be effective
(unless the relevant Loans are to be converted from Euro-Dollar Loans to Base
Rate Loans or continued as Base-Rate Loans of the same type for an additional
Interest Period, in which case such notice shall be delivered to the Agent at
least three Domestic Business Days before such conversion or continuation is to
be effective). Notwithstanding the foregoing, in the case of any conversion of a
Euro-Dollar Loan to a Base Rate Loan, or the continuation of a Base Rate Loan,
such notice need only be delivered to the Agent at least one Domestic Business
Day before such conversion or continuation is to be effective. During the
Revolving Credit Period a Notice of Interest Rate Election may, if it so
specifies, divide the aggregate principal amount of the relevant Borrowing into
two or more portions, each of which shall thereafter be deemed a "Borrowing";
provided that each such portion is allocated ratably among the Loans
- --------
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<PAGE>
comprising such Borrowing and is at least $1,000,000 or any larger multiple of
$250,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Borrowing to which such notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the applicable
clause of subsection (a) above;
(iii) if the Loans comprising such Borrowing are to be converted,
the new type of Loans and, if such Loans of a new type are Fixed Rate
Loans, the duration of the next Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for
an additional Interest Period, the duration of such additional Interest
Period,
and, if requested by the Agent, shall be accompanied by a certificate of the
Borrower satisfactory to the Agent showing the calculation of Total Available
Commitments as of the commencement of such Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election
shall comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Agent shall promptly notify each
Bank of the contents thereof and such notice shall not thereafter by revocable
by the Borrower. If the Borrower fails to deliver a timely Notice of Interest
Rate Election to the Agent for any Borrowing consisting of Fixed Rate Loans,
such Loans shall be converted into Base Rate Loans on the last day of the then
current Interest Period applicable thereto.
SECTION 2.07. Interest Rates.
--------------
(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made until it
becomes due, at a rate per annum equal to the Base Rate plus the Applicable
Margin for Base Rate Loans for such day. Such interest shall be payable for each
Interest Period on the last day thereof. Any overdue principal of or interest on
any Base
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<PAGE>
Rate Loan shall bear interest, payable on demand, for each day until paid at a
rate per annum equal to the sum of four percent (4%) plus the rate otherwise
applicable to Base Rate Loans for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin for Euro-
Dollar Loans for such day plus the Adjusted London Interbank Offered Rate
applicable to such Interest Period. Such interest shall be payable for each
Interest Period on the last day thereof and, if such Interest Period is longer
than three months, at intervals of three months after the first day thereof.
The "Adjusted London Interbank Offered Rate" applicable to any
--------------------------------------
Interest Period means a rate per annum equal to the quotient obtained (rounded
upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the
applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.
The "London Interbank Offered Rate" applicable to any Interest Period
-----------------------------
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
the Euro-Dollar Reference Bank in the London interbank market at approximately
11:00 a.m. (London time) two Euro-Dollar Business Days before the first day of
such Interest Period in an amount approximately equal to the principal amount of
the Euro-Dollar Loan of the Euro-Dollar Reference Bank to which such Interest
Period is to apply and for a period of time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Euro-currency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
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<PAGE>
(c) Subject to Section 8.01, each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London Interbank
Offered Rate for such Interest Period (determined in accordance with Section
2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-
Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank
making such Loan in accordance with Section 2.03. Each Money Market Absolute
Rate Loan shall bear interest on the outstanding principal amount thereof, for
the Interest Period applicable thereto, at a rate per annum equal to the Money
Market Absolute Rate quoted by the Bank making such Loan in accordance with
Section 2.03. Such interest shall be payable for each Interest Period on the
last day thereof and, if such Interest Period is longer than ninety days, at
intervals of ninety days after the first day thereof.
(d) Any overdue principal of or interest on any Euro-Dollar Loan or
Money Market Loan shall bear interest, payable on demand, for each day from and
including the date payment thereof was due to but excluding the date of actual
payment, at a rate per annum equal to the sum of four per cent (4%) plus the
rate applicable to Base Rate Loans for such day.
(e) Each Swing Loan shall bear interest on the outstanding principal
amount thereof, and in the case of any amount of overdue Swing Loan, overdue
interest thereon at a rate per annum for each day equal to the sum of four
percent (4%) plus the rate applicable to Base Rate Loans for such day.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Euro-Dollar Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any Euro-
Dollar Reference Bank does not furnish a timely quotation, the Agent shall
determine the relevant interest rate on the basis of the quotation or quotations
furnished by the remaining Euro-Dollar Reference Bank or Banks or, if none of
such quotations is available on a timely basis, the provisions of Section 8.01
shall apply.
SECTION 2.08. Fees.
----
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<PAGE>
(a) Facility Fee. The Borrower shall pay to the Lead Agent for the
------------
account of the Banks ratably in proportion to their respective Commitments a
facility fee accruing at a rate per annum equal to the applicable Facility Fee
Percentage from time to time in effect on the amount of the Commitments, such
fee being payable quarterly in arrears. The Facility Fee shall be payable in
arrears on each January 1, April 1, July 1 and October 1 during the Term.
(b) Extension Fee. Within one week of the notification by the Agent
-------------
to the Borrower that a Request to Extend has been accepted pursuant to Section
2.01(c), the Borrower shall pay to the Agent for the account of the Banks
ratably in proportion to their Commitments an extension fee of .10% of the
Commitments.
(c) Conversion Fee. On the date that pursuant to Section 2.01(d) the
--------------
Borrower notifies the Agent of its election of the Conversion Option, the
Borrower shall pay to the Agent for the account of the Banks ratably in
proportion to their Commitments of the then outstanding principal balance of the
Loans a conversion fee of .15% of the Commitments that will be outstanding as of
the Conversion Date.
(d) Fees Non-Refundable. All fees set forth in this Section 2.08
-------------------
shall be deemed to have been earned on the date payment is due in accordance
with the provisions hereof and shall be non-refundable. The obligation of the
Borrower to pay such fees in accordance with the provisions hereof shall be
binding upon the Borrower and shall inure to the benefit of the Agent and the
Banks regardless of whether any Loans are actually made.
SECTION 2.09. Optional Termination or Reduction of Commitments.
------------------------------------------------
During the Revolving Credit Period, the Borrower may, upon at least three
Domestic Business Days' notice to the Agent prior to the end of any Interest
Period, (i) terminate the Commitments at any time, if no Loans or Swing Loans
are outstanding at such time or (ii) ratably reduce from time to time by an
aggregate amount of $1,000,000 or any larger multiple of $250,000, the aggregate
amount of the Commitments in excess of the aggregate outstanding principal
amount of the Loans and the Swing Loans.
SECTION 2.10. Maturity; Mandatory Termination or Reduction of
-----------------------------------------------
Commitments.
- -----------
(a) The Commitments and Swing Commitment shall terminate on the
Revolver Termination Date or, if pursuant to Section 2.01(d) the Borrower has
exercised the Conversion Option, except with respect to the Swing Loans, on the
third anniversary of the Conversion Date, and any Loans then out-
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<PAGE>
standing (together with accrued interest thereon) shall mature and be due and
payable on such date.
(b) On any date on or after the Conversion Date on which the
Commitment of any Bank shall be greater than the principal amount of the Loan or
Loans or Swing Loans of such Bank outstanding on such date (after giving effect
to any repayment, prepayment and borrowing on such date), the Commitment of such
Bank shall be automatically reduced to an amount equal to such outstanding
principal amount.
(c) The Commitment of each Bank shall be further reduced, on (x) each
of the first five Commitment Reduction Dates, by an amount equal to fifteen
percent (15%) of the amount of such Bank's Commitment in effect on the
Conversion Date (after giving effect to any reduction pursuant to subsection (e)
on such date), and (y) the sixth Commitment Reduction Date, by an amount equal
to twenty-five percent (25%) of the amount of such Bank's Commitment in effect
on the Conversion Date (after giving effect to any reduction pursuant to
subsection (e) on such date). No reduction of any Commitment pursuant to
subsection (c), (d) or (e) shall reduce the amount of any subsequent mandatory
reduction of such Commitment pursuant to this subsection (f).
(d) On each date of reduction of any Commitment, the Borrower shall
repay such principal amount (together with accrued interest thereon) of each
Bank's outstanding Loans or Swing Loans, if any, as may be necessary so that
after such repayment the aggregate outstanding principal amount of such Bank's
Loans or Swing Loans does not exceed the amount of such Bank's Available
Commitment as then reduced. In connection with the prepayment of a Euro-Dollar
Loan prior to the maturity thereof, the Borrower shall also pay any applicable
expenses pursuant to Section 2.13.
(e) If at any time the Borrower or any Consolidated Subsidiary sells,
transfers, assigns or conveys any Real Property Asset which shall cause the
Borrower to fail to be in compliance with any covenant contained in Article V
hereof, the Borrower shall pay to the Agent, for the account of the Banks,
within ten (10) days of the date such Real Property Asset is sold, transferred,
assigned or conveyed, an amount such that the Borrower subsequent to such
payment shall be in compliance with the covenants contained in Article V hereof.
Borrower shall make such prepayment together with interest accrued to the date
of the prepayment on the principal amount prepaid. In connection with the
prepayment of a Euro-Dollar Loan prior to the maturity thereof, the Borrower
shall also pay any applicable expenses pursuant to Section 2.12. Each such
prepayment shall be applied to prepay ratably the Loans of the Banks. As used in
this Section 2.09(e) only, the phrase "sells, transfers,
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assigns or conveys" shall not include (i) sales or conveyances among Borrower
and any wholly-owned Subsidiaries, or (ii) mortgages secured by Real Property
Assets.
(f) If at any time the Borrower or any Consolidated Subsidiary shall
issue shares of capital stock or other equity interest, the Borrower shall pay
to the Agent, for the account of the Banks, within ten (10) days after the date
of such issuance, an amount equal to the Net Offering Proceeds of such issuance
less any such proceeds which shall be used to make any Permitted Investment
which occurs within ten (10) days after the date of such issuance of shares of
capital stock or other equity interest. The Borrower shall make such prepayment
together with interest accrued to the date of the prepayment on the principal
amount prepaid. In connection with the prepayment of a Euro-Dollar Loan prior to
the maturity thereof, the Borrower shall also pay any applicable expenses
pursuant to Section 2.12. Each such prepayment shall be applied to prepay
ratably the Loans of the Banks.
SECTION 2.11. Optional Prepayments.
--------------------
(a) The Borrower may, upon at least one (1) Domestic Business Days'
notice to the Agent, prepay any Base Rate Borrowing or Swing Loan in whole at
any time or from time to time in part in amounts aggregating $1,000,000 or any
larger multiple of $250,000, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Loans of the several
Banks included in such Borrowing.
(b) The Borrower may, upon at least three Euro-Dollar Business Days'
notice to the Agent, in case of a Borrowing comprised of Euro-Dollar Loans,
prepay the Loans comprising such Borrowing, on the last day of any Interest
Period applicable to such Borrowing, in whole at any time, or from time to time
in part in amounts aggregating $1,000,000 or any larger multiple of $250,000, by
paying the principal amount to be prepaid together with accrued interest thereon
to the date of prepayment. Each such optional prepayment shall be applied to
prepay ratably the Loans of the several Banks included in such Borrowing.
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower.
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<PAGE>
(d) Notwithstanding anything contained herein to the contrary, the
Borrower may not prepay any Money Market Loan.
SECTION 2.12. General Provisions as to Payments.
---------------------------------
(a) The Borrower shall make each payment of principal of, and
interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New
York City time) on the date when due, in Federal or other funds immediately
available in New York City, to the Agent at its address referred to in Section
9.01. The Agent will promptly distribute to each Bank its ratable share of each
such payment received by the Agent for the account of the Banks. If and to the
extent that the Agent shall receive any such payment for the account of the
Banks on or before 12:00 Noon (New York City time) on any Domestic Business Day,
and Agent shall not have distributed to any Bank its applicable share of such
payment on such Domestic Business Day, Agent shall distribute such amount to
such Bank together with interest thereon, for each day from the date such amount
should have been distributed to such Bank until the date Agent distributes such
amount to such Bank, at the Federal Funds Rate. Whenever any payment of
principal of, or interest on, the Base Rate Loans or of fees shall be due on a
day which is not a Domestic Business Day, the date for payment thereof shall be
extended to the next succeeding Domestic Business Day. Whenever any payment of
principal of, or interest on, the Euro-Dollar Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar
Business Day falls in another calendar month, in which case the date for payment
thereof shall be the next preceding Euro-Dollar Business Day. If the date for
any payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Banks hereunder that the
Borrower will not make such payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrower shall not have so made such payment, each Bank shall
repay to the Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
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SECTION 2.13. Funding Losses. If the Borrower makes any payment of
--------------
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a Base Rate Loan (pursuant to this Article II or Article VI or VIII
or otherwise) on any day other than the last day of an Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.07(c), or if the Borrower fails to borrow or prepay any Fixed Rate
Loans after notice has been given to any Bank in accordance with Section 2.04(a)
or 2.11(c), the Borrower shall reimburse each Bank within 15 days after demand
for any resulting loss or expense incurred by it (or by an existing or
prospective Participant in the related Loan), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits from third
parties, but excluding loss of margin for the period after any such payment or
conversion or failure to borrow or prepay; provided that such Bank shall have
--------
delivered to the Borrower a certificate as to the amount of such loss or
expense, which certificate shall be prima facie evidence of the matters
certified therein.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
--------------------------------
Base Rate hereunder shall be computed on the basis of a year of 365 days (or 366
days in a leap year) and paid for the actual number of days elapsed (including
the first day but excluding the last day). All other interest and fees shall be
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day if and only if
such payment is made in accordance with the provisions of the first sentence of
Section 2.12(a)).
ARTICLE III
CONDITIONS
SECTION 3.01. Conditions Precedent to Effectiveness of Agreement.
