-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D8sjSP/+wvh0eTCB3IaJf44gYwboC4lneWoyLaoq1wQPi9l2kXBB+MxTwnw2as3I 3PorD3RtUUTFUt4xMid7hA== 0000891618-98-001004.txt : 19980309 0000891618-98-001004.hdr.sgml : 19980309 ACCESSION NUMBER: 0000891618-98-001004 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-44467 FILM NUMBER: 98558624 BUSINESS ADDRESS: STREET 1: 777 CALIFORNIA AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154943700 MAIL ADDRESS: STREET 1: 777 CALIFORNIA AVENUE CITY: PALO ALTO STATE: CA ZIP: 94304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PORTFOLIO LP CENTRAL INDEX KEY: 0001053059 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-44467-01 FILM NUMBER: 98558625 BUSINESS ADDRESS: STREET 1: 777 CALIFORNIA AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154943700 MAIL ADDRESS: STREET 1: 777 CALIFORNIA AVENUE CITY: PALO ALTO STATE: CA ZIP: 94304 S-3/A 1 AMENDMENT NO. 1 TO FORM S-3 (333-44467) 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998 REGISTRATION NO. 333-44467 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ESSEX PROPERTY TRUST, INC. ESSEX PORTFOLIO, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND CALIFORNIA (STATE OR OTHER JURISDICTION OF INCORPORATION OR (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) ORGANIZATION) 77-0369576 77-0369575 (IRS EMPLOYER INDEMNIFICATION NO.) (IRS EMPLOYER INDEMNIFICATION NO.)
KEITH R. GUERICKE PRESIDENT AND CHIEF EXECUTIVE OFFICER 777 CALIFORNIA AVENUE PALO ALTO, CALIFORNIA 94304 (650) 494-3700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: STEPHEN J. SCHRADER, ESQ. JUSTIN L. BASTIAN MORRISON & FOERSTER LLP 755 PAGE MILL ROAD, PALO ALTO, CALIFORNIA 94304 (650) 813-5600 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ======================================================================================================================= PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED(1) REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE(11) - ----------------------------------------------------------------------------------------------------------------------- ESSEX PROPERTY TRUST, INC. Common Stock(5).................... Preferred Stock(6)................. Warrants(7)........................ $100,000,000(2) (2)(4) $100,000,000(2) $29,500 Depositary Shares representing Preferred Stock(8)............... Guarantees(9)...................... - ----------------------------------------------------------------------------------------------------------------------- ESSEX PORTFOLIO, L.P. Debt Securities(10)................ $250,000,000(3) (3)(4) $250,000,000(3) $73,750 - ----------------------------------------------------------------------------------------------------------------------- Total.......................... $350,000,000 (4) $350,000,000 $103,250(11)(12) =======================================================================================================================
(1) This Registration Statement also covers contracts which may be issued by the Registrant under which the counterparty may be required to purchase Common Stock, Preferred Stock or Depositary Shares or Debt Securities. (2) In no event will the aggregate maximum offering price of shares of Common Stock, shares of Preferred Stock, Warrants to purchase shares of Common Stock or Preferred Stock or Depositary Shares representing Preferred Stock, sold pursuant to this Registration Statement exceed $100,000,000. Any securities registered hereunder may be sold separately or as units with other securities registered hereunder. (3) In no event will the aggregate maximum offering price of Debt Securities of Essex Portfolio, L.P. sold pursuant to this Registration Statement exceed $250,000,000. (4) The proposed maximum offering price per unit (a) has been omitted pursuant to Instruction II.D. of Form S-3 and (b) will be determined, from time to time, by the Registrant in connection with the issuance by the Registrant of the securities registered hereunder. (5) Subject to footnote 2, there is being registered hereunder an indeterminate number of shares of Common Stock as may be sold, from time to time, by Essex Property Trust, Inc. including shares of Common Stock that may be issued upon conversion of Preferred Stock or Depositary Shares registered hereunder or upon exercise of Warrants registered hereunder, as the case may be. (6) Subject to footnote 2, there is being registered hereunder an indeterminate number of shares of Preferred Stock as may be sold, from time to time, by the Company, or may be issued upon exercise of Warrants registered hereunder. (7) Subject to footnote 2, there is being registered hereunder an indeterminate number of Warrants representing rights to purchase Preferred Stock or Common Stock registered hereunder. (8) To be represented by Depositary Receipts representing an interest in all or a specified portion of a share of Preferred Stock. (9) Debt Securities issued by Essex Portfolio, L.P. may be accompanied by a Guarantee to be issued by the Company. None of the proceeds will be received by the Company for the Guarantees. (10) Subject to footnote 3, there are being registered hereunder an indeterminate number of Debt Securities as may be sold from time to time by Essex Portfolio, L.P. (11) Calculated pursuant to Rule 457(o) of the rules and regulations under the Securities Act of 1933, as amended. These fees were paid with the initial filing of this Registration Statement. (12) Excludes fees of $12,763.41 previously paid in connection with the filing of registration statement on Form S-3 (No. 333-16119), and relating to $42,119,250 of equity securities of the Company included in the Prospectus herein pursuant to Rule 429 under the Securities Act of 1933, as amended. PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATED TO REGISTRATION STATEMENT NO. 333-16119 PREVIOUSLY FILED BY THE COMPANY ON FORM S-3 AND DECLARED EFFECTIVE ON NOVEMBER 19, 1996. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement relates to securities which may be offered from time to time by Essex Property Trust, Inc. (the "Company") and Essex Portfolio, L.P., a majority-owned subsidiary of the Company (the "Operating Partnership"). This Registration Statement contains a form of base prospectus (the "Base Prospectus") relating to both the Company and the Operating Partnership which will be used in connection with an offering of securities by the Company or the Operating Partnership. The specific terms of the securities to be offered will be set forth in a Prospectus Supplement relating to such securities. To the extent securities of the Operating Partnership, which are limited to unsecured non-convertible investment grade debt securities, are offered pursuant to the enclosed Base Prospectus, the Base Prospectus will include the financial statements, together with notes and schedule, Selected Financial Data and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Operating Partnership set forth on pages F-1 through F-35 of the Base Prospectus. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 6, 1998 $142,119,250 ESSEX PROPERTY TRUST, INC. COMMON STOCK, PREFERRED STOCK, DEPOSITARY SHARES AND WARRANTS $250,000,000 ESSEX PORTFOLIO, L.P. DEBT SECURITIES Essex Property Trust, Inc. ("Essex" or the "Company") may from time to time offer in one or more series or classes (i) shares of its common stock, par value $0.0001 per share (the "Common Stock"), (ii) shares or fractional shares of its preferred stock (the "Preferred Stock"), (iii) shares of Preferred Stock represented by Depositary Shares (the "Depositary Shares"), (iv) warrants to purchase Preferred Stock or Common Stock (the "Warrants"), and (v) unconditional guarantees (the "Guarantees") of unsecured Debt Securities (defined below) issued by Essex Portfolio, L.P. (the "Operating Partnership"), in amounts, at prices and on terms to be determined at the time of offering, with an aggregate public offering price of up to $142,119,250. The Operating Partnership may from time to time offer in one or more series unsecured non-convertible investment grade securities, which may be either senior debt securities ("Senior Securities") or subordinated debt securities ("Subordinated Securities" and, together with the Senior Securities, the "Debt Securities"), with an aggregate offering price of up to $250,000,000, in amounts, at prices and on terms to be determined at the time of the offering. The Common Stock, Preferred Stock, Depositary Shares, Warrants and Debt Securities (collectively, the "Offered Securities") may be offered, separately or together, in separate series in amounts, at prices and on terms to be set forth in one or more supplements to this Prospectus (each a "Prospectus Supplement"). The general terms of the Offered Securities in respect to which this Prospectus is being delivered are set forth herein. Specific terms of the Offered Securities will be set forth in the applicable Prospectus Supplement and will include, where applicable (i) in the case of Common Stock, the specific title and stated value and any initial public offering price; (ii) in the case of Preferred Stock, the specific title and stated value, any dividend, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; (iii) in the case of Depositary Shares, the fractional share of Preferred Stock represented by each such Depositary Share; (iv) in the case of Warrants, the duration, offering price, exercise price and detachability; and (v) in the case of Debt Securities the specific title, aggregate principal amount, currency, form (which may be registered, or certificated or global), authorized denominations, maturity, rate (or manner of calculation thereof) and time of payment of interest, terms for redemption at the option of the Operating Partnership or repayment at the option of the holder, terms for sinking fund payments, covenants and any initial public offering price. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Offered Securities, in each case as may be appropriate to preserve the status of the Company as a REIT for federal income tax purposes. To ensure that the Company maintains its qualification as a REIT, the charter of the Company provides that no person, with certain exceptions, may own more than 6.0% of the value of the outstanding capital stock of the Company including any shares of Common Stock or Preferred Stock offered hereby. See "Description of Common Stock -- Restrictions on Transfer." The applicable Prospectus Supplement will also contain information, where applicable, about material United States federal income tax considerations relating to, and any listing on a securities exchange of, the Offered Securities covered by such Prospectus Supplement. The Offered Securities may be offered directly, through agents designated from time to time by the Company, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Offered Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No Offered Securities may be sold without delivery of the applicable Prospectus Supplement describing the method and terms of the offering of such series of Offered Securities. FOR CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE OFFERED SECURITIES, SEE "RISK FACTORS," COMMENCING ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE DATE OF THIS PROSPECTUS IS MARCH , 1998. 4 AVAILABLE INFORMATION The Company is and, following the sale of any securities hereunder by the Operating Partnership, the Operating Partnership will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith the Company files, and the Operating Partnership may be required to file, reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed can be inspected and copied at the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, and at the following regional offices of the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. In addition, the Common Stock of the Company is listed on the New York Stock Exchange and similar information concerning the Company can be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The Company and/or the Operating Partnership have filed with the Commission registration statements on Form S-3 (the "Registration Statement"), of which this Prospectus is a part, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Offered Securities. This Prospectus does not contain all of the information set forth in the Registration Statements, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other documents are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding the Company, the Operating Partnership and the Offered Securities, reference is hereby made to the Registration Statement and such exhibits and schedules which may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the fees prescribed by the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The documents listed below have been filed by the Company (File No. 1-13106) under the Exchange Act with the Commission and are incorporated herein by reference: a. The Company's Annual Report on Form 10-K for the year ended December 31, 1996 (including relevant portions of the Company's definitive proxy statement for the 1997 annual meeting of stockholders specifically incorporated by reference in Part III of such Form 10-K); b. The Company's Quarterly Reports on Form 10-Q for the Quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; c. The Company's Current Reports on Form 8-K dated April 3, 1997; June 26, 1997; August 29, 1997; September 9, 1997; December 1, 1997, December 5, 1997 and March 3, 1998; d. The description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A. Each document filed by the Company and the Operating Partnership pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of all Offered Securities to which this Prospectus relates shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein (or in the applicable Prospectus Supplement) or in any other subsequently filed 2 5 document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such information, unless such exhibits are specifically incorporated by reference in such information) will be provided without charge to each person, including any beneficial owner, to whom this Prospectus is delivered upon written or oral request. Requests should be directed to the Investor Service Manager of the Company at 777 California Avenue, Palo Alto, California 94304, telephone number: (650) 494-3700. 3 6 As used herein, the terms "Company" and "Essex" mean Essex Property Trust, Inc., a Maryland real estate investment trust, those entities controlled by Essex Property Trust, Inc. and Predecessors of Essex Property Trust, Inc., unless the context indicates otherwise and the term "Operating Partnership" refers to Essex Portfolio, L.P., a California limited partnership, formed on March 15, 1994, as to which the Company owns an approximate 89.9% general partnership interest, as of September 30, 1997 (except with regard to the section entitled "Risk Factors," below, wherein all references to the "Company" shall be deemed to be references to the Company and the Operating Partnership, unless the context indicates otherwise). This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY AND THE OPERATING PARTNERSHIP The Company is a self-administered and self-managed equity real estate investment trust ("REIT") that was formed in 1994 to continue and expand the real estate investment and management operations conducted by Essex Property Corporation since 1971. The Company's multi-family residential portfolio consists of 54 properties comprising 10,700 apartment units, 19 of which are located in Southern California, 13 of which are located in the San Francisco Bay Area, 18 of which are located in the Seattle metropolitan area, and four of which are located in the Portland, Oregon, metropolitan area. The Company also owns three retail properties, which are located in the Portland, Oregon, metropolitan area and in Eugene, Oregon, and which the Company presently considers to be held for sale, and two office buildings located in Palo Alto, California, one of which houses the Company's headquarters (collectively, the "Commercial Properties," and together with the Company's 54 multi-family residential properties, the "Properties"). The Company conducts substantially all of its activities through the Operating Partnership in which the Company owns an approximate 89.9% general partnership interest. An approximate 10.1% limited partnership interest in the Operating Partnership is owned by senior members of the Company's management and certain outside investors. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the Properties. The description of the Company's business and properties, that is set forth herein, and in documents incorporated by reference herein, would apply, without material differences, to the Operating Partnership's business and properties. The Company's Common Stock is listed on the New York Stock Exchange under the Symbol "ESS." The Company is a Maryland corporation. The Company's and the Operating Partnership's executive offices are located at 777 California Avenue, Palo Alto, California 94304, and its telephone number is (650) 494-3700. USE OF PROCEEDS The Company intends to invest the net proceeds of any sale of Offered Securities in the Operating Partnership. Unless otherwise indicated in the applicable Prospectus Supplement, the Operating Partnership intends to use such net proceeds for general corporate purposes including, without limitation, the acquisition and development of multi-family residential properties and the repayment of debt. Net proceeds from the sale of the Offered Securities initially may be temporarily invested in short-term securities. RATIO OF EARNINGS TO FIXED CHARGES The Company's ratio of earnings to combined fixed charges and preferred stock dividends for the nine months ended September 30, 1997 and the fiscal year ended December 31, 1996 was approximately 2.95x and 2.11x, respectively. Prior to 1996, the Company did not have any outstanding preferred stock. The Company's and the Operating Partnership's ratio of earnings to fixed charges for the nine months ended September 30, 1997, for the fiscal years ended December 31, 1996, December 31, 1995, and the period of June 13, 1994 through December 31, 1994, was approximately 3.47x, 2.22x, 2.14x and 1.87x, respectively. The ratio of earnings to fixed charges of the predecessor to the Company and the Operating Partnership for the period of January 1, 1994 through June 12, 1994 and for the fiscal years ended December 31, 1993 and December 31, 1992 was approximately 1.06x, 1.03x and 0.83x, respectively. For purposes of computing these ratios, earnings have been calculated by adding fixed charges (excluding capitalized interest) to income (loss) from operations, before gains on sales and extraordinary items. Fixed charges consist of interest costs, whether expensed or capitalized, and amortization of debt discounts and deferred financing fees, whether expensed or capitalized. 