---------------------------------------------------
The Closing as contemplated hereunder shall occur upon receipt by the Agent of
the following documents, each dated as of the Closing Date (or dated as
otherwise provided below) or a date otherwise satisfactory to the Agent and in
each case satisfactory in form and substance to the Agent:
(1) a duly executed Note for the account of each Bank, complying
with the provisions of Section 2.05;
(2) a duly executed copy of this Agreement;
(3) an opinion of Mayer, Brown & Platt, counsel for the
Borrower, satisfactory to the Agent;
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<PAGE>
(4) all documents the Agent may reasonably request relating to the
existence of the Borrower, the authority for and the validity of this Agreement
and the other Loan Documents, and any other matters relevant hereto, all inform
and substance reasonably satisfactory to the Agent. Such documentation shall
include, without limitation, the articles of incorporation and by-laws of the
Borrower, as amended, modified or supplemented to the Closing Date, each
certified to be true, correct and complete by a senior officer of the Borrower,
as of a date not more than ten (10) days prior to the Closing Date, together
with a good standing certificate from the Secretary of State (or the equivalent
thereof) of Maryland and a good standing certificate from the Secretary of State
(or the equivalent thereof) from the Secretary of State (or the equivalent
thereof) of each other State in which the Borrower is required to be qualified
to transact business, each to be dated not more than ten (10) days prior to the
Closing Date;
(5) all certificates, agreements and other documents and papers
referred to in this Section 3.01 and Section 3.02, unless otherwise specified,
in sufficient counterparts, satisfactory in form and substance to the Agent in
its sole discretion;
(6) the Borrower shall have taken all actions required to authorize
the execution and delivery of this Agreement and the other Loan Documents and
the performance thereof by the Borrower;
(7) an unaudited consolidated balance sheet and income statement of
the Borrower for the fiscal quarter ended September 30, 1997;
(8) wire transfer instructions in connection with any Loans to be
made on the Closing Date;
all fees due and payable pursuant to Section 2.08 hereof on or before the
Closing Date;
(9) copies of all consents, licenses and approvals, if any, required
in connection with the execution, delivery and performance by the Borrower, and
the validity and enforceability, of the Loan Documents, or in connection with
any of the transactions contemplated thereby, and such consents, licenses and
approvals shall be in full force and effect;
(10) satisfactory reports of Uniform Commercial Code filing searches
conducted by a search firm acceptable to the Agent with respect to the Borrower,
such searches to be conducted in each of the locations specified by the Agent;
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(11) no material defaults or events of default (as defined therein)
shall exist under any existing agreement entered into by Borrower in connection
with any Debt of Borrower;
(12) the representations and warranties of the Borrower contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date both before and after giving effect to the making of any Loans;
(13) to the extent not previously delivered, certificates of insurance
with respect to the Unencumbered Asset Pool demonstrating the coverages required
under this Agreement; and
(14) a certificate of the chief financial officer or the chief
accounting officer of the Borrower certifying that the Borrower is in compliance
with all covenants of the Borrower contained in this Agreement, including,
without limitation, the requirements of Section 5.07 through 5.19, inclusive, as
of the Closing Date.
The Agent shall promptly notify the Borrower and the Banks of the Closing Date,
and such notice shall be conclusive and binding on all parties hereto.
SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan,
----------
other than a Refunding Swing Loan, on the occasion of any Borrowing is subject
to the satisfaction of the following conditions:
(a) receipt by the Agent of an appropriate Notice of Borrowing as
required by Section 2.02 or 2.03;
(b) if requested by the Agent or the Required Banks, receipt by the
Agent of a certificate of the Borrower satisfactory to the Agent showing the
calculation of Total Available Commitments as of the date of such Borrowing;
(c) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Committed Loans and Swing Loans will not
exceed the amount of the Total Available Commitments;
(d) the fact that, immediately before and after such Borrowing, no
Default or Event of Default shall have occurred and be continuing;
(e) the fact that the representations and warranties of the Borrower
contained in this Agreement and any other Loan Document (except those that
relate specifically
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to an earlier date) shall be true in all material respects on and as of the date
of such Borrowing;
(f) there shall not be more than twelve (12) Borrowings (including
Swing Loans) outstanding at any time;
(g) receipt by the Agent of a certificate of the Borrower
satisfactory to the Agent showing the calculation of the aggregate Borrowings
hereunder (determined on a cumulative basis);
(h) no law or regulation shall have been adopted, no order, judgment
or decree of any governmental authority shall have been issued, and no
litigation shall be pending or threatened, which does or, with respect to any
threatened litigation, seeks to enjoin, prohibit or restrain, the making or
repayment of the Loans, or any participations therein or the consummation of the
transactions contemplated hereby; and
(i) no event, act or condition shall have occurred after the Closing
Date which, in the reasonable judgment of the Agent or the Required Banks, as
the case may be, has had or is likely to have a Material Adverse Effect.
Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to the facts specified
in clauses (b), (c), (d), (e), (h) and (i) of this Section.
SECTION 3.03. Conditions Precedent to New Acquisitions and Additional Real
------------------------------------------------------------
Property Assets.
- ---------------
(a) All New Acquisitions or Real Property Assets to be added to the
Unencumbered Asset Pool shall be approved by the Required Banks; provided, that
if Borrower shall have received an Investment Grade Rating from both S&P and
Moody's, and for so long as Borrower shall maintain both such Investment Grade
Ratings, no such approval shall be required to include any New Acquisition or
Real Property Asset in the Unencumbered Asset Pool, which is (i) 100% owned in
fee or leasehold by Borrower or any Consolidated Subsidiary of Borrower, (ii)
not subject (nor is any equity interest therein subject) to any Lien, negative
pledge, stock pledge or pledge of partnership interest and (iii) in compliance
with the provisions of Section 5.19 hereof.
(b) If Borrower shall not have received or shall not maintain an
Investment Grade Rating from both S&P and Moody's, Borrower shall submit to the
Agent and the Banks as provided in subsection (c) below the materials set forth
below (the "Due Diligence Package") relating to each potential New Acquisition
---------------------
or Real Property Asset to be added to
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<PAGE>
the Unencumbered Asset Pool. The Due Diligence Package shall include (i) a
description of the Real Property Asset or New Acquisition, (ii) two years of
historical cash flow operating statements, if available, (iii) three years of
cash flow projections (including capital expenditures), if available, (iv) an
environmental report in compliance with Section 3.01(p), (v) a satisfactory
engineer's property/ structural inspection report (other than Construction
Assets), (vi) evidence of compliance with zoning and other local laws, (vii) a
final investment memorandum prepared by the Borrower in connection with the New
Acquisition or Real Property Asset and (viii) such additional information
regarding the Real Property Asset or New Acquisition as the Agent may reasonably
request. The Borrower shall permit the Agent at all reasonable times and upon
reasonable prior notice to make an inspection of such New Acquisition or Real
Property Asset.
(c) If Borrower shall not have received or shall not maintain an
Investment Grade Rating from both S&P and Moody's, the Borrower shall distribute
a copy of each item constituting the Due Diligence Package by overnight mail to
each of the Banks for their review and approval. Failure to respond to the Agent
in writing by any Bank within ten (10) Domestic Business Days after receipt of
the Due Diligence Package, shall be deemed to be an approval by such Bank of
such potential New Acquisition or Real Property Asset.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
-----------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of Maryland, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
SECTION 4.02. Corporate and Governmental Authorization; No
--------------------------------------------
Contravention. The execution, delivery and performance by the Borrower of each
- -------------
Loan Document to which it is or will be a party are within its corporate powers,
have been duly authorized by all necessary corporate action, require no action
by or in respect of, or filing with, any governmental body, agency or official
and do not contravene, or constitute a default under, any provision of
applicable law or regulation, or of the certificate of incorporation or by-laws
of the Borrower or of any agreement, judgment, in-
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<PAGE>
junction, order, decree or other instrument binding upon the Borrower or any of
its Subsidiaries, or result in the creation or imposition of any Lien on any
asset of the Borrower or any of its Subsidiaries, except as contemplated by the
Loan Documents.
SECTION 4.03. Binding Effect. Each Loan Document constitutes, or
--------------
when duly executed and delivered will constitute a valid and binding
obligation of the Borrower.
SECTION 4.04. Financial Information.
---------------------
(a) The unaudited consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of September 30, 1997 and the related unaudited
consolidated statement of earnings and statement of cash flows for the three
months then ended, a copy of which has been delivered to each of the Banks,
fairly present, in conformity with generally accepted accounting principles, the
consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such three month period.
(b) Since September 30, 1997 there has been no material adverse
change in the business, operations, properties, assets or financial condition of
the Borrower and its Consolidated Subsidiaries, taken as a whole.
SECTION 4.05. Litigation. There is no action, suit or proceeding
----------
pending against, or to the knowledge of the Borrower threatened against or
affecting, the Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could have a Material
Adverse Effect.
SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group
---------------------
has fulfilled its obligations under the minimum funding standards of ERISA and
the Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability
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under Title IV of ERISA other than a liability to the PBGC for premiums under
Section 4007 of ERISA.
SECTION 4.07. Environmental Matters. Except as indicated in the
---------------------
environmental reports previously delivered to the Agent, (i) the Borrower and
each Subsidiary (x) is in compliance with all applicable Environmental Laws,
except to the extent non-compliance would not have a Material Adverse Effect,
(y) has all material permits, licenses, approvals, rulings, variances,
exemptions or other authorizations under applicable Environmental Laws to
operate each Real Property Asset as presently conducted or as reasonably
anticipated to be conducted, (z) has received no written communication, from a
governmental authority, alleging that the Borrower or any such Subsidiary is not
in full compliance with all Environmental Laws, and there are no events or
circumstances, to the Borrower's or any Subsidiary's knowledge, that may
prevent or interfere with such full compliance in the future, except to the
extent non-compliance would not have a Material Adverse Effect, (ii) there is no
Environmental Claim pending or, to the Borrower's or any such Subsidiary's
knowledge, threatened against the Borrower or any such Subsidiary, (iii) to the
Borrower's or any such Subsidiary's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents including,
without limitation, the release, emission, discharge or disposal of any
Hazardous Substances, that could form the basis of any Environmental Claim
against the Borrower or any such Subsidiary, (iv) to the Borrower's or any such
Subsidiary's knowledge, without in any way limiting the generality of the
foregoing (A) there are no sites on any Real Property Asset in which the
Borrower or any such Subsidiary, has stored (except in full compliance with
Environmental Laws), disposed or arranged for the disposal of any Hazardous
Substances, (B) there are no underground storage tanks located on any Real
Property Asset, other than propane tanks, (C) there is no asbestos contained in
or forming a part of any improvement on any Real Property Asset, other than non-
friable materials that are the subject of an operations and maintenance program,
and (D) no polychlorinated biphenyls (PCBs) are used or stored on any Real
Property Asset, other than transformers owned by utility companies.
SECTION 4.08. Taxes. The Borrower and its Subsidiaries have filed
-----
all United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by the Borrower or any
Subsidiary, except if such assessment is being contested in good faith by
appropriate proceedings and adequate reserves have been established with respect
thereto. The charges, accruals and reserves on the
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books of the Borrower and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Borrower, adequate.
SECTION 4.09. Subsidiaries. Each of the Borrower's corporate
------------
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, each of the
Borrower's partnership Subsidiaries is a limited partnership duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, and each such entity has all corporate or partnership powers, as
applicable, and all material governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted.
SECTION 4.10. Investments. Neither the Borrower nor any Consolidated
-----------
Subsidiary has any Investment in any Person other than Investments specified in
clauses (i), (ii), (iii) and (iv) of Section 5.20.
SECTION 4.11. Not an Investment Company. Neither the Borrower nor
-------------------------
any Subsidiary or Affiliate of the Borrower is an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
SECTION 4.12. Full Disclosure. All information heretofore furnished
---------------
by the Borrower to the Agent or any Bank for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such
information hereafter furnished by the Borrower to the Agent or any Bank will
be, true and accurate, taken as a whole, in all material respects on the date as
of which such information is stated or certified. The Borrower has disclosed to
the Banks in writing any and all facts which materially and adversely affect or
may so affect (to the extent the Borrower can now reasonably foresee) the
business, operations, properties, assets or financial condition of the Borrower
and its Consolidated Subsidiaries, taken as a whole, or the value of any Real
Property Asset, or the ability of the Borrower to perform its obligations under
any Loan Document.
SECTION 4.13. Relationship of Borrower and Its Affiliates. The
-------------------------------------------
Borrower is an Affiliate of Group and is controlled by Group. At the date
hereof, at least 45% of each class of Equity Interests of the Borrower is owned
beneficially by Group.
SECTION 4.14. Contracts. Except as indicated on Schedule 4.14 or has
---------
been previously delivered to the Agent in connection with the Existing Credit
Agreement, there are no material leasing, asset management, property management
or advisory contracts in connection with the Real Property
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<PAGE>
Assets. All contracts in connection with the operation of the Real Property
Assets (other than the Investor Agreement between Group and the Borrower) are
(i) to the Borrower's knowledge, market rate contracts with third parties on
customary terms for similar contracts and (ii) in each case (except for
contracts set forth on Schedule 4.14) terminable by the Borrower on no more than
30 days' notice.
SECTION 4.15. Qualification as a REIT. The Borrower qualifies, and
-----------------------
intends to maintain its status, as a "real estate investment trust" for purposes
of the Internal Revenue Code (a "REIT").
----
SECTION 4.16. No Plan Assets. The Borrower does not hold "plan
--------------
assets" within the meaning of Section 2510.3-101 of the Regulations of the
Department of Labor.
SECTION 4.17. Subsidiary Debt. No Subsidiary has any Debt
---------------
outstanding other than Debt permitted under Section 5.26.
The Borrower shall also be deemed to represent and warrant that as of
the first day of each Interest Period of each Borrowing (x) the aggregate
outstanding principal amount of the Loans does not exceed the amount of the
Total Available Commitments, (y) no Default has occurred and is continuing and
(z) the representations and warranties of the Borrower contained in this
Agreement and any other Loan Document (except (i) the representations and
warranties set forth in Section 4.05 as to any matter which has theretofore been
disclosed in writing by the Borrower to the Banks, (ii) the representation and
warranty set forth in Section 4.14 to the extent such contracts are otherwise
permitted by this Agreement and (iii) the representation and warranty set forth
in Section 4.07 to the extent a breach thereof would by virtue of the proviso to
Section 6.01(c) not give rise to an Event of Default pursuant to Section 5.34)
are true in all material respects on and as of such day.
SECTION 4.18. Ownership of Property. Schedule 4.18 attached hereto and
--------------------- -------------
made a part hereof sets forth all the real property owned or leased by the
Borrower and Persons in which the Borrower, directly or indirectly, owns an
interest as of the Closing Date. As of the Closing Date, Borrower and such
Persons have good and insurable fee simple title (or leasehold title if so
designated on Schedule 4.18) to all of such real property, subject to customary
-------------
encumbrances and liens as of the date of this Agreement. As of the date of this
Agreement, there are no mortgages, deeds of trust, indentures, debt instruments
or other agreements creating a Lien against any of the Real Property Assets
except as disclosed on Schedule 4.18.
-------------
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<PAGE>
ARTICLE V
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Note or hereunder remains unpaid:
SECTION 5.01. Information. The Borrower will deliver to each of the
-----------
Banks:
(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, a consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of the end of such fiscal year
and the related consolidated statement of earnings and statement of cash flows
for such fiscal year, setting forth in each case in comparative form the figures
for the previous fiscal year, all reported on (in a manner acceptable to the
Securities and Exchange Commission, if the Borrower is required to file
reports with the Securities and Exchange Commission), by Arthur Andersen & Co.,
Coopers & Lybrand, Deloitte & Touche, Ernst & Young LLP, KPMG Peat Marwick,
Price Waterhouse or Kenneth Leventhal & Co.;
(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Borrower, a
consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as
of the end of such quarter and the related consolidated statement of earnings
and statement of cash flows for such quarter and for the portion of the
Borrower's fiscal year ended at the end of such quarter, setting forth in the
case of such financial statements in comparative form the figures for the
corresponding quarter and the corresponding portion of the Borrower's previous
fiscal year, all certified (subject to normal year-end or audit adjustments)
as to fairness of presentation, generally accepted accounting principles and
consistency by the controller of the Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the chief
financial officer or the chief accounting officer of Borrower (i) setting forth
in reasonable detail the calculations required to establish whether the Borrower
was in compliance with the requirements of Sections 5.07 through 5.19 on the
last day of the preceding quarter; (ii) stating whether any Default exists on
the date of such certificate and, if any Default then exists, setting forth the
details thereof and the action which the Borrower is taking or proposes to take
with respect thereto; and (iii) certifying (x) that such financial statements
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<PAGE>
fairly present the financial condition and the results of operations of the
Borrower on the dates and for the periods indicated, on the basis of GAAP, with
respect to the Borrower subject, in the case of interim financial statements,
to normally recurring year-end adjustments, and (y) that such officer has
reviewed the terms of the Loan Documents and has made, or caused to be made
under his or her supervision, a review in reasonable detail of the business and
condition of the Borrower during the period beginning on the date through which
the last such review was made pursuant to this Section 5.01(c) (or, in the case
of the first certification pursuant to this Section 5.01(c), the Closing Date)
and ending on a date not more than ten (10) Domestic Business Days prior to the
date of such delivery and that (1) on the basis of such financial statements and
such review of the Loan Documents, no Event of Default existed under Section
6.01(b) with respect to Sections 5.07 through 5.19, inclusive, at or as of the
date of said financial statements, and (2) on the basis of such review of the
Loan Documents and the business and condition of the Borrower, no Default or
Event of Default under any other provision of Section 6.01 occurred or, if any
such Default or Event of Default has occurred, specifying the nature and
extent thereof and, if continuing, the action the Borrower proposes to take in
respect thereof. Such certificate shall, set forth the calculations required to
establish the matters described in clause (1) above;
(d) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements (i) whether
anything has come to their attention to cause them to believe that any Default
existed on the date of such statements and (ii) confirming the calculations set
forth in the most recent officer's certificate delivered pursuant to clause (c)
above;
(e) within five days after any executive officer of the Borrower
(including without limitation any member of the board of directors, any managing
director, any senior vice president, the secretary or the controller) obtains
knowledge of any Default, if such Default is then continuing, a certificate of
the controller of the Borrower setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect thereto;
(f) within five days after any executive officer of the Borrower
(including without limitation any member of the board of directors, any managing
director, any senior vice president, the secretary or the controller) obtains
knowledge of any Environmental Claim against the Borrower or any Subsidiary, a
certificate of the controller of the Borrower setting forth the details thereof
and the action
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<PAGE>
which such Person is taking or proposes to take with respect thereto;
(g) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(h) promptly upon the filing thereof, if any, copies of all
registration statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-
K (or their equivalents) which the Borrower shall have filed with the Securities
and Exchange Commission;
(i) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of
such notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could result
in the imposition of a Lien or the posting of a bond or other security, a
certificate of the controller of the Borrower setting forth details as to such
occurrence and action, if any, which the Borrower or applicable member of the
ERISA Group is required or proposes to take;
(j) simultaneously with delivery of the certificate required pursuant to
Section 5.01(c), an updated Schedule 4.18, certified by the chief financial or
accounting officer or any senior vice president or vice president of the
Borrower as true, correct and complete as of the date such updated schedules are
delivered;
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<PAGE>
(k) within fifteen (15) days after filing of the annual income tax return
with the Internal Revenue Service, a certificate of the chief financial or
accounting officer of Borrower certifying that Borrower is properly classified
and continues to qualify as a real estate investment trust under the Internal
Revenue Code and has taken all actions consistent with maintaining such status;
and
(l) from time to time such additional information regarding the financial
position or business of the Borrower and its Subsidiaries as the Agent, at the
request of any Bank, may reasonably request.
SECTION 5.02. Payment of Obligations. The Borrower will pay and
----------------------
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, any obligation pursuant to any agreement by which it or any
of its properties, or any Subsidiary or any of its Subsidiaries' properties, may
be bound and any tax liabilities, impositions, assessments, and public charges
of every character, except where the same may be contested in good faith by
appropriate proceedings, and will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of the same.
SECTION 5.03. Maintenance of Property; Insurance.
----------------------------------
(a) The Borrower will keep, and will cause each Subsidiary to keep,
all property useful and necessary in its business in good order and condition,
ordinary wear and tear excepted.
(b) The Borrower shall or shall cause the Subsidiaries to maintain "all
risk" insurance covering 100% replacement cost of its real property assets with
insurers having an A.M. Best policyholder's rating of not less than A- and
financial size category of not less than X which insurance shall in any event
not provide for materially less coverage than the insurance in effect on the
Closing Date. The Borrower will deliver to the Banks (i) upon request of any
Bank through the Agent from time to time full information as to the insurance
carried, (ii) within five days of receipt of notice from any insurer a copy of
any notice of cancellation or material change in coverage from that existing on
the date of this Agreement and (iii) forthwith, notice of any cancellation or
nonrenewal of coverage by the Borrower.
SECTION 5.04. Conduct of Business and Maintenance of Existence. The
------------------------------------------------
Borrower will (x) continue to engage in business of the same general type as now
conducted by the Borrower, and will preserve, renew and keep in full force
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<PAGE>
and effect its corporate existence and its rights, privileges and franchises
necessary or desirable in the normal conduct of business and (y) except to the
extent that a failure to do so would not have a Material Adverse Effect, cause
each Subsidiary to engage in business of the same general type as now conducted
by the Borrower and its Subsidiaries, and preserve, renew and keep in full force
and effect their respective corporate or partnership existence and their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business; provided that nothing in this Section 5.04 shall
--------
prohibit (i) the merger of a Subsidiary into the Borrower or the merger or
consolidation of a Subsidiary with or into another Person if the corporation
surviving such consolidation or merger is a Subsidiary and if, in each case,
after giving effect thereto, no Default shall have occurred and be continuing,
(ii) the termination of the corporate existence of any Subsidiary if the
Borrower in good faith determines that such termination is in the best interest
of the Borrower and is not materially disadvantageous to the Banks, or (iii) the
Homestead Investment.
SECTION 5.05. Compliance with Laws. The Borrower will comply, and
--------------------
cause each Subsidiary to comply, with all applicable laws, ordinances, rules,
regulations, and requirements of governmental authorities (including, without
limitation, Environmental Laws, land use laws, all zoning and building codes
with respect to the Real Property Assets and ERISA and the rules and regulations
thereunder) except where the necessity of compliance therewith is contested in
good faith by appropriate proceedings and except to the extent non-compliance
would not have a Material Adverse Effect.
SECTION 5.06. Inspection of Property, Books and Records. The Borrower
-----------------------------------------
will keep, and will cause each Subsidiary to keep, proper books of record and
account in which full, true and correct entries shall be made of all dealings
and transactions in relation to its business and activities; and will permit,
and will cause each Subsidiary to permit, representatives of any Bank at such
Bank's expense and risk to visit and inspect any of their respective properties,
including without limitation the Real Property Assets, to examine and make
abstracts from any of their respective books and records and to discuss their
respective affairs, finances and accounts with their respective officers,
employees and independent public accountants, all at such reasonable times, upon
reasonable prior notice and as often as may reasonably be desired.
SECTION 5.07. Debt to Consolidated Tangible Net Worth. As of the last
---------------------------------------
day of each calendar quarter, the ratio as of the date of determination of (i)
the sum of (x)
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the aggregate Debt of the Borrower and its Consolidated Subsidiaries and (y) the
Borrower's pro rata share of the Debt of any Subsidiaries of the Borrower which
are not Consolidated Subsidiaries, at the time of determination, to (ii)
Consolidated Tangible Net Worth of the Borrower and its Consolidated
Subsidiaries will be equal to or less than 1.0:1.
SECTION 5.08. EBITDA to Interest Expense Coverage. As of the last day
-----------------------------------
of each calendar quarter, the ratio of EBITDA to Combined Interest Expense will
not, for the previous four (4) consecutive quarters including the quarter then
ended, be less than 2.0:l.
SECTION 5.09. Adjusted EBITDA to Debt Service Coverage. As of the
----------------------------------------
last day of each calendar quarter, the ratio of (x) Adjusted EBITDA to (y)
Combined Debt Service for the previous four (4) consecutive quarters including
the quarter then ended, will not be less than 1.4:1.
SECTION 5.10. Unencumbered Cash Flow. If Borrower shall not have an
----------------------
Investment Grade Rating from both S&P and Moody's, as of the last day of each
calendar quarter, the ratio of (x) Unencumbered Asset Pool Cash Flow to (y)
Unsecured Interest Expense for the previous four (4) consecutive quarters
including the quarter then ended, will not be less than 1.75:1.
SECTION 5.11. Unencumbered Asset Pool Value. (a) At no time shall the
-----------------------------
ratio, calculated on a quarterly basis by the Borrower as of the last day of
each calendar quarter, of the sum of (i) the Unencumbered Asset Pool Value and
(ii) 50% of the aggregate book value of the Construction Assets which are
multifamily residential property, as of the date of determination, to the
aggregate amount of Unsecured Debt outstanding as of the date of determination,
be less than 1.75:1.
(b) At no time shall the ratio, calculated on a quarterly basis by
the Borrower as of the last day of each calendar quarter, of the Unencumbered
Asset Pool Value to the aggregate amount of Unsecured Debt outstanding as of the
date of determination, be less than 1.5:1.
SECTION 5.12. Minimum Consolidated Tangible Net Worth. Consolidated
---------------------------------------
Tangible Net Worth will at no time be less than the sum of (x) $500,000,000 and
(y) seventy-five percent (75%) of all Net Offering Proceeds received by Borrower
after the date hereof, but less seventy-five percent (75%) of the cost of any
repurchases of any shares or other equity interests in Borrower.
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SECTION 5.13. Secured Debt Ratio. Secured Debt of the Borrower and
------------------
its Consolidated Subsidiaries shall at no time exceed forty (40%) percent of
Gross Asset Value.
SECTION 5.14. Debt to Total Asset Value Ratio. After the Conversion
-------------------------------
Date, at no time shall the ratio, calculated on a quarterly basis by the
Borrower as of the last day of each calendar quarter, of the aggregate amount of
Debt of the Borrower and its Consolidated Subsidiaries outstanding as of the
date of determination, to Total Asset Value exceed fifty-five percent (55%)
during the first year after the Conversion Date, if any, and fifty percent (50%)
thereafter.
SECTION 5.15. Investments in Unimproved Real Property. The aggregate
---------------------------------------
amount of the investments of the Borrower and its Consolidated Subsidiaries in
unimproved real property, excluding Construction Assets, will at no time exceed
10% of Gross Asset Value.
SECTION 5.16. Minority Holdings. The value of the Borrower's Minority
-----------------
Holdings, exclusive of the Homestead Investment, shall at no time exceed ten
(10%) percent of Gross Asset Value.
SECTION 5.17. Joint Ventures. The value of the Borrower's interest
--------------
in any joint ventures, whether consolidated or unconsolidated, shall at no
time exceed ten (10%) percent of Gross Asset Value.
SECTION 5.18. Restricted Payments. The Borrower will not make any
-------------------
Restricted Payment during any of its fiscal quarters which, when added to all
Restricted Payments made during the three immediately preceding fiscal quarters,
exceeds 95% of the Funds From Operations during its four fiscal quarters then
most recently ended; provided that the foregoing shall not prohibit the Borrower
--------
from making the minimum amount of Restricted Payments required to be made in
order for the Borrower to comply with the provisions of Section 5.32. For
purposes of this provision "Restricted Payment" means (i) any dividend or other
------------------
distribution on any shares of the Borrower's capital stock (except dividends
payable solely in shares of its capital stock or in rights to subscribe for or
purchase shares of its capital stock) or (ii) any payment on account of the
purchase, redemption, retirement or acquisition of (a) any shares of the Bor
rower's capital stock or (b) any option, warrant or other right to acquire
shares of the Borrower's capital stock.
SECTION 5.19. Certain Requirements for the Unencumbered Asset Pool.
-----------------------------------------------------
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(a) At all times, (i) the Real Property Assets in the
Unencumbered Asset Pool shall be on average during any consecutive twelve-month
period at least 85% leased to tenants and (ii) no Real Property Asset in the
Unencumbered Asset Pool shall be less than 85% leased to tenants during any
consecutive six-month period (provided, however, that with respect to
Construction Assets that have achieved the required 85% leased status and are no
longer deemed to be Construction Assets, the foregoing requirement that the same
shall have been 85% leased for an initial six months shall not apply). In the
event that the requirements of this Section 5.19 are not satisfied and if
Borrower would not be in compliance with the covenants contained in this Article
V if such Real Property Asset were not in the Unencumbered Asset Pool based on
pro forma calculations as of the last day of the previous calendar quarter, the
Borrower shall be prohibited from further Borrowings unless Borrower adds a New
Acquisition or Real Property Asset to the Unencumbered Asset Pool in accordance
with this Agreement in order to restore compliance with the requirements of this
provision. Failure to restore compliance with the requirements of this Section
5.19 within thirty (30) days of such non-compliance shall be an Event of
Default.
(b) Any Subsidiary which owns any of the Real Property Assets
in the Unencumbered Asset Pool shall not at any time incur any Recourse Debt for
borrowed money which in the aggregate exceeds $100,000 unless such Subsidiary
guaranties Borrower's obligations under this Agreement.
SECTION 5.20. Investments. Neither the Borrower nor any Consolidated
-----------
Subsidiary will make or acquire any Investment in any Person other than:
(i) Investments in Subsidiaries made primarily for the purpose of
(A) prudent tax planning as disclosed to the Agent in writing at least ten (10)
days prior to such transaction or (B) assuming or refinancing Debt described in
Sections 5.26 (i) and (ii),
(ii) Temporary Cash Investments,
(iii) Permitted Investments,
(iv) the Homestead Investment, and
(v) any Investment not otherwise permitted by the foregoing clauses
of this Section if, immediately after such Investment is made or acquired, the
aggregate net book value of all Investments permitted by this clause (v) does
not exceed 10% of Consolidated Tangible Net Worth.
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SECTION 5.21. Consolidations, Mergers and Sales of Assets. The
-------------------------------------------
Borrower will not (i) consolidate or merge with or into any other Person or (ii)
sell, lease or otherwise transfer, directly or indirectly, all or any
substantial part of the assets of the Borrower and its Subsidiaries, taken as a
whole, to any other Person.
SECTION 5.22. Use of Proceeds. The proceeds of the Loans made under
---------------
this Agreement will be used by the Borrower to directly or indirectly acquire
and develop parcels of real property improved or to be improved by income-
producing multifamily buildings, to refinance the acquisition costs thereof, for
the Homestead Investment and for working capital purposes, provided, however,
the Outstanding Working Capital Amount shall not exceed $30,000,000 at any one
time. None of such proceeds will be used, directly or indirectly, for the
purpose, whether immediate, incidental or ultimate, of buying or carrying any
"margin stock" within the meaning of Regulation U.