4 7 RISK FACTORS Prospective investors should carefully consider the following information, which the Company currently believes represents all material risks associated with the Offered Securities, in conjunction with the other information contained in this Prospectus and the applicable Prospectus Supplement before purchasing Offered Securities. For purposes of this section only, all references to the "Company" shall be deemed to be references to the Company and the Operating Partnership, unless the context indicates otherwise. DEBT FINANCING; RISK OF UNCERTAINTY OF ABILITY TO REFINANCE BALLOON PAYMENTS AND RISK OF RISING INTEREST PAYMENTS The Company is subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, that the Company will not be able to refinance existing indebtedness on the encumbered Properties or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. As of September 30, 1997, the Company had outstanding approximately $187.9 million of indebtedness (including $42.8 million of variable rate mortgage indebtedness) secured by certain of the Properties. The Company is not expected to have sufficient cash flows from operations to make all of the balloon payments of principal when due under its mortgage indebtedness and lines of credit, which were, as of September 30, 1997, an aggregate of approximately $187.9 million. As of September 30, 1997, such mortgage indebtedness and lines of credit had the following scheduled maturity dates: 1997 - $0.8 million; 1998 - $3.7 million; 1999 - $4.0 million; 2000 - $4.3 million; 2001 and thereafter - $175.1 million. As a result, the Company will be subject to risks that it will not be able to refinance such mortgage indebtedness and the mortgaged properties could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value to the Company, or, that the indebtedness, if any, refinanced will have higher interest rates. An inability to make such payments when due could cause the mortgage lender to foreclose on the Properties securing the mortgage, which would have a material adverse effect on the Company. As of September 30, 1997, the Company had approximately $42.8 million of variable rate mortgage indebtedness, which bears interest at a floating rate tied to the rate of short-term tax exempt securities. Although approximately $29.2 million of such variable rate indebtedness is subject to the interest rate protection agreement which may reduce the risks associated with fluctuations in interest rates, an increase in interest rates will have an adverse effect on the Company's net income and results of operations. ACQUISITION ACTIVITIES; RISKS THAT ACQUISITIONS WILL FAIL TO MEET EXPECTATIONS The Company intends to actively continue to acquire multifamily residential properties. Acquisitions of such properties entail risks that investments will fail to perform in accordance with expectations. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. The Company anticipates that future acquisitions will be financed, in whole or in part, under existing credit facilities or loan commitments or other lines of credit or other forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could have a diluting effect on the interest of existing shareholders of the Company. If new acquisitions are financed under existing lines of credit, there is a risk that, unless substitute financing is obtained, further availability under the lines of credit for new development may not be available or may be available only on disadvantageous terms. In addition, there is a risk that upon the maturity of such existing lines of credit, the lines of credit will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness. Further, acquisitions of properties are subject to the general risks associated with real estate investments. See "-- Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." 5 8 DEVELOPMENT ACTIVITIES; RISKS THAT DEVELOPMENTS WILL BE DELAYED OR NOT COMPLETED The Company pursues multifamily residential property development projects. Such projects generally require various governmental and other approvals, the receipt of which cannot be assured. The Company's development activities will entail certain risks, including the expenditure of funds on and devotion of management's time to projects which may not come to fruition; the risk that construction costs of a project may exceed original estimates, possibly making the project not economical; the risk that a development project may experience delays due to, among other things, adverse weather conditions; the risk that occupancy rates and rents at a completed project will be less than anticipated; and the risk that expenses at a completed development will be higher than anticipated. These risks may result in a development project causing a reduction in the funds available for distribution. Further, development of properties is subject to the general risks associated with real estate investments. See "-- Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." THE GEOGRAPHIC CONCENTRATION OF THE PROPERTIES MAY ADVERSELY IMPACT THE COMPANY'S INCOME DUE TO FLUCTUATIONS IN LOCAL MARKETS Approximately 43%, 25%, 26%, and 6% of the Company's rental revenues for the three months ended September 30, 1997, were derived from Properties located in the San Francisco Bay Area, the Seattle metropolitan area, Southern California and the Portland metropolitan area, respectively. As a result of this geographic concentration, if a local property market performs poorly, the income from the Properties in that market could decrease and, in turn, the ability of the Company to make expected dividends to stockholders could be adversely affected. The performance of the economy in each of these areas affects occupancy, market rental rates and expenses and, consequently, has an impact on the income from the Properties and their underlying values. The financial results of major local employers may have an impact on the cash flow and value of certain of the properties. COMPETITION IN THE MULTIFAMILY RESIDENTIAL MARKET MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS AND THE DEMAND FOR THE COMPANY'S PROPERTIES There are numerous housing alternatives that compete with the multifamily Properties in attracting residents. The multifamily Properties compete directly with other multifamily rental apartments and single family homes that are available for rent in the markets in which the Properties are located. The Properties also compete for residents with new and existing homes and condominiums. In addition, other competitors for development and acquisitions of properties may have greater resources than the Company. If such competition results in a reduced demand for the Company's Properties or if the Company's competitors develop and/or acquire competing properties on a more cost-effective basis than the Company, the Company may experience a drop in rental rates, which may have a material adverse effect on the Company's financial position and results of operations. The Company faces competition from other REITs, businesses and other entities in the acquisition, development, operation of its properties. Some of the Company's competitors are larger and have greater financial resources than the Company. This competition may result in a higher cost for properties the Company wishes to acquire and/or develop. DEBT FINANCING ON PROPERTIES MAY RESULT IN INSUFFICIENT CASH FLOW Where possible, the Company intends to continue to use leverage to increase the rate of return on its investments and to allow the Company to make more investments than it otherwise could. Such use of leverage presents an additional element of risk in the event that the cash flow from the Properties is insufficient to meet both debt payment obligations and the distribution requirements of the REIT provisions of the Code. To the extent the Company or Operating Partnership determines to obtain additional debt