SECTION 5.23. Sale of Unencumbered Asset Pool. Prior to the sale or
-------------------------------
transfer of any Real Property Asset in the Unencumbered Asset Pool or any
interest in any Subsidiary owning any Real Property Asset in the Unencumbered
Asset Pool, to which, individually or in the aggregate, $25,000,000 or more of
Gross Asset Value is attributable, the Borrower shall (i) deliver prior written
notice to the Agent and the Banks, (ii) deliver to the Agent and the Banks a
certificate from its chief financial or accounting officer certifying that at
the time of such sale or other disposal (based on pro-forma calculations for the
previous period assuming that such Real Property Asset or interest was not owned
by Borrower for the relevant period) all of the covenants contained in Sections
5.07 through 5.19 are and after giving effect to the transaction shall continue
to be true and accurate in all respects, and (iii) pay to the Lead Agent an
amount equal to that required pursuant to Section 2.10(e).
SECTION 5.24. Liens; Release of Liens. Neither the Borrower nor any
-----------------------
of its Subsidiaries shall at any time during the Term directly or indirectly
create, incur, assume or permit to exist any Lien for borrowed monies or any
other Lien unless the same is being contested in good faith and the same is
discharged, bonded off or paid within sixty (60) days of filing of such Lien, on
or with respect to any Real Property Asset in the Unencumbered Asset Pool.
Notwithstanding the foregoing, the Borrower may obtain a release from the terms
of this Agreement of any Real Property Asset in the Unencumbered Asset Pool
provided that the Borrower has complied with Section 2.10(e) and prior to or
simultaneously with such release (i) Borrower shall pay to the Agent any amounts
due pursuant to Section 2.10(e), and (ii)
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Borrower delivers to the Agent and the Banks a certificate from its chief
financial or accounting officer certifying that at the time of the release all
of the covenants con tained in Sections 5.07 through 5.19 are and after giving
effect to the transaction shall continue to be true and accurate in all
respects.
SECTION 5.25. Limitations on Recourse Debt. Neither the Borrower nor
----------------------------
any Consolidated Subsidiary shall at any time create, incur or guaranty any
Recourse Debt, except for at such time and for so long as Borrower shall
maintain a long term debt rating from both S&P and Moody's of not less than BBB-
/Baa3 (an "Investment Grade Rating"), (i) $500,000,000 of Recourse Debt which is
-----------------------
Unsecured Debt (inclusive of the Loans), and (ii) Unsecured Debt with an
Investment Grade Rating or better at the time of issuance.
SECTION 5.26. Limitations on Subsidiary Debt. The Borrower will not
------------------------------
permit any Subsidiary to have or incur any Debt other than (i) Debt incurred or
assumed for the purpose of financing all or any part of the cost of acquiring or
developing an asset, provided that the amount of Debt so incurred or assumed
--------
does not exceed the acquisition or development cost of such asset, (ii) Debt
consisting, or in respect, of existing tax-exempt bonds or the refinancing
thereof, (iii) Debt the sole obligee of which is the Borrower and (iv)
Permitted Intercompany Debt.
SECTION 5.27. Other Debt Instruments. The Borrower will not, and
----------------------
will not permit any Subsidiary to enter into any agreement containing any
provision (a) which would be violated or breached by any Borrowings hereunder or
by the performance by the Borrower of its obligations hereunder or under any
other Loan Document, or (b) which is materially more restrictive upon the
Borrower than the terms and conditions of this Agreement. The Borrower will not,
and will not permit any of its Subsidiaries to, enter into any agreement (other
than this Agreement and the other Loan Documents) prohibiting the creation or
assumption of any Lien upon its properties (other than with respect to any
mortgage on a particular property), revenues or assets, whether now owned or
hereafter acquired, or restricting the ability of the Borrower to amend or
modify this Agreement or any other Loan Document.
SECTION 5.28. Hedging Requirements. The Borrower shall maintain
--------------------
Interest Rate Hedges on a notional amount of the Debt of the Borrower and its
Consolidated Subsidiaries which, when added to the aggregate principal amount of
the Debt of the Borrower and its Consolidated Subsidiaries which bears interest
at a fixed rate, equals or exceeds 100% of the aggregate principal amount of all
Debt, exclusive of the Loans, of the Borrower and its Consolidated Subsidiaries,
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except in connection with the assumption of up to $75,000,000 of Debt and the
Obligations and principal reserve funds required to be maintained in
connection with tax-exempt bonds.
SECTION 5.29. Restriction on Intercompany Debt; Subordination. The
-----------------------------------------------
Borrower (x) will cause each Subsidiary not to, and (y) as lender to Homestead
will not, modify or waive in any manner the terms of the Permitted Intercompany
Debt, and will cause each Subsidiary to comply with the terms of the
subordination provisions thereof. The Borrower will not, and will not permit
any Subsidiary to, sell, transfer, assign or pledge any Permitted Intercompany
Debt of which it is the obligee.
SECTION 5.30. Affiliate Transactions. The Borrower will not enter
----------------------
into any transaction with or make any payment to any Affiliates of the Borrower,
other than the Management Investment, the Administrative Services Contract, the
Investor Agreement between Group and the Borrower or Permitted Intercompany Debt
or any payments made in accordance therewith or dividends on shares of capital
stock to the extent not prohibited hereby. Notwithstanding the foregoing, the
Borrower or any Subsidiary may enter into transactions with Affiliates (other
than purchases or sales of real property, loan transactions or transactions for
services provided pursuant to the Property Management Contract) which involve
(i) underwriting or placement agent agreements as to which no amounts are
payable by the Borrower other than expenses payable to third parties or
indemnity obligations, in each case not less favorable to the Borrower or any
Subsidiary than those which are generally available in the market, (ii) stock
purchase, option or warrant agreements in which the Borrower is selling or
agreeing to sell Equity Interests thereunder, (iii) collective insurance
agreements, (iv) the Homestead Investment or (v) any other contract as to which
the Borrower gives the Agent 30 days prior notice of the terms thereof and, in
the reasonable judgment of the Required Banks, such terms are not less favorable
to the Borrower or any Subsidiary than those which are generally available in
the market. In addition, notwithstanding the foregoing, the Borrower may enter
into (i) temporary or bridge loan transactions with Group or any wholly-owned
subsidiary thereof, which loans shall be unsecured and subordinate (on the same
terms and conditions as set forth in clauses (A) and (B) of the definition of
"Permitted Intercompany Debt") to any and all Loans made by any Bank and
terminable upon thirty (30) days' notice and (ii) any and all transactions with
or through Atlantic Development Services Incorporated which are permitted by,
and in accordance with the terms of, this Agreement. No such transaction with or
through Atlantic Development Services Incorporated ("ADS") shall be permitted,
---
unless (i) all
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loans or advances to ADS are secured by first priority liens and security
interests (subject only to prior liens and security interests securing
performance guaranties granted in the ordinary course of ADS' business) in real
properties developed or acquired by ADS, (ii) the Borrower shall, at all times,
beneficially own at least ninety percent (90%) of the economic interests in ADS,
and (iii) the financial condition and results of operation of ADS shall be
consolidated with those of the Borrower for purposes of the financial
statements.
SECTION 5.31. Contracts. The Borrower will not, and will cause each
---------
Subsidiary not to, modify the Administrative Services Contract in any manner
that (i) materially increases fees payable thereunder, or (ii) adversely affects
the Borrower's termination rights.
SECTION 5.32. Real Estate Investment Trust. At all times prior to
----------------------------
electing treatment as a REIT, the Borrower (including without limitation its
organization and method of operations and those of its subsidiaries) will
satisfy the conditions specified in Sections 856 through 859 of the Internal
Revenue Code in order to elect treatment as a REIT. Borrower will timely elect
treatment as a REIT for the tax year 1994 and will for each tax year thereafter
continue to qualify as, and maintain its election under Section 856(c)(1) of the
Internal Revenue Code to be, a REIT.
SECTION 5.33. No Plan Assets. The Borrower will at no time hold
--------------
"plan assets" within the meaning of Section 2510.3-101 of the Regulations of the
Department of Labor.
SECTION 5.34. Environmental Matters. At its sole cost and expense,
---------------------
the Borrower will comply with, and will cause each Subsidiary to comply with,
all Environmental Laws, except to the extent non-compliance would not have a
Material Adverse Effect. Without limiting the generality of the foregoing, the
Borrower will not, and will cause each Subsidiary not to, use, store, discharge,
install or transport on any Real Property Asset, or permit to be used, stored,
discharged, installed or transported on any Real Property Asset, any Hazardous
Substances other than Hazardous Substances of such types and in such
quantities as are customarily used or stored in or at comparable, prudently-
managed multifamily buildings. Furthermore, the Borrower will (i) immediately
commence any and all remedial action needed according to the environmental
reports delivered to the Agent pursuant to Section 3.01(a)(xvii), (ii)
diligently pursue such action to completion and (iii) promptly deliver to the
Agent notice of initiation as well as notice of completion of such action.
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ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred and be continuing:
-----------------
(a) (i) the Borrower shall fail to pay when due any principal of or
interest on any Loan, or (ii) shall fail to pay for five (5) Business Days after
written notice thereof has been given to the Borrower by the Agent, any fees or
any other amount payable hereunder;
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.07 through 5.14, 5.18, 5.19, 5.21, 5.22, 5.25, 5.27,
5.32, or 5.33, inclusive;
(c) the Borrower shall fail to observe or perform any covenant or
agreement set forth herein other than those specified in Section 6.01(a) or (b),
or the Borrower or any Subsidiary shall fail to perform any covenant or
agreement contained in any other Loan Document to which it is a party, in either
case, for 30 days (or such shorter period as may be provided for therein) after
written notice thereof has been given to the Borrower by the Agent at the
request of any Bank; provided, however, that, in the event a Default hereunder
--------
arises due to a breach of the covenant contained in Section 5.34, which breach
is caused by non-compliance with Environmental Laws affecting a Real Property
Asset (the "Contaminated Property") due solely to the action or inaction of one
---------------------
or more third parties, then the Borrower shall have up to sixty (60) days to (i)
cure such breach (the "Cure Period") and (ii) provide the Agent with a report of
-----------
an environmental consultant, reasonably acceptable to the Required Banks, which
report demonstrates to the reasonable satisfaction of the Required Banks that
such breach has been cured and that the Contaminated Property is in compliance
with applicable Environmental Laws (satisfaction of (i) and (ii) collectively a
"Cure"). In the event the breach of Section 5.34 shall not have been Cured by
----
the end of the Cure Period, then such breach shall constitute an Event of
Default hereunder;
(d) any representation, warranty, certification or statement made by
the Borrower in any Loan Document or in any certificate, financial statement or
other document delivered pursuant to any Loan Document shall prove to have been
incorrect in any material respect when made (or deemed made);
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(e) the Borrower shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any Debt (other than the Obligations and Non-
Recourse Debt for which the aggregate outstanding principal amount is
$25,000,000 or less) which is $10,000,000 or more, individually or in the
aggregate, and such default shall continue beyond the giving of any required
notice and the expiration of any applicable grace period and such default has
not been waived, in writing, by the holder of any such Debt; or the Borrower
shall default in the performance or observance of any obligation or condition
with respect to any such Debt or any other event shall occur or condition exist
beyond the giving of any required notice and the expiration of any applicable
grace period, if the effect of such default, event or condition is to accelerate
the maturity of any such indebtedness or to permit (without any further
requirement of notice or lapse of time) the holder or holders thereof, or any
trustee or agent for such holders, to accelerate the maturity of any such
indebtedness;
(f) the Borrower or any Material Subsidiary shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing;
(g) an involuntary case or other proceeding shall be commenced
against the Borrower or any Material Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for
a period of 90 days; or an order for relief shall be entered against the
Borrower or any Material Subsidiary under the federal bankruptcy laws as now
or hereafter in effect;
(h) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $25,000,000 which it shall have
become liable to pay under Title IV of ERISA; or notice of intent to terminate a
Mate-
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rial Plan shall be filed under Title IV of ERISA by any member of the
ERISA Group, any plan administrator or any combination of the foregoing; or the
PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or there shall
occur a complete or partial withdrawal from, or a default, within the meaning of
Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
which could cause one or more members of the ERISA Group to incur a current
payment obligation in excess of $5,000,000;
(i) a judgment or order for the payment of money in excess of
$25,000,000 shall be rendered against the Borrower or any Subsidiary and such
judgment or order shall continue unsatisfied and unstayed for a period of 30
days (excluding any judgment as to which, and only to the extent, a reputable
insurance company has acknowledged coverage of such claim in writing);
(j) (i) the Borrower is no longer an Affiliate of Group, is no longer
controlled by Group, or Group no longer owns beneficially, and either of record
or through a wholly-owned subsidiary of Group which holds of record, at least
20% of each class of Equity Interests of the Borrower having the right to vote
on the election of directors and any other material actions, proposals, issues
or activities of the Borrower and its Subsidiaries, or (ii) the New Manager, to
the extent that the same shall exist, is no longer a wholly-owned Subsidiary of
Borrower;
(k) any person or group of persons (within the meaning of Section 13
or 14 of the Securities Exchange Act of 1934, as amended) other than Group shall
have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated
by the Securities and Exchange Commission under said Act) of a percentage of any
class of Equity Interests of the Borrower having the right to vote on the
election of directors and any other material actions, proposals, issues or
activities of the Borrower and its Subsidiaries, equal to the percentage of such
class then owned beneficially by Group minus 10% or, during any period of 24
consecutive calendar months commencing on or after November 1, 1997, individuals
who were directors of the Borrower on the first day of such period (and
directors appointed or nominated by any number of such individuals) shall cease
to constitute a majority of the board of directors of the Borrower;
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(l) any Loan Document shall for any reason cease to be in full force
and effect, or the material rights, powers and privileges purported to be
created thereby; or
(m) Borrower shall cease at any time to qualify as a REIT under the
Internal Revenue Code;
then, and in every such event, the Agent shall (i) if requested by Banks
having more than 50% in aggregate amount of the Commitments, by notice to the
Borrower terminate the Commitments and they shall thereupon terminate, or (ii)
if requested by Banks holding Notes evidencing more than 50% in aggregate
principal amount of the Loans, by notice to the Borrower declare the Notes
(together with accrued interest thereon) to be, and the Notes shall thereupon
become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower;
provided that in the case of any of the Events of Default specified in clause
- --------
(g) or (h) above with respect to the Borrower, without any notice to the
Borrower or any other act by the Agent or the Banks, the Commitments shall
thereupon terminate and the Notes (together with accrued interest thereon) shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
-----------------
Borrower under Section 6.01(c) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank irrevocably
-----------------------------
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement and the other Loan Documents as are
delegated to the Agent by the terms hereof or thereof, together with all such
powers as are reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
--------------------
New York shall have the same rights and powers under this Agreement as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with
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the Borrower or any Subsidiary or affiliate of the Borrower as if it were not
the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent
---------------
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article VI.
SECTION 7.04. Consultation with Experts. The Agent may consult with
-------------------------
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor any of its
------------------
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks or of a lesser
number of Banks requesting action pursuant to Section 6.01 or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible
for or have any duty to ascertain, inquire into or verify (i) any statement,
warranty or representation made in connection with this Agreement or any
borrowing hereunder; (ii) the performance or observance of any of the covenants
or agreements of the Borrower; (iii) the satisfaction of any condition specified
in Article III, except receipt of items required to be delivered to the Agent;
or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes,
any other Loan Documents or any other instrument or writing furnished in
connection herewith or therewith. The Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex or similar writing) believed by it to
be genuine or to be signed by the proper party or parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in
---------------
accordance with its Commitment, indemnify the Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this
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Agreement or any other Loan Document or any action taken or omitted by such
indemnitees hereunder or thereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
---------------
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time by
---------------
giving notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent, which
successor Agent, provided no Event of Default shall have occurred and be
continuing, shall be subject to approval by the Borrower, which approval shall
not be unreasonably withheld or delayed. If no successor Agent shall have been
so appointed by the Required Banks, and shall have accepted such appointment,
within 30 days after the retiring Agent gives notice of resignation, then the
retiring Agent may, on behalf of the Banks, appoint a successor Agent. The
Agent, whether appointed by the Required Banks or by the retiring Agent, shall
be a commercial bank organized or licensed under the laws of the United States
of America or of any State thereof and having a combined capital and surplus of
at least $500,000,000. Upon the acceptance of its appointment as Agent hereunder
by a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent. In addition, if Morgan Guaranty Trust Company of New York
("Morgan"), as Agent, shall at any time hold Commitments equal to less than
------
$25,000,000 in the aggregate, it shall promptly notify the Banks and the
Borrower thereof and shall offer to resign as Agent. If such offer shall be
accepted by the Required Banks (for this purpose only, Morgan shall be deemed to
have accepted its own offer to resign), a successor Agent shall be appointed in
accordance with this Section 7.08.
SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for
-----------
its own account fees in the amounts and at the times previously agreed upon
between the Borrower and the Agent.
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ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or
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Unfair. If on or prior to the first day of any Interest Period for any Fixed
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Rate Borrowing or Money Market Borrowing:
(a) the Agent is advised by the Euro-Dollar Reference Bank that
deposits in dollars (in the applicable amounts) are not being offered to the
Euro-Dollar Reference Bank in the relevant market for such Interest Period, or
(b) Banks having 50% or more of the aggregate principal amount of the
affected Loans advise the Agent that the Adjusted London Interbank Offered Rate,
as the case may be, as determined by the Agent will not adequately and fairly
reflect the cost to such Banks of funding their Euro-Dollar Loans for such
Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make Euro-Dollar Loans, as the case may be, or to convert outstanding Loans into
Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan
shall be converted into a Base Rate Loan on the last day of the then current
Interest Period applicable thereto. Unless the Borrower notifies the Agent at
least two Domestic Business Days before the date of any Fixed Rate Borrowing or
Money Market Borrowing for which a Notice of Committed Borrowing has previously
been given that it elects not to borrow on such date, (i) if such Borrowing is a
Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrow-
ing, and (ii) if such Borrowing is a Money Market LIBOR Borrowing, the Money
Market LIBOR Loans comprising such Borrow ing shall bear interest for each day
from and including the first day to but excluding the last day of the Interest
Period applicable thereto at the Base Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this
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Agreement, the adoption of any applicable law, rule or regulation, or any change
in any applicable law, rule or regulation, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank (or its Euro-Dollar Lending Office) with any request or
directive (whether or not having the force of law) of any
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such authority, central bank or comparable agency shall make it unlawful or
impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or
fund its Euro-Dollar Loans or Money Market Loans and such Bank shall so notify
the Agent, the Agent shall forthwith give notice thereof to the other Banks and
the Borrower, whereupon until such Bank notifies the Borrower and the Agent that
the circumstances giving rise to such suspension no longer exist, the obligation
of such Bank to make or convert Euro-Dollar Loans or Money Market Loans, or to
convert outstanding Loans into Euro-Dollar Loans, shall be suspended. Before
giving any notice to the Agent pursuant to this Section, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will avoid
the need for giving such notice and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. If such notice is given, each Euro-
Dollar Loan or Money Market Loan of such Bank then outstanding shall be
converted to a Base Rate Loan either (a) on the last day of the then current
Interest Period applicable to such Euro-Dollar Loan or Money Market Loan if such
Bank may lawfully continue to maintain and fund such Loan to such day or (b)
immediately if such Bank shall determine that it may not lawfully continue to
maintain and fund such Loan to such day.
SECTION 8.03. Increased Cost and Reduced Return.
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(a) If on or after (x) the date hereof, in the case of any Committed
Loan or any obligation to make Committed Loans, or (y) the date of the related
Money Market Quote, in the case of any Money Market Loan, the adoption of any
applicable law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Applicable Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency shall
impose, modify or deem applicable any reserve (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System, but excluding with respect to any Euro-Dollar Loan any such requirement
included in an applicable Euro-Dollar Reserve Percentage), special deposit,
insurance assessment or similar requirement against assets of, deposits with or
for the account of, or credit extended by, any Bank (or its Applicable Lending
Office) or shall impose on any Bank (or its Applicable Lending Office) or on the
United States market for certificates of deposit or the London interbank market
any other condition affecting its Fixed Rate Loans or Money Market Loans, its
Note or its obligation to make Fixed Rate Loans, and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of
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making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum
received or receivable by such Bank (or its Applicable Lending Office) under
this Agreement or under its Note with respect thereto, by an amount deemed by
such Bank to be material, then, within 15 days after demand by such Bank (with a
copy to the Agent), and provided such Bank is generally exercising rights
similar to those set forth in this Section 8.03 (a) against other borrowers
similarly situated to the Borrower, the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that, after the date hereof,
the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on capital of such Bank (or its Parent) as a consequence of such Bank's
obligations hereunder to a level below that which such Bank (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies with respect to capital adequacy) by an amount
deemed by such Bank to be material, then from time to time, within 15 days after
demand by such Bank (with a copy to the Agent), and provided such Bank is
generally exercising rights similar to those set forth in this Section 8.03(b)
against other borrowers similarly situated to the Borrower, the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
(or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank
claiming compensation under this Section and setting forth the additional amount
or amounts to be paid to it hereunder shall be prima facie evidence of the
matters certified therein. In determining such amount, such Bank may use any
reasonable averaging and attribution methods.
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SECTION 8.04. Taxes.
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(a) Any and all payments by the Borrower to or for the account of any
Bank or the Agent hereunder or under any Note shall be made free and clear of
and without deduction for any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of each Bank and the Agent, taxes imposed on its
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income, and franchise taxes imposed on it, by the jurisdiction under the laws of
which such Bank or the Agent (as the case may be) is organized or any political
subdivision thereof and, in the case of each Bank, taxes imposed on its income,
and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such non-
excluded taxes, duties, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note to any Bank or the Agent, (i) the sum payable shall
be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
8.04) such Bank or the Agent (as the case may be) receives an amount equal to
the sum it would have received had no such deductions been made, (ii) the
Borrower shall make such deductions, (iii) the Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 9.01, the original or a certified copy of
a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies, including without limitation documentary, intangibles,
recording, mortgage recording and transfer taxes, which arise from any extension
of credit hereunder, any payment made hereunder or under any Note or from the
execution or delivery or performance of, or the exercise of remedies under, or
otherwise with respect to, this Agreement or any other Loan Document
(hereinafter referred to as "Other Taxes").
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(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04) paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 15 days
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from the date such Bank or the Agent (as the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrower (but
only so long as such Bank remains lawfully able to do so), shall provide the
Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which reduces the rate of withholding tax on payments of
interest or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States. If the form provided by a Bank at the time such Bank first becomes a
party to this Agreement indicates a United States interest withholding tax rate
in excess of zero, withholding tax at such rate shall be considered excluded
from "Taxes" as defined in Section 8.04(a).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.04(a) with respect to
Taxes imposed by the United States; provided that, should a Bank, which is
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otherwise exempt from or subject to a reduced rate of withholding tax, become
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.04, then such Bank will
change the jurisdiction of its Applicable Lending Office so as to eliminate or
reduce any such additional payment which may thereafter accrue if such change,
in the judgment of such Bank, is not otherwise disadvantageous to such Bank.
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate
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Loans. If (i) the obligation of any Bank to make or maintain, or convert
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outstanding Loans to, Euro-Dollar Loans has been suspended pursuant to Section
8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04
with respect to its Euro-Dollar Loans and
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the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to
such Bank through the Agent, have elected that the provisions of this Section
shall apply to such Bank, then, unless and until such Bank notifies the Borrower
that the circumstances giving rise to such suspension or demand for
compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as (or
continued as or converted into) Euro-Dollar Loans shall be Base Rate Loans (on
which interest and principal shall be payable contemporaneously with the related
Fixed Rate Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans has been repaid (or converted
into a Base Rate Loan), all payments of principal which would otherwise be
applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate
Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise
to such notice no longer apply, the principal amount of each such Base Rate Loan
shall be converted into a Euro-Dollar Loan on the first day of the next
succeeding Interest Period applicable to the related Euro-Dollar Loans of the
other Banks.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other
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communications to any party hereunder shall be in writing (including bank wire,
telex, facsimile transmission or similar writing) and shall be given to such
party: (x) in the case of the Borrower or the Agent, at its address or telex
number set forth on the signature pages hereof, (y) in the case of any Bank, at
its address or telex number set forth in its Administrative Questionnaire or (z)
in the case of any party, such other address or telex number as such party may
hereafter specify for the purpose by notice to the Agent and the Borrower. Each
such notice, request or other communication shall be effective (i) if given by
telex, when such telex is transmitted to the telex number specified in this
Section and the appropriate answer back is received, (ii) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided that notices
to the Agent under Article II or Article VIII shall not be effective until
received.
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SECTION 9.02. No Waivers. No failure or delay by the Agent or any
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Bank in exercising any right or remedy hereunder or under any Note, and no
course of dealing with respect thereto, shall operate as a waiver thereof nor
shall any single or partial exercise of any right or remedy hereunder or under
any Note or under any other Loan Document preclude any other or further exercise
thereof or the exercise of any other right or remedy. The rights and remedies
provided herein, under any Note or in any other Loan Document are cumulative and
may be exercised independently or concurrently and are not exclusive of any
other rights or remedies provided by law.
SECTION 9.03. Expenses; Indemnification.
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(a) The Borrower shall pay (i) all out-of-pocket expenses of the
Agent, including reasonable fees and disbursements of special counsel and local
counsel for the Agent, in connection with the preparation and administration of
this Agreement and each other Loan Document, any waiver or consent hereunder or
thereunder or any amendment hereof or thereof or any Default or alleged Default
hereunder, (ii) all appraisal fees, recording and filing fees, taxes, brokerage
fees and commissions, abstract fees, title insurance premiums and fees, Uniform
Commercial Code and other search fees, escrow fees, environmental report fees,
engineering report fees, and all other costs and expenses of every character
incurred in connection with the preparation, execution, delivery, filing,
recordation or performance of any Loan Document and (iii) if an Event of Default
occurs, all out-of-pocket expenses incurred by the Agent and each Bank,
including fees and disbursements of counsel, in connection with such Event of
Default, and collection, bankruptcy, insolvency and other enforcement
proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank, their
respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
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harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee in connection
with any investigative, administrative or judicial proceeding (whether or not
such Indemnitee shall be designated a party thereto) brought or threatened
relating to or arising out of (i) this Agreement or any Loan Document or any
actual or proposed use of proceeds of Loans hereunder, (ii) any violation by the
Borrower or any Subsidiary of any applicable Environmental Law or other law,
(iii) any Environmental Claim or other claim arising out of the management,
use, control, ownership or operation of property or assets by the
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Borrower or any Subsidiary, including, without limitation, all on-site and off-
site activities involving Hazardous Substances, (iv) the breach of any
representation, warranty or covenant set forth herein or in any Loan Document,
(v) the grant to the Agent of any Lien on any property or assets of the Borrower
or any Subsidiary, or (vi) the exercise by the Agent and the Banks of their
rights and remedies (including, without limitation, foreclosure) under any
agreement creating any such Lien, provided that no Indemnitee shall have the
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right to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction.
SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
-------------------
by exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate amount of principal and interest due with
respect to any Note held by it which is greater than the proportion received by
any other Bank in respect of the aggregate amount of principal and interest due
with respect to any Note held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
held by the other Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest with respect to the
Notes held by the Banks shall be shared by the Banks pro rata; provided that
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nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in a
Note, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation. If any Rejecting
Bank shall be repaid pursuant to Section 2.01(c), then, from and after the
Conversion Date, the provisions of this Section 9.04 shall not apply as to such
Rejecting Bank.
SECTION 9.05. Amendments and Waivers. Except as expressly provided
----------------------
in any other Loan Document, any provision of this Agreement or the Notes or any
other Loan Document may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Borrower and the Required Banks (or by
the Agent after receiving approval therefor from the Required Banks) (and, if
the rights or duties of the Agent are affected thereby, by the Agent); provided
that no such amendment or waiver shall, unless signed by all the Banks, (i)
increase or decrease the Com-
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mitment of any Bank (except for a ratable decrease in the Commitments of all
Banks) or subject any Bank to any additional obligation (other than any Bank
signing such amendment or waiver), (ii) reduce the principal of or rate of
interest on any Loan or any fees hereunder, except as provided below, (iii)
postpone the date fixed for any payment of principal of or interest on any Loan
or any fees hereunder or for any reduction or termination of any Commitment,
(iv) change the aggregate amount by which or to which the Commitments are
required to be reduced on or prior to any Commitment Reduction Date, or (v)
change the percentage of the Commitments or of the aggregate unpaid principal
amount of the Notes, or the number of Banks, which shall be required for the
Banks or any of them to take any action under this Section or any other
provision of this Agreement. In addition, no such amendment or waiver shall,
unless signed by the Swing Lender and each other Bank affected thereby, increase
the Swing Loan Commitment, postpone the date fixed for the termination of the
Swing Loan Commitment or otherwise affect any of its rights or obligations
hereunder relating to the Swing Loan Commitment or the Swing Loans.
Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in
writing and signed by the Designating Lender on behalf of its Designated Lender
affected thereby, (a) subject such Designated Lender to any additional
obligations, (b) reduce the principal of, interest on, or other amounts due with
respect to, the Designated Lender Note made payable to such Designated Lender,
or (c) postpone any date fixed for any payment of principal of, or interest on,
or other amounts due with respect to the Designated Lender Note made payable to
the Designated Lender.