financing in the future, it may do so through mortgages on some or all of its properties. These mortgages may be on recourse, non-recourse, or cross-collateralized bases. As of September 30, 1997, the Company had mortgages on 15 Properties which were secured by deeds of trust relating solely to those Properties, one mortgage which 6 9 was cross-collateralized by 8 Properties and one mortgage which was cross-collateralized by 3 Properties. The Company also held a line of credit that was secured by 6 Properties. Holders of indebtedness which is so secured will have a claim against these Properties and to the extent indebtedness is cross-collateralized, lenders may seek to foreclose upon properties which are not the primary collateral for their loan, which may, in turn, result in acceleration of other indebtedness secured by Properties. Foreclosure of Properties would result in a loss of income and asset value to the Operating Partnership and the Company. INCREASE IN DIVIDEND REQUIREMENTS AS A RESULT OF THE CONVERTIBLE PREFERRED STOCK MAY LEAD TO A POSSIBLE INABILITY TO SUSTAIN DIVIDENDS On June 20, 1996, the Company entered into a stock purchase agreement (the "Stock Purchase Agreement") to sell up to $40.0 million of the Company's 8.75% convertible preferred stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-Investment Partnership I, L.P. (formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.) (collectively, "Tiger/Westbrook"). Pursuant to the Stock Purchase Agreement, Tiger/Westbrook has purchased 1,600,000 shares of Convertible Preferred Stock for an aggregate purchase price of $40.0 million. For a summary of the terms and conditions of the Convertible Preferred Stock see "Description of Preferred Stock -- Convertible Preferred Stock." The cash dividends payable on the Convertible Preferred Stock substantially increased the cash required to continue to pay cash dividends on the Common Stock at current levels. The terms and conditions of the Convertible Preferred Stock provide that dividends may be paid on shares of Common Stock in any fiscal quarter only if full, cumulative cash dividends have been paid on all shares of Convertible Preferred Stock in the annual amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share price), or (ii) the dividends (subject to adjustment) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. See "Description of Preferred Stock -- Convertible Preferred Stock -- Dividends." Currently, 1,200,000 of the 1,600,000 outstanding shares of Convertible Preferred Stock are convertible at the option of the holder thereof into shares of Common Stock. As of March 20, 1998, the remaining 400,000 outstanding shares will become convertible. If, after June 20, 2001, the Company requires a mandatory conversion of all of the Convertible Preferred Stock, but under no other circumstances, each of the holders of the Convertible Preferred Stock may cause the Company to redeem any or all of such holder's shares of Convertible Preferred Stock. Such a redemption would decrease the amount of cash available to pay cash dividends on the Common Stock. At such time as there ceases to be in excess of 40,000 shares of Convertible Preferred Stock outstanding, the Company may at its option purchase all of the outstanding shares of Convertible Preferred Stock from the holders thereof. See "Description of Preferred Stock -- Convertible Preferred Stock -- Redemption at Holder's Option After Notice of Mandatory Conversion." If the Company is unable to pay dividends on the Common Stock, the Company's status as a REIT may be jeopardized. See "Federal Income Tax Considerations -- Requirements for Qualification -- Annual Distribution Requirements." Any Common Stock or other Offered Securities that may in the future be issued pursuant to this Prospectus, upon exercise of stock options or otherwise, will further substantially increase the costs required to continue to pay cash dividends at current levels. The Company's ability to pay dividends will depend in large part on the performance of its Properties and other properties that it may acquire in the future. The Company's ability to pay dividends on its stock is further limited by the Maryland General Corporation Law ("MGCL"). Under the MGCL, the Company may not make a distribution on its stock if, after giving effect to such distribution, either (i) the Company would not be able to pay its indebtedness as such indebtedness becomes due in the usual course of business or (ii) the Company's total assets would be less than its total liabilities (which, in accordance with the articles supplementary filed by the Company on July 1, 1996 (the "Articles Supplementary"), will not include amounts required to satisfy the preferential rights of the Convertible Preferred Stock upon dissolution of the Company). See "Description of Preferred 7 10 Stock -- Convertible Preferred Stock -- Liquidation Preference." If the Company is unable to pay dividends on its stock, the Company's status as a REIT may be jeopardized. See "Federal Income Tax Considerations -- Requirements for Qualification -- Annual Distribution Requirements." THE REGISTRATION RIGHTS AND PREEMPTIVE RIGHTS OF THE CONVERTIBLE PREFERRED STOCK MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF THE OFFERED SECURITIES Holders of the Convertible Preferred Stock have certain registration rights with respect to the Convertible Preferred Stock or shares of Common Stock issuable upon conversion of the Convertible Preferred Stock for sale to the public. See "Description of Preferred Stock -- Convertible Preferred Stock -- Registration Rights." Registration rights are also held by the senior members of the Company's management and certain outside investors (collectively, the "Founders") who own an approximate 10.1% limited partnership interest in the Operating Partnership, and have certain "demand" and "piggyback" registration rights with respect to shares of Common Stock issuable in connection with the exchange of their limited partnership interests in the Operating Partnership. The aggregate 10.1% limited partnership interest held by the Founders in the Operating Partnership is exchangeable for an aggregate of 1,873,473 shares of Common Stock. In addition, the Operating Partnership has invested in certain real estate partnerships (other than the Operating Partnership). Certain partners in such limited partnerships have the right to have their limited partnership interests in such partnerships redeemed for cash or, at the Company's option, for 518,386 shares of the Company's Common Stock. The Other Partners have certain "demand" and "piggyback" registration rights with respect to the shares of Common Stock that might possibly be issued in exchange for such limited partnership interests. The registration rights of the holders of the Convertible Preferred Stock, the Founders, and the Other Partners could have a material adverse effect on the market price for the Offered Securities. In addition, the Stock Purchase Agreement provides Tiger/Westbrook with preemptive rights to purchase a pro rata share of the Company's equity offerings. The preemptive rights could have a material adverse effect on the market price for the Offered Securities. See "Description of Preferred Stock -- Convertible Preferred Stock -- Right of Tiger/Westbrook to Participate in Offerings." CONVERSION OF THE CONVERTIBLE PREFERRED STOCK MAY LEAD TO SUBSTANTIAL DILUTION TO THE HOLDERS OF COMMON STOCK Subject to certain quantity limitations, the shares of Convertible Preferred Stock are convertible, at the option of the holders, into such number of shares of Common Stock as is determined by dividing $25.00 (plus accrued and unpaid dividends) by the conversion price then in effect. As of September 30, 1997, the then current conversion price was $21.875 per share and, therefore, each share of Convertible Preferred Stock was convertible into approximately 1.14 shares of Common Stock. In order to provide certain antidilution protection to the holders of the Convertible Preferred Stock, the conversion price is subject to reduction in certain circumstances, including in the event that the Company issues Common Stock at a price below the conversion price. Such reduction in the conversion price could increase the dilution to holders of Common Stock that would arise if and when the Convertible Preferred Stock is converted into Common Stock. Holders of Common Stock could experience substantial dilution in their proportionate ownership, voting power and earnings per share in the event that the Company issues a substantial number of additional shares of Common Stock and/or Preferred Stock, either upon conversion of the Convertible Preferred Stock, in connection with future acquisitions or otherwise, which issuances could adversely affect the market price of the Offered Securities. See "Description of Preferred Stock -- Convertible Preferred Stock -- Conversion Rights." CONCENTRATION OF VOTING POWER AND