SECTION 9.06. Successors and Assigns.
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(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or otherwise transfer any of
its rights under this Agreement without the prior written consent of all
Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment
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on any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
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retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
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that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii), (iv) or (vi) of Section 9.05 without the consent of the
Participant. The Borrower agrees that each Participant shall, to the extent
provided in its participation agreement, be entitled to the benefits of Article
VIII with respect to its participating interest. An assignment or other transfer
which is not permitted by subsection (c) or (d) below shall be given effect for
purposes of this Agreement only to the extent of a participating interest
granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
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rights and obligations under this Agreement and the Notes and the other Loan
Documents, and such Assignee shall assume such rights and obligations, pursuant
to a Transfer Supplement in substantially the form of Exhibit D hereto executed
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by such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Agent and, unless an Event of Default shall have occurred and be
continuing, the Borrower, which in each case shall not be unreasonably withheld
(the withholding of such consent shall not be deemed unreasonable if such
Assignee is not an Eligible Assignee); provided that if an Assignee is an
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affiliate of such transferor Bank, no such consent shall be required; and
provided further that if the Assignee is not an Affiliate of the transferor Bank
- -------- -------
and not a Bank, the amount of the Commitment being assigned shall not be less
than the lesser of (i) the entire Commitment of the transferor Bank or (ii)
$10,000,000. Upon execution and delivery of such instrument and payment by such
Assignee to such transferor Bank of an amount equal to the purchase price agreed
between such transferor Bank and such Assignee, such Assignee shall be a Bank
party to this Agreement and shall have all the rights and obligations of a Bank
with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this subsection
(c), the transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the Agent
an administrative fee for processing such assignment in the amount of $2,500. If
the Assignee is not incorporated under the laws of the United States of America
or a state thereof,
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it shall deliver to the Borrower and the Agent certification as to exemption
from deduction or withholding of any United States federal income taxes in
accordance with Section 8.04.
(d) Any Bank (each, a "Designating Lender") may at any time designate
------------------
one Designated Lender to fund Money Market Loans on behalf of such Designating
Lender subject to the terms of this Section 9.06(d) and the provisions in
Section 9.06(b) and (c) shall not apply to such designation. No Bank may
designate more than one (1) Designated Lender. The parties to each such
designation shall execute and deliver to the Agent for its acceptance a
Designation Agreement. Upon such receipt of an appropriately completed
Designation Agreement executed by a Designating Lender and a designee
representing that it is a Designated Lender, the Agent will accept such
Designation Agreement and will give prompt notice thereof to the Borrower,
whereupon, (i) the Borrower shall execute and deliver to the Designating Bank a
Designated Lender Note payable to the order of the Designated Lender, (ii) from
and after the effective date specified in the Designation Agreement, the
Designated Lender shall become a party to this Agreement with a right (subject
to the provisions of Section 2.03(b)) to make Money Market Loans on behalf of
its Designating Lender pursuant to Section 2.03 after the Borrower has accepted
a Money Market Loan (or portion thereof) of the Designating Lender, and (iii)
the Designated Lender shall not be required to make payments with respect to any
obligations in this Agreement except to the extent of excess cash flow of such
Designated Lender which is not otherwise required to repay obligations of such
Designated Lender which are then due and payable; provided, however, that
regardless of such designation and assumption by the Designated Lender, the
Designating Lender shall be and remain obligated to the Borrower, Agent and the
Banks for each and every obligation of the Designating Lender and its related
Designated Lender with respect to this Agreement, including, without limitation,
any indemnification obligations under Section 7.06 hereof and any sums otherwise
payable to the Borrower by the Designated Lender. Each Designating Lender shall
serve as the administrative agent of the Designated Lender and shall on behalf
of, and to the exclusion of, the Designated Lender: (i) receive any and all
payments made for the benefit of the Designated Lender and (ii) give and receive
all communications and notices and take all actions hereunder, including,
without limitation, votes, approvals, waivers, consents and amendments under or
relating to this Agreement and the other Loan Documents. Any such notice,
communication, vote, approval, waiver, consent or amendment shall be signed by
the Designating Lender as administrative agent for the Designated Lender and
shall not be signed by the Designated Lender on its own behalf and shall be
binding upon the Designated Lender to the same extent as if signed by the
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Designated Lender on its own behalf. The Borrower, the Agent and the Banks may
rely thereon without any requirement that the Designated Lender sign or
acknowledge the same. No Designated Lender may assign or transfer all or any
portion of its interest hereunder or under any other Loan Document, other than
assignments to the Designating Lender which originally designated such
Designated Lender or otherwise in accordance with the provisions of Section
9.06(b) and (c).
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.03 or 8.04
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent (provided no Event of Default shall have occurred and be continuing) or
by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to
designate a different Applicable Lending Office under certain circumstances or
at a time when the circumstances giving rise to such greater payment did not
exist.
SECTION 9.07. Collateral. Each of the Banks represents to the Agent
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and each of the other Banks that it in good faith is not relying upon any
"margin stock" (as defined in Regulation U) of the Borrower or any Subsidiary
Guarantor or Affiliate as collateral in the extension or maintenance of the
credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to Jurisdiction. This
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Agreement and each Loan Document, including, without limitation, each Note,
shall be governed by and construed in accordance with the laws of the State of
New York. The Borrower hereby submits to the nonexclusive jurisdiction of the
United States District Court for the Southern District of New York and of any
New York State court sitting in New York City for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum.
SECTION 9.09. Counterparts; Integration; Effectiveness. This
-----------------------------------------
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
-83-
<PAGE>
upon the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective upon receipt by the Agent of
counterparts hereof signed by each of the parties hereto (or, in the case of any
party as to which an executed counterpart shall not have been received, receipt
by the Agent in form satisfactory to it of telegraphic, telex or other written
confirmation from such party of execution of a counterpart hereof by such
party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT
--------------------
AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Survival. All indemnities set forth herein shall
--------
survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Loans and the termination of the
Commitments hereunder.
SECTION 9.12. Domicile of Loans. Each Bank may transfer and carry
-----------------
its Loans at, to or for the account of any domestic or foreign branch office,
subsidiary or affiliate of such Bank.
SECTION 9.13. Limitation of Liability. No claim may be made by the
-----------------------
Borrower or any other Person acting by or through Borrower against the Agent or
any Bank or the affiliates, directors, officers, employees, attorneys or agent
of any of them for any consequential or punitive damages in respect of any claim
for breach of contract or any other theory of liability arising out of or
related to the transactions contemplated by this Agreement or by the other Loan
Documents, or any act, omission or event occurring in connection therewith; and
the Borrower hereby waives, releases and agrees not to sue upon any claim for
any such damages, whether or not accrued and whether or not known or suspected
to exist in its favor.
SECTION 9.14. Recourse Obligation. This Agreement and the Obligations
-------------------
hereunder are fully recourse to the Borrower. Notwithstanding the foregoing, no
recourse under or upon any obligation, covenant, or agreement contained in this
Agreement shall be had against any officer, director, shareholder or employee of
the Borrower except in the event of fraud or misappropriation of funds on the
part of such officer, director, shareholder or employee.
-84-
<PAGE>
SECTION 9.15. Further Assurances. At any time or from time to time
------------------
upon the request of the Agent, the Borrower will, at its expense, promptly
execute, acknowledge, and deliver such further documents and do such other acts
and things as shall be necessary or advisable, in the Agent's discretion, in
order to effect fully the purposes of this Agreement or any of the other Loan
Documents. The Borrower will pay all fees and expenses (including reasonable
attorneys fees) incurred by the Agent in connection therewith.
SECTION 9.16. Confidentiality; Disclosure of Information. Each party
------------------------------------------
hereto shall treat the transactions contemplated hereby and all financial and
other information furnished to it about the Banks, the Borrower, any Subsidiary
or any of the Real Property Assets, as applicable, as confidential; provided,
however, that such confidential information may be disclosed (a) as required by
law or pursuant to generally accepted accounting procedures, (b) to officers,
directors, employees, agents, partners, attorneys, accountants, engineers and
other consultants of the parties hereto who need to know such information,
provided such Persons are instructed to treat such information confidentially,
or (c) by any Bank to any Participant or Assignee or any prospective transferee
(provided such prospective transferee agrees to treat such information
confidentially), which disclosure to prospective transferees may include any and
all information which has been delivered to such Bank by the Borrower pursuant
to this Agreement or the other Loan Documents or which has been delivered to
such Bank in connection with such Bank's credit evaluation of the Borrower prior
to entering into this Agreement. Notwithstanding the foregoing, this Section
9.16 shall not apply to any Bank so long as any Event of Default hereunder or
under any other Loan Documents shall have occurred and be continuing and, in any
such event, such Bank shall be entitled to disclose any information furnished to
it in connection with this Agreement as it deems necessary or appropriate in its
sole and absolute discretion. Notwithstanding the foregoing, the Borrower hereby
consents to the disclosure of any non-public information with respect to it
which is related to this transaction by any Designated Lender to any rating
agency, commercial paper dealer, or provider of a surety, guaranty or credit or
liquidity enhancement to such Designated Lender, provided, however, that prior
to any such disclosure such Designated Lender shall obtain an agreement from the
applicable Person pursuant to which it shall agree to be bound by
confidentiality provisions similar to those set forth herein.
SECTION 9.17. No Bankruptcy Proceedings. Each of the Borrower, the
-------------------------
Banks, and the Agent hereby agrees that it will not institute against any
Designated Lender or join any other Person in instituting against any Designated
Lender
-85-
<PAGE>
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding under any federal or state bankruptcy or similar law, until the later
to occur of (i) one year and one day after the payment in full of the latest
maturing commercial paper note issued by such Designated Lender and (ii) the
Revolver Termination Date.
-86-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
BORROWER:
SECURITY CAPITAL ATLANTIC
INCORPORATED
By: _________________________
Name:
Title:
7777 Market Center Avenue
El Paso, Texas 79912
Attention: Anne Schumacher
Fax number: (915) 877-3301
Commitments BANKS:
- -----------
$40,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: _________________________
Name:
Title:
$35,000,000 THE FIRST NATIONAL BANK OF
BOSTON
By: _________________________
Name:
Title:
$35,000,000 TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: _________________________
Name:
Title:
-87-
<PAGE>
$40,000,000 WELLS FARGO BANK, NATIONAL
ASSOCIATION
By: ____________________
Name:
Title:
$35,000,000 BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
By: _________________________
Name:
Title:
$40,000,000 FIRST UNION NATIONAL BANK
By: _________________________
Name:
Title:
-88-
<PAGE>
$25,000,000 DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCHES
By: _________________________
Name:
Title:
By: _________________________
Name:
Title:
$20,000,000 DG BANK DEUTSCHE GENOSSENSCHAFTSBANK
By: _________________________
Name:
Title:
By: _________________________
Name:
Title:
$12,000,000 CORESTATES BANK, N.A.
By: _________________________
Name:
Title:
-89-
<PAGE>
$35,000,000 COMMERZBANK AKTIENGESELLSCHAFT,
LOS ANGELES BRANCH
By: _________________________
Name:
Title:
By: _________________________
Name:
Title:
$20,000,000 WACHOVIA BANK,N.A.
By: ___________________
Name:
Title:
Total Commitments
- -----------------
$350,000,000
-90-
<PAGE>
AGENT:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By:_____________________________
Name: Timothy V. O'Donovan
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention: William R. Barrett
Fax Number: (212) 648-5748
Domestic Lending Office:
J.P. Morgan Services Inc.
500 Stanton-Christiana Road
Newark, Delaware 19713
Attention: Jeannie Mattson
Fax Number: (302) 634-4222
Euro-Currency Lending Office:
Nassau, Bahamas Office
c/o J.P. Morgan Services Inc.
Euro-Loan Servicing Unit
500 Stanton-Christiana Road
Newark, Delaware 19713
Attention: Jeannie Mattson
Fax Number: (302) 634-4222
-91-
<PAGE>
EXHIBIT A-1
-----------
NOTE
New York, New York
as of ______, 199_
For value received, SECURITY CAPITAL ATLANTIC INCORPORATED, a Maryland
corporation (the "Borrower"), promises to pay to the order of _________________
---------
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
----
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the maturity date provided for in the
Credit Agreement. The Borrower promises to pay interest on the unpaid principal
amount of each such Loan on the dates and at the rate or rates provided for in
the Credit Agreement. All such payments of principal and interest shall be made
in lawful money of the United States in Federal or other immediately available
funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall
Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This note is one of the Notes referred to in the Revolving Credit
Agreement, dated as of ________, 1997, among the Borrower, the banks listed on
the signature pages thereof and Morgan Guaranty Trust Company of New York, as
Agent (as the same may be amended from time to time, the "Credit Agreement").
----------------
Terms defined in the Credit Agreement are used herein with the same meanings.
A-1
<PAGE>
Reference is made to the Credit Agreement for provisions for the prepayment
hereof and the acceleration of the maturity hereof.
SECURITY CAPITAL ATLANTIC
INCORPORATED
By: _____________________
Name:
Title:
A-2
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
________________________________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
A-3
<PAGE>
EXHIBIT A-2
-----------
NOTE
New York, New York
as of ______, 199_
For value received, SECURITY CAPITAL ATLANTIC INCORPORATED, a Maryland
corporation (the "Borrower"), promises to pay to the order of _________________
--------
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
----
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the maturity date provided for in the
Credit Agreement. The Borrower promises to pay interest on the unpaid principal
amount of each such Loan on the dates and at the rate or rates provided for in
the Credit Agreement. All such payments of principal and interest shall be made
in lawful money of the United States in Federal or other immediately available
funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall
Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof and
all repayments of the principal thereof shall be recorded by the Bank and, if
the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to
each such Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; provided that the failure of the Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This note is one of the Notes referred to in the Revolving Credit
Agreement, dated as of _________, 1997, among the Borrower, the banks listed on
the signature pages thereof and Morgan Guaranty Trust Company of New York, as
Agent (as the same may be amended from time to time, the "Credit Agreement").
----------------
Terms defined in the Credit Agreement are used herein with the same meanings.
Reference is made to the Credit Agreement for provisions for the prepayment
hereof and the acceleration of the maturity hereof.
SECURITY CAPITAL ATLANTIC
INCORPORATED
By: ___________________
Name:
A2-1
<PAGE>
Title:
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
________________________________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
A2-2
<PAGE>
EXHIBIT A-3
-----------
NOTE
New York, New York
as of ______, 199_
For value received, SECURITY CAPITAL ATLANTIC INCORPORATED, a Maryland
corporation (the "Borrower"), promises to pay to the order of _________________
--------
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
----
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the maturity date provided for in the
Credit Agreement. The Borrower promises to pay interest on the unpaid principal
amount of each such Loan on the dates and at the rate or rates provided for in
the Credit Agreement. All such payments of principal and interest shall be made
in lawful money of the United States in Federal or other immediately available
funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall
Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank and,
if the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This note is one of the Designated Lender Notes referred to in the
Revolving Credit Agreement, dated as of _________, 1997, among the Borrower, the
banks listed on the signature pages thereof and Morgan Guaranty Trust Company of
New York, as Agent (as the same may be amended from time to time, the "Credit
------
Agreement"). Terms defined in the Credit Agreement are used herein with the
- ---------
same meanings. Reference is made to the Credit Agreement for provisions for
the prepayment hereof and the acceleration of the maturity hereof.
SECURITY CAPITAL ATLANTIC
INCORPORATED
By: ___________________
Name:
Title:
A3-1
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
________________________________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
A3-2
<PAGE>
EXHIBIT B
---------
UNENCUMBERED ASSET POOL
B-1
<PAGE>
EXHIBIT C
---------
CONSTRUCTION ASSETS
C-1
<PAGE>
EXHIBIT D
---------
TRANSFER SUPPLEMENT
-------------------
TRANSFER SUPPLEMENT (this "Transfer Supplement") dated as of ______,
199_ between _______________ (the "Assignor") and _________________ having an
address at _______________(the "Purchasing Bank").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Assignor has made loans to Security Capital Atlantic
Incorporated, a Maryland corporation (the "Borrower"), pursuant to the First
Amended and Restated Revolving Credit Agreement, dated as of _________, 1997 (as
the same may be amended, supplemented or otherwise modified through the date
hereof, the "Credit Agreement"), among the Borrower, the banks party thereto,
and Morgan Guaranty Trust Company of New York, as Agent. All capitalized terms
used and not otherwise defined herein shall have the respective meanings set
forth in the Credit Agreement;
WHEREAS, the Purchasing Bank desires to purchase and assume from
the Assignor, and the Assignor desires to sell and assign to the Purchasing
Bank, certain rights, title, interest and obligations under the Credit
Agreement;
NOW, THEREFORE, IT IS AGREED:
1. In consideration of the amount set forth in the receipt (the
"Receipt") given by Assignor to Purchasing Bank of even date herewith, and
transferred by wire to Assignor, the Assignor hereby assigns and sells, without
recourse, representation or warranty except as specifically set forth herein, to
the Purchasing Bank, and the Purchasing Bank hereby purchases and assumes from
the Assignor, a __% interest (the "Purchased Interest") of the Loans
constituting a portion of the Assignor's rights and obligations under the Credit
Agreement as of the Effective Date (as defined below) including, without
limitation, such percentage interest of the Assignor in any Loans owing to the
Assignor, any Note held by the Assignor, any Loan Commitment of the Assignor and
any other interest of the Assignor under any of the Loan Documents.
2. The Assignor (i) represents and warrants that as of the date
hereof the aggregate outstanding principal amount of its share of the Loans
owing to it (without giving effect to assignments thereof which have not yet
become effective) is $__________; (ii) represents and warrants that it is the
legal
D-1
<PAGE>
and beneficial owner of the interests being assigned by it hereunder and that
such interests are free and clear of any adverse claim; (iii) represents and
warrants that it has not received any notice of Default or Event of Default from
the Borrower; (iv) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations (or
the truthfulness or accuracy thereof) made in or in connection with the Credit
Agreement, or the other Loan Documents or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Credit Agreement, or
the other Loan Documents or any other instrument or document furnished pursuant
thereto; and (v) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or any
Subsidiary of Guarantor or the performance or observance by the Borrower or any
Subsidiary of Guarantor of any of its obligations under the Credit Agreement or
the other Loan Documents or any other in strument or document furnished pursuant
thereto. Except as specifically set forth in this Paragraph 2, this assignment
shall be without recourse to Assignor.
3. The Purchasing Bank (i) confirms that it has received a copy of
the Credit Agreement, and the other Loan Documents, together with such financial
statements and such other documents and information as it has deemed appropriate
to make its own credit analysis and decision to enter into this Transfer Supple
ment and to become a party to the Credit Agreement, and has not relied on any
statements made by Assignor or Skadden, Arps, Slate, Meagher & Flom LLP; (ii)
agrees that it will, independently and without reliance upon any of the Agent,
the Assignor or any other Bank and based on such documents and information as it
shall deem appropriate at the time, continue to make its own appraisal of and
investigation into the business, operations, property, prospects, financial and
other conditions and credit worthiness of the Borrower and will make its own
credit analysis, appraisals and decisions in taking or not taking action under
the Credit Agreement, and the other Loan Documents; (iii) appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under the Credit Agreement, and the other Loan Documents as are
delegated to the Agent by the terms thereof, together with such powers as are
incidental thereto; (iv) agrees that it will be bound by and perform in
accordance with their terms all of the obligations which by the terms of the
Credit Agreement are required to be performed by it as a Bank; (v) specifies as
its address for notices and lending office, the office set forth beneath its
name on the signature page hereof; (vi) it has full power and authority to
execute and deliver, and perform under, this Transfer Supplement, and all
necessary corporate and/or partnership action has taken to authorize, and all
approvals and consents have been obtained for, the execution, delivery and
performance thereof; (vii) this Transfer Supplement constitutes its legal, valid
and binding
D-2
<PAGE>
obligation enforceable in accordance with its terms; and (viii) the interest
being assigned hereunder is being acquired by it for its own account, for
investment purposes only and not with a view to the public distribution thereof
and without any present intention of its resale in either case that would be in
violation of applicable securities laws.
4. This Transfer Supplement shall be effective on the date (the
"Effective Date") on which all of the following have occurred (i) it shall have
--------------
been executed and delivered by the parties hereto, (ii) copies hereof shall have
been delivered to the Agent and the Borrower, and (iii) the Purchasing Bank
shall have paid to the Assignor the agreed purchase price as set forth in the
Receipt.
5. On and after the Effective Date, (i) the Purchasing Bank shall be
a party to the Credit Agreement and, to the extent provided in this Transfer
Supplement, have the rights and obligations of a Bank thereunder and be entitled
to the benefits and rights of the Banks thereunder and (ii) the Assignor shall,
to the extent provided in this Transfer Supplement as to the Pur-chased
Interest, relinquish its rights and be released from its obligations under the
Credit Agreement.
6. From and after the Effective Date, the Assignor shall cause the
Agent to make all payments under the Credit Agreement, and the Notes in respect
of the Purchased Interest assigned hereby (including, without limitation, all
payments of principal, fees and interest with respect thereto and any amounts
accrued but not paid prior to such date) to the Purchasing Bank.
7. This Transfer Supplement may be executed in any number of
counterparts which, when taken together, shall be deemed to constitute one and
the same instrument.
8. Assignor hereby represents and warrants to Purchasing Bank that it
has made all payments demanded to date by Morgan Guaranty Trust Company of New
York ("Morgan") as Agent in connection with the Assignor's pro rata share of
------
the obligation to reimburse the Agent for its expenses. In the event Morgan, as
Agent, shall demand reimbursement for fees and expenses from Purchasing Bank for
any period prior to the Effective Date, Assignor hereby agrees to promptly pay
Morgan, as Agent, such sums directly, subject, however, to Paragraph 12 hereof.
9. Assignor will, at the cost of Assignor, and without expense to
Purchasing Bank, do, execute, acknowledge and deliver all and every such further
acts, deeds conveyances, assignments, notices of assignments, transfers and
assurances as Purchasing Bank shall, from time to time, reasonably require, for
the better assuring, conveying, assigning, transferring and confirming unto
Purchasing Bank the property and rights hereby given, granted,
D-3
<PAGE>
bargained, sold, aliened, enfeoffed, conveyed, confirmed, assigned and/or
intended now or hereafter so to be, on which Assignor may be or may hereafter
become bound to convey or assign to Purchasing Bank, or for carrying out the
intention or facilitating the performance of the terms of this Agreement or for
filing, registering or recording this Agreement.
10. The parties agree that no broker or finder was instrumental in
bringing about this transaction. Each party shall indemnify, defend the other
and hold the other free and harmless from and against any damages, costs or
expenses (including, but not limited to, reasonable attorneys' fees and
disbursements) suffered by such party arising from claims by any broker or
finder that such broker or finder has dealt with said party in connection with
this transaction.
11. Subject to the provisions of Paragraph 12 hereof, if, with
respect to the Purchased Interest only, Assignor shall on or after the Effective
Date receive (a) any cash, note, securities, property, obligations or other
consideration in respect of or relating to the Loan or the Loan Documents or
issued in substitution or replacement of the Loan or the Loan Documents, (b) any
cash or non-cash consideration in any form whatsoever distributed, paid or
issued in any bankruptcy proceeding in connection with the Loan or the Loan
Documents or (c) any other distribution (whether by means of repayment,
redemption, realization of security or otherwise), Assignor shall accept the
same as Purchasing Bank's agent and hold the same in trust on behalf of and for
the benefit of Purchasing Bank, and shall deliver the same forthwith to
Purchasing Bank in the same form received, with the endorsement (without
recourse) of Assignor when necessary or appropriate. If the Assignor shall fail
to deliver any funds received by it within the same Business Day of receipt,
unless such funds are received by Assignor after 4:00 p.m., Eastern Standard
Time, then the following business day after receipt, said funds shall accrue
interest at the federal funds interest rate and in addition to promptly
remitting said amount, Assignor shall remit such interest from the date received
to the date such amount is remitted to the Purchasing Bank.
12. Assignor and Purchasing Bank each hereby agree to indemnify and
hold harmless the other, each of its directors and each of its officers in
connection with any claim or cause of action based on any matter or claim based
on the acts of either while acting as a Bank under the Credit Agreement.
Promptly after receipt by the indemnified party under this Section of notice of
the commencement of any action, such indemnified party shall notify the
indemnifying party in writing of the commencement thereof. If any such action
is brought against any indemnified party and that party notifies the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein, and to the extent that it may elect by
D-4
<PAGE>
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel satisfactory to such indemnified party, and after receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof. In no event shall the indemnified party settle or consent to a
settlement of such cause of action or claim without the consent of the
indemnifying party.
D-5
<PAGE>
13. THIS TRANSFER SUPPLEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK.
Wire Transfer Instructions: __________________________
By:_______________________
Name:
Title:
___________________________
By: ______________________
Name:
Title:
Acknowledged this
____ day of ________, 199_:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By:__________________________
Name:
Title:
D-6
<PAGE>
EXHIBIT E
Form of Money Market Quote Request
----------------------------------
[Date]
To: Morgan Guaranty Trust Company of New York (the "Agent")
From: Security Capital Atlantic Incorporated
Re: First Amended and Restated Revolving Credit Agreement (the "Credit
Agreement"), dated as of __________, 1997 among Security Capital
Atlantic Incorporated, the Banks parties thereto and the Agent
We hereby give notice pursuant to Section 2.3 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
Principal Amount/*/ Interest Period/*/
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate]. [The applicable base rate is the London Interbank Offered
Rate.]
The funding of Money Market Loans made in connection with this Money
Market Quote Request [may/may not] be made by Designated Lenders.
Terms used herein have the meanings assigned to them in the Credit
Agreement.
Security Capital Atlantic Incorporated
By:________________________
Name:
Title:
___________________
Amount must be $20,000,000 or a larger multiple of $1,000,000.
Not less than one month (LIBOR Auction) or not less than 30 days (Absolute
Rate Auction), subject to the provisions of the definition of Interest Period.
E-1
<PAGE>
EXHIBIT F
Form of Invitation for Money Market Quotes
------------------------------------------
To: [Name of Bank]
Re: Invitation for Money Market Quotes to TriNet Corporate Realty Trust, Inc.
(the "Borrower")
Pursuant to Section 2.03 of the First Amended and Restat ed Revolving
Credit Agreement, dated as of _______, 1997 among Security Capital Atlantic
Incorporated, the Banks parties thereto and the undersigned, as Agent, we are
pleased on behalf of the Borrower to invite you to submit Money Market Quotes to
the Borrower for the following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate]. [The applicable base rate is the London Interbank Offered
Rate.]
Please respond to this invitation by no later than 10:00 A.M. (New
York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By______________________
Authorized Officer
F-1
<PAGE>
EXHIBIT G
Form of Money Market Quote
--------------------------
To: Morgan Guaranty Trust Company of New York, as Agent
Re: Money Market Quote to Security Capital Atlantic Incorporated (the
"Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
_____________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following principal
amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
- -------- --------- ---------------------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans for
which the above offers may be accepted shall not exceed $____________.]**
We understand and agree that the offer(s) set forth above,
subject to the satisfaction of the applicable conditions set forth in the
First Amended and Restated Revolving Credit Agreement dated as of ______,
1997 among Security Capital Atlantic Incorporated, the Banks parties
thereto and yourselves, as Agent, irrevocably obligates us to make the
Money Market Loan(s) for which any offer(s) are accepted, in whole or in
part.
Very truly yours,
[NAME OF BANK]
Dated:_________________________
Authorized Officer
G-1
<PAGE>
EXHIBIT H
FORM OF DESIGNATION AGREEMENT
-----------------------------
Dated _____________, 199___
Reference is made to that certain First Amended and Restated Revolving
Credit Agreement dated as of ______, 1997 (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement") among SECURITY CAPITAL
ATLANTIC INCORPORATED, the banks parties thereto, and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK (the "Agent"), as Agent. Terms defined in the Credit
Agreement are used herein with the same meaning.
[NAME OF DESIGNOR] (the "Designor"), [NAME OF DESIGNEE] (the "Designee"),
the Agent and Borrower agree as follows:
1. The Designor hereby designates the Designee, and the Designee hereby
accepts such designation, to have a right to make Money Market Loans pursuant to
Article III of the Credit Agreement. Any assignment by Designor to Designee of
its rights to make a Money Market Loan pursuant to such Article III shall be
effective at the time of the funding of such Money Market Loan and not before
such time.
2. Except as set forth in Section 7 below, the Designor makes no
representation or warranty and assumes no responsibility pursuant to this
Designation Agreement with respect to (a) any statements, warranties or
representations made in or in connection with any Loan Document or the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of any Loan Document or any other instrument and document furnished pursuant
thereto and (b) the financial condition of the Borrower or the performance or
observance by the Borrower of any of its obligations under any Loan Document or
any other instrument or document furnished pursuant thereto.
3. The Designee (a) confirms that it has received a copy of each Loan
Document, together with copies of the financial statements referred to in
Articles IV and V of the Credit Agreement and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Designation Agreement; (b) agrees that it will
independently and without reliance upon the Agent, the Designor or any other
Bank and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit decisions in
H-1
<PAGE>
taking or not taking action under any Loan Document; (c) confirms that it is a
Designated Lender; (d) appoints and authorizes the Agent to take such action as
agent on its behalf and to exercise such powers and discretion under any Loan
Document as are delegated to the Agent by the terms thereof, together with such
powers and discretion as are reasonably incidental thereto; and (e) agrees to be
bound by each and every provision of each Loan Document and further agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of any Loan Document are required to be performed by it as a Bank.