CONSENT REQUIREMENTS OF THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK MAY BE DETRIMENTAL TO HOLDERS OF OFFERED SECURITIES The holders of the Convertible Preferred Stock have significant direct and indirect influence over the Company's affairs. The approval of holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting as a separate class, is required to, among other things, make certain revisions to the corporate structure of the Company, including such revisions that would affect the rights, priority and preferences of the Convertible Preferred Stock, and for the Company or the Operating Partnership to merge or consolidate with 8 11 another entity or for the Company to sell all or substantially all of its assets. In addition, the approval of holders of a majority of the outstanding shares of Convertible Preferred Stock, voting as a separate class, is required for the Company to, among other things, make substantial sales of its assets, change the geographic concentration of its portfolio of Properties, or undergo a change in control affecting the Company or the Operating Partnership. See "Description of Preferred Stock -- Convertible Preferred Stock -- Voting Rights." As of the date of this Prospectus, Tiger/Westbrook was the sole holder of all outstanding shares of the Convertible Preferred Stock. The Company's Charter provides that the holders of the Convertible Preferred Stock voting as a class, have the right to elect one member of the Board of Directors. Gregory J. Hartman has been elected to the Board of Directors by the holders of Convertible Preferred Stock. Mr. Hartman is a managing principal of Westbrook Real Estate Partners, L.L.C., the managing member of the sole general partner of Tiger/Westbrook. Under certain circumstances, the holders of the Convertible Preferred Stock will be entitled to elect up to four additional directors. Such circumstances include the Company's failure to pay quarterly dividends on the Convertible Preferred Stock for four quarters and the Company's breach of certain provisions of the Charter and the Company's bylaws (the "Bylaws") affecting the holders of the Convertible Preferred Stock. See "Description of Preferred Stock -- Convertible Preferred Stock -- Voting Rights." Moreover, the Company may not authorize or create any class or series of stock that ranks equal or senior to the Convertible Preferred Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting separately as a single class. There can be no assurance that the interests of Tiger/Westbrook, and indirectly the director or directors elected by the holders of the Convertible Preferred Stock, would not differ from or conflict with the interests of the holders of Common Stock or other Offered Securities. In addition, upon conversion of the Convertible Preferred Stock into shares of Common Stock, the holders of the Convertible Preferred Stock would have considerable influence with respect to the election of directors and the approval or disapproval of significant corporate actions, since they would hold approximately 9.0% of all outstanding shares of Common Stock (assuming exchange of all partnership interests in the Operating Partnership into shares of Common Stock), assuming that such conversion took place on the date of this Prospectus. In view of the substantial influence of the holders of the Convertible Preferred Stock over the Company's affairs, it should be noted that Tiger/Westbrook's interests do not necessarily coincide with those of the holders of the Common Stock and therefore its actions with respect to the Company will not necessarily be in the best interests of the holders of Common Stock or other Offered Securities. In addition, George M. Marcus, the Chairman of the Board of Directors of the Company, beneficially owns 1,904,601 shares of Common Stock (including shares issuable upon exchange of partnership interests in the Operating Partnership) representing approximately 10.3% of the outstanding shares of Common Stock (including shares issuable upon exchange of partnership interests in the Operating Partnership). While, as of the date of this Prospectus, Mr. Marcus does not have majority control of the Company, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. EXEMPTION OF TIGER/WESTBROOK FROM THE MARYLAND BUSINESS COMBINATION LAW MAY ALLOW CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND TIGER/WESTBROOK TO PROCEED WITHOUT COMPLIANCE WITH SUCH LAW Under the MGCL, certain "business combinations" (including certain issuances of equity securities) between a Maryland corporation and any individual or entity which is the beneficial owner of 10% or more of a corporation's outstanding stock which is entitled to vote generally in the election of directors (the "Interested Stockholder") or an affiliate of an Interested Stockholder are prohibited for five years after the date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combinations between the Company and the interested stockholder must be approved by a super-majority vote of the stockholders, unless, among other conditions, the Company's Common Stockholders receive a Minimum Price 9 12 (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its Common Stock. However, as permitted by the statute, the Board of Directors irrevocably has elected to exempt any business combination by the Company with Tiger/ Westbrook and its affiliates from the "business combination" provision of the MGCL. Consequently, the five-year prohibition and the super-majority vote requirement described above will not apply to any business combination between Tiger/Westbrook (or affiliates thereof) and the Company. As a result, the Company may in the future enter into business combinations with Tiger/Westbrook (or affiliates thereof), without compliance by the Company with the super-majority vote requirements and other provisions of the statute. ANTI-TAKEOVER PROVISIONS CONTAINED IN THE CHARTER, THE BYLAWS, THE CONVERTIBLE PREFERRED STOCK AND CERTAIN PROVISIONS OF MARYLAND LAW COULD DELAY, DEFER OR PREVENT A CHANGE IN CONTROL OF THE COMPANY The Company's Charter authorizes the Board of Directors to cause the Company to issue additional shares of Common Stock or preferred stock and to set the preferences, rights and other terms of such preferred stock without the approval of the holders of the Common Stock, provided that the Company must obtain the approval of the holders of two-thirds of the outstanding shares of Convertible Preferred Stock in order to authorize, create or issue any class or series of stock that ranks equal or senior to the Convertible Preferred Stock. See "Description of Preferred Stock -- Convertible Preferred Stock -- Voting Rights." Although the Board of Directors has no intention to issue any additional shares of Convertible Preferred Stock or other preferred stock at the present time, subject to the consent of the requisite holders of Convertible Preferred Stock, it may establish one or more series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the Company's stock or otherwise be in the best interests of the holders of Offered Securities, or that could have dividend, voting or other rights that could adversely affect the interest of holders of Offered Securities. The Charter of the Company also contains other provisions that may delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interests of the stockholders, and the Bylaws may be amended by the Board of Directors (subject to the consent of the holders of the Convertible Preferred Stock in certain circumstances) to include provisions that would have a similar effect, although the Board of Directors presently has no such intention. The Charter provides that the Company must obtain the approval of the holders of the Convertible Preferred Stock holding two-thirds of the outstanding shares of Convertible Preferred Stock before the Company or the Operating Partnership may merge or consolidate with any other entity or sell all or substantially all of the Company's or the Operating Partnership's assets. Also, the terms of the Convertible Preferred Stock require that the Company must obtain the approval of the holders of the Convertible Preferred Stock holding more than 50% of the outstanding shares of Convertible Preferred Stock before it may undergo a change in control (as defined in the Charter). Additionally, the Charter contains ownership provisions limiting the transferability and ownership of shares of the capital stock of the Company, which may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. For example, subject to receiving an exemption from the Board of Directors (see "Description of Common Stock -- Restrictions on Transfer"), these ownership provisions preclude any potential acquiror from purchasing more than 6% percent in value of the Company's stock (other than qualified pension trusts which can acquire 9.9%), thereby discouraging any tender offer which may be attractive to the holders of the Common Stock and limiting the opportunity for stockholders to receive a premium for their Common Stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 6% of the Company's stock, or to otherwise effect a change in control of the Company. See "Description of Common Stock -- Restrictions on Transfer." In addition, the MGCL restricts the voting rights of shares deemed to be "control shares." Under the MGCL, "control shares" are those which, when aggregated with any other shares held by the acquiror, entitle the acquiror to exercise voting power within specified ranges. Although the Bylaws provide that the control share provisions of the MGCL shall not apply to any acquisition by any person of shares of stock of the Company, the provisions of the Bylaws may be amended or eliminated by the Board of Directors at any time in the future, provided that it obtains the approval of the holders of two-thirds of the outstanding shares of the 10 13 Convertible Preferred Stock. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the MGCL not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the MGCL could delay, defer or prevent a transaction or change in control of the Company that might involve a premium price for the Company's stock or otherwise be in the best interests of the stockholders or that could otherwise adversely affect the interests of the stockholders. BOND COMPLIANCE REQUIREMENTS MAY LIMIT THE COMPANY'S INCOME FROM CERTAIN PROPERTIES As of September 30, 1997 the Company had approximately $69.3 million of tax-exempt financing relating to its Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks Apartments. The tax-exempt financing subjects these Properties to certain deed restrictions and restrictive covenants. The Company expects to engage in tax-exempt financings in the future. In addition, the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder impose various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on qualified bond obligations, including requirements that at least 20% of apartment units be made available to residents with gross incomes that do not exceed 50% of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certain state and local authorities may impose additional rental restrictions. The bond compliance requirements and the requirements of any future tax-exempt bond financing utilized by the Company may have the effect of limiting the Company's income from the tax-exempt financed properties if the Company is required to lower its rental rates to attract residents who satisfy the median income test. If the required number of apartment homes are not reserved for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations of the Company under the bond documents may be accelerated and other contractual remedies against the Company may be available. ADVERSE EFFECT TO PROPERTY INCOME AND VALUE DUE TO GENERAL REAL ESTATE INVESTMENT RISKS Real property investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the Properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, the Company's cash flow and ability to make distributions to its stockholders will be adversely affected. The performance of the economy in each of the areas in which the Properties are located affects occupancy, market rental rates and expenses and, consequently, has an impact on the income from the Properties and their underlying values. The financial results of major local employers may have an impact on the cash flow and value of certain of the Properties. Income from the Properties may be further adversely affected by, among other things, the general economic climate, local economic conditions in which the Properties are located, such as oversupply of space or a reduction in demand for rental space, the attractiveness of the Properties to tenants, competition from other available space, the ability of the Company to provide for adequate maintenance and insurance and increased operating expenses. There is also the risk that as leases on the Properties expire, tenants will enter into new leases on terms that are less favorable to the Company. Income and real estate values may also be adversely affected by such factors as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. In addition, real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. JOINT VENTURES AND JOINT OWNERSHIP OF PROPERTIES COULD LIMIT THE COMPANY'S ABILITY TO CONTROL SUCH PROPERTIES Instead of purchasing properties directly, the Company may invest as a co-venturer. Joint venturers often have equal control over the operation of the joint venture assets. Therefore, such investments may, under 11 14 certain circumstances, involve risks such as the possibility that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the business interests or goals of the Company, or be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives. Consequently, actions by a co-venturer might result in subjecting property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient control of any joint venture to permit the Company's objectives to be achieved, it may be unable to take action without the approval of its joint venture partners or its joint venture partners could take actions binding on the joint venture without the Company's consent. Additionally, should a joint venture partner become bankrupt, the Company could become liable for such partner's share of joint venture liabilities. INVESTMENTS IN MORTGAGES The Company may invest in mortgages, in part as a strategy for ultimately acquiring the underlying property. In general, investments in mortgages include the risk that the value of mortgaged property may be less than the amounts owed, the risk that interest rates payable on the mortgages may be lower than the Company's cost of funds, and, in the case of junior mortgages, the risk that foreclosure of a senior mortgage would eliminate the junior mortgage. If any of the above were to occur, cash flows from operations and the Company's ability to make expected dividends to stockholders could be adversely affected. POSSIBLE ENVIRONMENTAL LIABILITIES Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow money using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injuries associated with asbestos-containing materials. In connection with the ownership (direct or indirect), operation, financing, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries to persons and property. GENERAL UNINSURED LOSSES The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. Further, certain of the Properties are located in areas that are subject to earthquake activity. Although the Company has obtained certain limited earthquake insurance policies, should a Property sustain damage as a result of an earthquake, the Company may sustain losses due to insurance deductibles, co- payments on insured losses or uninsured losses. RISK THAT INTEREST RATE HEDGING ARRANGEMENTS CANNOT BE REFINANCED OR REPLACED The Company has, from time to time, entered into agreements to reduce the risks associated with increases in interest rates, and the Company may continue to enter into such agreements. Although these agreements may provide the Company with some protection against rising interest rates, these agreements also may reduce the benefits to the Company when interest rates decline. There can be no assurance that any such hedging arrangements can be refinanced or that the Company will be able to enter into other hedging arrangements to replace existing hedging arrangements should interest rates decline. Furthermore, interest 12 15 rate movements during the term of interest rate hedging arrangements may result in a gain or loss on the Company's investment in the hedging arrangement. In addition, if a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, the Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may result in credit risks to the Company. In order to minimize counterparty credit risk, the Company's policy is to enter into hedging arrangements only with large financial institutions that maintain an investment grade credit rating. CHANGES IN REAL ESTATE TAX AND OTHER LAWS Costs resulting from changes in real estate tax laws generally are not directly passed through to residential property tenants and increases in income, service or other taxes, generally are also not passed through to tenants under leases and may adversely affect the Company's funds from operations and its ability to make distributions to stockholders. Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect the Company's funds from operations and its ability to make distributions to stockholders. CHANGES IN FINANCING POLICY; NO LIMITATION ON DEBT The Company has adopted a policy of maintaining a debt-to-total-market-capitalization ratio of less than 50%. The Company calculates debt-to-total-market-capitalization based on the ratio of the total property indebtedness to the sum of (i) the aggregate market value of the outstanding shares of Common Stock (based on the greater of current market price or the gross proceeds per share from public offerings of its shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of Common Stock and the conversion of all shares of Convertible Preferred Stock into shares of Common Stock and (ii) the total property indebtedness. Based on this calculation, the Company's debt-to-total-market-capitalization ratio was approximately 22% as of September 30, 1997. The organizational documents of the Company and the Operating Partnership do not limit the amount or percentage of indebtedness that they may incur. Accordingly, the Board of Directors of the Company could change the current policies of the Company and the Operating Partnership regarding indebtedness. If these policies were changed, the Company and the Operating Partnership could become more highly leveraged, resulting in an increased risk of default on the obligations of the Company and the Operating Partnership and in an increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company. Such increased leverage could exceed the underlying value of the Properties. RISK OF A HIGHLY LEVERAGED TRANSACTION OR A CHANGE IN CONTROL IMPACTING THE COMPANY'S ABILITY TO SERVICE INDEBTEDNESS, INCLUDING THE DEBT SECURITIES The First Amended and Restated Agreement of Limited Partnership of the Operating Partnership provides that, a vote of at least a majority of the limited partners is required for the Operating Partnership to sell all or substantially all of its assets. The Operating Partnership currently does not contemplate any such sale of its assets. However, the sale of all or substantially all of the Operating Partnership's assets would have a material adverse effect on its ability to service its debt obligations including the Debt Securities. Furthermore, the Company may at any time, enter into a highly leveraged transaction or undergo a change of control (through acquisition of securities, the election of directors or otherwise). As the Company is the general partner of the Operating Partnership, such a transaction could have an adverse affect on the Operating Partnership's ability to service its debt obligations including the Debt Securities. In addition, the Indenture under which Debt Securities will be issued does not contain any provision that would afford holders of Debt Securities protection in the event of a highly leveraged transaction, change in control (through the acquisition of securities, the election of directors or otherwise) or sale of all or substantially all of its assets involving the Operating Partnership or the Company. Accordingly, except as may 13 16 be set forth in any Prospectus Supplement, the Debt Securities will not contain any protection in the event of such a transaction. A highly leveraged transaction, a change in control or sale of all or substantially all of the assets of the Operating Partnership or the Company could adversely affect the Operating Partnership's ability to meet its obligations under the Debt Securities. FAILURE TO QUALIFY AS A REIT The Company has operated so as to qualify as a REIT under the Code, commencing with its taxable year ended December 31, 1994. Although the Company believes that it has operated in a manner which satisfies the REIT qualification requirements, no assurance can be given that the Company will continue to do so. A REIT is generally not taxed on its net income distributed to its stockholders so long as it annually distributes to its stockholders at least 95% of its taxable income. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company's control. See "Federal Income Tax Considerations." If the Company fails to qualify as a REIT in any taxable year, the Company would generally be subject to federal income tax (including any applicable alternative minimum tax) at corporate rates on its taxable income for such year. Moreover, unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year of disqualification as a REIT. This treatment would reduce the net earnings of the Company available for investment or distribution to stockholders because of the additional tax liability of the Company for the years involved. In addition, distributions would no longer be required to be made. See "Federal Income Tax Considerations." YEAR 2000 COMPLIANCE The Company utilizes a number of computer software programs and operating systems across its entire organization, including applications used in financial business systems and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification or replacement of such applications will be necessary. In addition, the ability of third parties with whom the Company transacts business ("Third Parties") to adequately address their "Year 2000" issues is outside of the Company's control. The Company is currently evaluating appropriate courses of action regarding Year 2000 compliance. The Company has contacted its current software vendor and has determined that an upgraded package will be available for implementation. Any costs related to Year 2000 compliance will be expensed as incurred. Total costs are not expected to have a material impact on operations. No assurance can be given, however, that all of the Company's or Third Parties' systems will be Year 2000 compliant or that compliance costs or the impact of the Company's or Third Parties' failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's future liquidity or results of operations. DESCRIPTION OF COMMON STOCK STOCK -- GENERAL As of December 31, 1997, the total number of shares of all classes of capital stock that the Company had authority to issue was 1,000,000,000 shares, consisting of 668,400,000 shares of Common Stock, par value $0.0001 per share, 1,600,000 shares of Convertible Preferred Stock, par value $0.0001 per share, and 330,000,000 shares of excess stock (the "Excess Stock"). As of December 31, 1997, there were 16,611,811 shares of Common Stock issued and outstanding. Up to 875,400 shares of Common Stock have been reserved for issuance under the Essex Property Trust, Inc. 1994 Employee Stock Incentive Plan, up to 70,000 shares of Common Stock have been reserved for issuance under the Essex Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan and up to 406,500 14 17 shares of Common have been reserved for issuance under the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. In addition, 220,000 shares of Common Stock have been reserved for issuance upon the exercise of an option granted to The Marcus & Millichap Company (the "M&M Stock Option") and an aggregate of 1,873,473 shares of Common Stock may be issued upon the conversion of limited partnership interests in the Operating Partnership. As of December 31, 1997, there were 1,600,000 shares of Convertible Preferred Stock issued and outstanding. Currently, 1,200,000 of such shares are convertible at the option of the holder thereof into shares of Common Stock. As of March 20, 1998, the remaining 400,000 outstanding shares will become convertible. The 1,600,000 shares of Convertible Preferred Stock are convertible, with adjustments in certain situations, into 1,828,572 shares of Common Stock, and the Company has reserved such shares of Common Stock for issuance. COMMON STOCK The following description of the Common Stock sets forth certain general terms and provisions of the Common Stock to which any Prospectus Supplement may relate, including a Prospectus Supplement providing that Common Stock will be issuable upon conversion of Preferred Stock or Depositary Shares or upon the exercise of Warrants issued by the Company. This description is in all respects subject to and qualified in its entirety by reference to the applicable provisions of the Company's Charter and the its Bylaws. The Common Stock is listed on the New York Stock Exchange under the symbol "ESS." Boston EquiServe is the Company's transfer agent. The holders of the outstanding Common Stock are entitled to one vote per share on all matters voted on by stockholders, including elections of directors. The Charter provides that shares of Common Stock do not have cumulative voting rights. The shares of Common Stock offered hereby will, when issued, be fully paid and nonassessable and will not be subject to preemptive or similar rights. Subject to the preferential rights of any outstanding series of capital stock, the holders of Common Stock are entitled to such distributions as may be declared from time to time by the Board of Directors from funds available for distribution to such holders. The Company currently pays regular quarterly dividends to holders of Common Stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the assets remaining after satisfaction of all liabilities and payment of liquidation preferences and accrued dividends, if any, on any series of capital stock that has a liquidation preference. The rights of holders of Common Stock are subject to the rights and preferences established by the Board of Directors for any capital stock that may subsequently be issued