4. The Designee hereby appoints Designor as Designee's agent and attorney
in fact, and grants to Designor an irrevocable power of attorney, to receive
payments made for the benefit of Designee under the Credit Agreement, to deliver
and receive all communications and notices under the Credit Agreement and
other Loan Documents and to exercise on Designee's behalf all rights to vote
and to grant and make approvals, waivers, consents of amendments to or under the
Credit Agreement or other Loan Documents. Any document executed by the Designor
on the Designee's behalf in connection with the Credit Agreement or other Loan
Documents shall be binding on the Designee. The Borrower, the Agent and each of
the Banks may rely on and are beneficiaries of the preceding provisions.
5. Following the execution of this Designation Agreement by the Designor
and its Designee, it will be delivered to the Agent for acceptance and recording
by the Agent. The effective date for this Designation Agreement (the "Effective
Date") shall be the date of acceptance hereof by the Agent, unless otherwise
specified on the signature page thereto.
6. The Agent hereby agrees that it will not institute against any
Designated Lender or join any other Person in instituting against any Designated
Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding under any federal or state bankruptcy or similar law, until the later
to occur of (i) one year and one day after the payment in full of the latest
maturing commercial paper note issued by such Designated Lender and (ii) the
Maturity Date.
7. The Designor unconditionally agrees to pay or reimburse the Designee
and save the Designee harmless against all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed or asserted by any of the
parties to the Loan Documents against the Designee, in its capacity as such, in
any way relating to or arising out of this Agreement or
H-2
<PAGE>
any other Loan Documents or any action taken or omitted by the Designee
hereunder or thereunder, provided that the Designor shall not be liable for any
--------
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements if the same results from the
Designee's gross negligence or willful misconduct.
8. Upon such acceptance and recording by the Agent, as of the Effective
Date, the Designee shall be a party to the Credit Agreement with a right
(subject to the provisions of Section 2.03(b)) to make Money Market Loans as a
Bank pursuant to Section 2.03 of the Credit Agreement and the rights and
obligations of a Bank related thereto; provided, however, that the Designee
-------- -------
shall not be required to make payments with respect to such obligations except
to the extent of excess cash flow of such Designee which is not otherwise
required to repay obligations of such Designated Lender which are then due and
payable. Notwithstanding the foregoing, the Designor, as administrative agent
for the Designee, shall be and remain obligated to the Borrower, the Co-Agents
and the Banks for each and every of the obligations of the Designee and its
Designor with respect to the Credit Agreement, including, without limitation,
any indemnification obligations under Section 7.6 of the Credit Agreement and
any sums otherwise payable to the Borrower by the Designee.
9. This Designation Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
10. This Designation Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of a signature page to this Designation Agreement by facsimile
transmission shall be effective as delivery of a manually executed counter
part of this Designation Agreement.
H-3
<PAGE>
IN WITNESS WHEREOF, the Designor and the Designee, intending to be legally
bound, have caused this Designation Agreement to be executed by their officers
thereunto duly authorized as of the date first above written.
Effective Date: ________________________,
199__
[NAME OF DESIGNOR], as
Designor
By:
Title:
[NAME OF DESIGNEE] as
Designee
By:
Title:
Applicable Lending Office
(and address for notices):
[ADDRESS]
Accepted this _____ day
of ________, 19__
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
By:
Title:
H-4
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS
-----------
<S> <C>
SECTION 1.01. Definitions.................................................. 2
SECTION 1.02. Accounting Terms and Determinations.......................... 24
SECTION 1.03. Types of Borrowings.......................................... 25
ARTICLE II
THE CREDITS
-----------
SECTION 2.01. Commitments to Lend.......................................... 25
SECTION 2.02. Notice of Committed Borrowing................................ 26
SECTION 2.03. Money Market Borrowings...................................... 31
SECTION 2.04. Notice to Banks; Funding of Loans............................ 35
SECTION 2.05. Notes........................................................ 36
SECTION 2.06. Method of Electing Interest Rates............................ 37
SECTION 2.07. Interest Rates............................................... 39
SECTION 2.08. Fees......................................................... 41
SECTION 2.09. Optional Termination or Reduction of
Commitments................................................ 41
SECTION 2.10. Maturity; Mandatory Termination or
Reduction of Commitments.................................. 42
SECTION 2.11. Optional Prepayments......................................... 43
SECTION 2.12. General Provisions as to Payments............................ 44
SECTION 2.13. Funding Losses............................................... 45
SECTION 2.14. Computation of Interest and Fees............................. 45
ARTICLE III
CONDITIONS
SECTION 3.01. Conditions Precedent to Effectiveness
of Agreement............................................... 46
SECTION 3.02. Borrowings................................................... 47
SECTION 3.03. Conditions Precedent to New Acquisitions
and Additional Real Property Assets........................ 49
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power................................ 50
SECTION 4.02. Corporate and Governmental Authorization;
No Contravention........................................... 50
SECTION 4.03. Binding Effect............................................... 50
SECTION 4.04. Financial Information........................................ 50
SECTION 4.05. Litigation................................................... 51
SECTION 4.06. Compliance with ERISA........................................ 51
SECTION 4.07. Environmental Matters........................................ 51
SECTION 4.08. Taxes........................................................ 52
SECTION 4.09. Subsidiaries................................................. 52
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.10. Investments.................................................. 52
SECTION 4.11. Not an Investment Company.................................... 52
SECTION 4.12. Full Disclosure.............................................. 52
SECTION 4.13. Relationship of Borrower and Its
Affiliates................................................. 53
SECTION 4.14. Contracts.................................................... 53
SECTION 4.15. Qualification as a REIT...................................... 53
SECTION 4.16. No Plan Assets............................................... 53
SECTION 4.17. Subsidiary Debt.............................................. 53
SECTION 4.18. Ownership of Property........................................ 54
ARTICLE V
COVENANTS
SECTION 5.01. Information.................................................. 54
SECTION 5.02. Payment of Obligations....................................... 57
SECTION 5.03. Maintenance of Property; Insurance........................... 58
SECTION 5.04. Conduct of Business and Maintenance of
Existence.................................................. 58
SECTION 5.05. Compliance with Laws......................................... 58
SECTION 5.06. Inspection of Property, Books and Records.................... 59
SECTION 5.07. Debt to Consolidated Tangible Net Worth...................... 59
SECTION 5.08. EBITDA to Interest Expense Coverage.......................... 59
SECTION 5.09. EBITDA to Debt Service Coverage.............................. 59
SECTION 5.10. Unencumbered Cash Flow....................................... 59
SECTION 5.11. Unencumbered Asset Pool Value................................ 60
SECTION 5.12. Minimum Consolidated Tangible................................ 52
Net Worth.................................................. 60
SECTION 5.13. Secured Debt Ratio........................................... 60
SECTION 5.14. Debt to Total Asset Value Ratio.............................. 60
SECTION 5.15. Investments in Unimproved Real Property...................... 60
SECTION 5.16. Minority Holdings............................................ 60
SECTION 5.17. Joint Ventures............................................... 61
SECTION 5.18. Restricted Payments.......................................... 61
SECTION 5.19. Certain Requirements for the
Unencumbered Asset Pool.................................... 61
SECTION 5.20. Investments.................................................. 62
SECTION 5.21. Consolidations, Mergers and Sales of Assets.................. 62
SECTION 5.22. Use of Proceeds.............................................. 62
SECTION 5.23. Sale of Unencumbered Asset Pool.............................. 62
SECTION 5.24. Liens; Release of Liens...................................... 63
SECTION 5.25. Limitations on Recourse Debt................................. 63
SECTION 5.26. Limitations on Subsidiary Debt............................... 63
SECTION 5.27. Other Debt Instruments....................................... 64
SECTION 5.28. Hedging Requirements......................................... 64
SECTION 5.29. Restriction on Intercompany Debt;
Subordination.............................................. 64
SECTION 5.30. Affiliate Transactions....................................... 64
SECTION 5.31. Contracts.................................................... 65
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 5.32. Real Estate Investment Trust................................. 65
SECTION 5.33. No Plan Assets............................................... 66
SECTION 5.34. Environmental Matters........................................ 66
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default............................................ 66
SECTION 6.02. Notice of Default............................................ 70
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment and Authorization................................ 70
SECTION 7.02. Agent and Affiliates......................................... 70
SECTION 7.03. Action by Agent.............................................. 70
SECTION 7.04. Consultation with Experts.................................... 70
SECTION 7.05. Liability of Agent........................................... 70
SECTION 7.06. Indemnification.............................................. 71
SECTION 7.07. Credit Decision.............................................. 71
SECTION 7.08. Successor Agent.............................................. 71
SECTION 7.09. Agent's Fee.................................................. 72
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate
Inadequate or Unfair....................................... 72
SECTION 8.02. Illegality................................................... 73
SECTION 8.03. Increased Cost and Reduced Return............................ 74
SECTION 8.04. Taxes........................................................ 75
SECTION 8.05. Base Rate Loans Substituted for Affected
Fixed Rate Loans........................................... 77
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices...................................................... 78
SECTION 9.02. No Waivers................................................... 78
SECTION 9.03. Expenses; Indemnification.................................... 78
SECTION 9.04. Sharing of Set-Offs.......................................... 79
SECTION 9.05. Amendments and Waivers....................................... 80
SECTION 9.06. Successors and Assigns....................................... 81
SECTION 9.07. Collateral................................................... 84
SECTION 9.08. Governing Law; Submission to
Jurisdiction............................................... 84
SECTION 9.09. Counterparts; Integration;
Effectiveness.............................................. 84
SECTION 9.10. WAIVER OF JURY TRIAL......................................... 84
SECTION 9.11. Survival..................................................... 84
SECTION 9.12. Domicile of Loans............................................ 84
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 9.13. Limitation of Liability....................................... 85
SECTION 9.14. Recourse Obligation........................................... 85
SECTION 9.15. Further Assurances............................................ 85
SECTION 9.16. Confidentiality; Disclosure of
Information................................................. 85
SECTION 9.17. No Bankruptcy Proceedings..................................... 86
</TABLE>
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL ATLANTIC
INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings from operations............... $51,115 $32,998 $19,639 $ 9,926 $ 38
Add:
Interest expense..................... 20,292 16,181 19,042 9,240 --
------- ------- ------- ------- ----
Earnings, as adjusted.................. $71,407 $49,179 $38,681 $19,166 $ 38
======= ======= ======= ======= ====
Fixed charges:
Interest expense..................... $20,292 $16,181 $19,042 $ 9,240 $--
Capitalized interest................. 10,169 10,250 4,404 793 --
------- ------- ------- ------- ----
Total fixed charges.................. $30,461 $26,431 $23,446 $10,033 $--
======= ======= ======= ======= ====
Ratio of earnings to fixed charges..... 2.3 1.9 1.6 1.9 N/A
======= ======= ======= ======= ====
</TABLE>
- --------
(1) For the period from inception (October 26, 1993) to December 31, 1993.
<PAGE>
EXHIBIT 12.2
SECURITY CAPITAL ATLANTIC
INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings from operations.............. $51,115 $32,998 $19,639 $ 9,926 $ 38
Add:
Interest expense.................... 20,292 16,181 19,042 9,240 --
------- ------- ------- ------- ----
Earnings, as adjusted................. $71,407 $49,179 $38,681 $19,166 $ 38
======= ======= ======= ======= ====
Combined fixed charges and preferred
stock dividends:
Interest expense.................... $20,292 $16,181 $19,042 $ 9,240 $--
Capitalized interest................ 10,169 10,250 4,404 793 --
------- ------- ------- ------- ----
Total fixed charges............... 30,461 26,431 23,446 10,033 --
Preferred stock dividends............. 1,569 -- -- -- --
------- ------- ------- ------- ----
Combined fixed charges and preferred
stock dividends...................... $32,030 $26,431 $23,446 $10,033 $ --
======= ======= ======= ======= ====
Ratio of earnings to combined fixed
charges and preferred stock
dividends............................ 2.2 1.9 1.6 1.9 N/A
======= ======= ======= ======= ====
</TABLE>
- --------
(1) For the period from inception (October 26, 1993) to December 31, 1993.
<PAGE>
EXHIBIT 21
These consolidated wholly owned subsidiaries of the registrant carry on the
same line of business and operate in the United States.
STATE OF INCORPORATION OR
ORGANIZATION
------------
Atlantic-Alabama (1) Incorporated Maryland
Atlantic-Alabama (2) Incorporated Maryland
Atlantic-Alabama (3) Incorporated Delaware
Atlantic-Alabama (4) Incorporated Delaware
Atlantic-Alabama (5) Incorporated Maryland
Atlantic-Alabama (6) Incorporated Maryland
Atlantic Alabama Multifamily Trust Alabama
Atlantic-Tennessee Limited Partnership Delaware
SCA-Alabama Multifamily Trust Alabama
SCA Florida Holdings (1) Incorporated Florida
SCA Florida Holdings (2) Incorporated Delaware
SCA-Indiana Limited Partnership Delaware
SCA-North Carolina (1) Incorporated Maryland
SCA-North Carolina (2) Incorporated Maryland
SCA North Carolina Limited Partnership Delaware
SCA-South Carolina (1) Incorporated Maryland
SCA-Tennessee (1) Incorporated Maryland
SCA-Tennessee (2) Incorporated Maryland
SCA-Tennessee (3) Incorporated Maryland
SCA-Tennessee (4) Incorporated Maryland
SCA-Tennessee Limited Partnership Delaware
Security Capital Alabama Multifamily Trust Alabama
Security Capital Atlantic Multifamily Incorporated Delaware
This consolidated wholly owned subsidiary of the registrant operates in the
United States and provides management services to the registrant and its other
subsidiaries.
STATE OF INCORPORATION OR
ORGANIZATION
------------
SCG Realty Services Atlantic Incorporated Delaware
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-38477) of Security Capital Atlantic Incorporated (ATLANTIC) and in
the related Prospectus and the Registration Statements (Form S-8 No. 333-43761,
333-31419, and 333-25993) pertaining to the Security Capital Atlantic
Incorporated 401(K) Savings Plan, the Security Capital Atlantic Incorporated
Long-Term Incentive Plan and the Security Capital Atlantic Incorporated Share
Option Plan for Outside Directors of our report dated January 27, 1998, with
respect to the financial statements and schedule of ATLANTIC included in its
Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,273
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,364,572
<DEPRECIATION> 65,626
<TOTAL-ASSETS> 1,441,411
<CURRENT-LIABILITIES> 0
<BONDS> 320,525
0
50,000
<COMMON> 478
<OTHER-SE> 840,503
<TOTAL-LIABILITY-AND-EQUITY> 1,441,411
<SALES> 168,459
<TOTAL-REVENUES> 173,549
<CGS> 0
<TOTAL-COSTS> 90,926
<OTHER-EXPENSES> 11,016
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 20,292
<INCOME-PRETAX> 51,154
<INCOME-TAX> 0
<INCOME-CONTINUING> 51,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,154
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
</TABLE>