by the Company. Subject to the terms of the Convertible Preferred Stock and the Series B Preferred Stock, the Board of Directors is authorized to reclassify any unissued portion of the authorized shares of capital stock to provide for the issuance of shares in other classes or series, including other classes or series of Common Stock, to establish the number of shares in each class or series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of such class or series. Any Common Stock offered hereby will rank junior to the Convertible Preferred Stock and the Series B Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, unless the holders of the Convertible Preferred Stock and the Series B Preferred Stock otherwise consent. The rights, preferences, privileges and restrictions of such class or series of Common Stock will be fixed by the articles supplementary relating to such class or series. A Prospectus Supplement will specify the terms of such class or series. RESTRICTIONS ON TRANSFER In order for the Company to qualify as a REIT under the Code, among other requirements (see Federal Income Tax Considerations -- Requirements for Qualification), not more than 50% of the value of the outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the 15 18 Code) during the last half of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year. In addition, shares of the Company's stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year) or during a proportionate part of a shorter taxable year. Because the Board of Directors believes it is essential for the Company to continue to qualify as a REIT, the Charter, subject to certain exceptions, provides that no holder, other than George M. Marcus, may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 6.0% (the "Ownership Limit") of the value of the issued and outstanding shares of stock of the Company (the "Equity Stock"). However, the Ownership Limit Provisions provide that a qualified trust (as defined in the Charter) generally may own up to 9.9% of the value of the outstanding shares of Equity Stock. If George M. Marcus converts his limited partnership interests in the Operating Partnership into shares of Common Stock, he may exceed the Ownership Limit. The Ownership Limit provision therefore provides that George M. Marcus may acquire additional shares (up to 25% of the value of the outstanding shares of Equity Stock) pursuant to conversion rights or from other sources so long as the acquisition does not result in the five largest beneficial owners of Equity Stock holding more than 50% of the value of the outstanding shares of Equity Stock. The Board of Directors may exempt holders of Equity Stock from the Ownership Limit (the "Board Exemption") if evidence satisfactory to the Board of Directors is presented that such ownership will not jeopardize the Company's status as a REIT. As a condition to providing a Board Exemption, the Board of Directors must receive an opinion of counsel and representations and agreements from the applicant with respect to preserving the REIT status of the Company; provided, however, the Board of Directors may not grant a Board Exemption if the applicant would own above 25% of the value of the outstanding shares of Equity Stock unless, in addition to the foregoing, the Board of Directors receives a ruling from the Internal Revenue Service (the "IRS") to the effect that such an exemption will not jeopardize the Company's status as a REIT. The Board of Directors may also increase the Ownership Limit (to a maximum of 9.9%) and, in connection therewith, require opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to preserve the REIT status of the Company. For example, consistent with the preceding conditions and procedures, the Board of Directors effected a Board Exemption in connection with the issuance and sale of shares of the Company's Convertible Preferred Stock to Tiger/Westbrook. The Ownership Limit will not apply if the Board of Directors and the stockholders of the Company determine that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify, as a REIT. Any transfer of shares of stock that would (i) create a direct ownership of shares of Equity Stock in excess of the Ownership Limit (unless a Board Exemption is obtained), (ii) result in the shares of stock being owned by fewer than 100 persons or (iii) result in the Company's being "closely held" under Section 856(h) of the Code, shall be null and void, and the intended transferee will acquire no rights to the shares. The Charter also provides that shares involved in a transfer or change in capital structure that results in a person owning in excess of the Ownership Limit (unless a Board Exemption is obtained) or would cause the Company to become "closely held" within the meaning of Section 856(h) of the Code, will automatically be exchanged for shares of Excess Stock. All Excess Stock will be automatically transferred, without action by the stockholder, to a person who is unaffiliated with the Company, or the purported holder, as trustee (the "Trustee") for the exclusive benefit of one or more organizations described in Sections 170(b), 170(c) or 501(c)(3) of the Code as charitable beneficiary (the "Charitable Beneficiary") and designated by resolution of the Board of Directors. Such shares of Excess Stock held in trust are considered issued and outstanding shares of stock of the Company. In general, the Trustee of such shares is deemed to own the shares of Excess Stock held in trust for the exclusive benefit of the Charitable Beneficiary on the day prior to the date of the purported transfer or change in capital structure which resulted in the automatic transfer. The Ownership Limit provision will not be automatically removed even if the real estate investment trust provisions of the Code are changed so as to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased. Except as otherwise described above, any change in the Ownership Limit would require an amendment to the Charter. Such amendments to the Charter require the affirmative vote of holders owning a majority of the outstanding shares of Common Stock. In addition to 16 19 preserving the Company's status as a REIT, the Ownership Limit may have the effect of precluding an acquisition of control of the Company without the approval of the Board of Directors. All certificates representing shares of Equity Stock will bear a legend referring to the restrictions described above. In general, all persons who own, directly or by virtue of the attribution provisions of the Code, more than 5% of the value of the outstanding shares of Equity Stock (or generally 1% if there are fewer than 2,000 stockholders) must file written notice with the Company containing the information specified in the Charter by January 31 of each year. In addition, each stockholder shall upon demand be required to disclose to the Company in writing such information with respect to the direct, indirect and constructive ownership of shares of stock as the Board of Directors deems necessary to determine the effect, if any, of such ownership on the Company's status as a REIT and to ensure compliance with the Ownership Limit. See "Federal Income Tax Considerations -- Requirements for Qualification." The articles supplementary, if applicable, for the Offered Securities may also contain provisions that further restrict the ownership and transfer of the Offered Securities. The applicable Prospectus Supplement will specify any additional ownership limitation relating to the Offered Securities. DESCRIPTION OF PREFERRED STOCK GENERAL Subject to the terms of the Convertible Preferred Stock and the Series B Preferred Stock (see " -- Rank"), the Board of Directors is authorized to issue, from the authorized but unissued shares of stock of the Company, Preferred Stock in such classes or series as the Board of Directors may determine and to establish from time to time the number of shares of Preferred Stock to be included in any such class or series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the shares of any such class or series, and such other subjects or matters as may be fixed by resolution of the Board of Directors. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. Preferred Stock, upon issuance against full payment of the purchase price therefor, will be fully paid and nonassessable. The specific terms of a particular class or series of Preferred Stock will be described in the Prospectus Supplement relating to that class or series, including a Prospectus Supplement providing that Preferred Stock may be issuable upon the exercise of Warrants issued by the Company. The description of Preferred Stock set forth below and the description of the terms of a particular class or series of Preferred Stock set forth in a Prospectus Supplement do not purport to be complete and are qualified in their entirety by reference to the articles supplementary relating to that class or series. The preferences and other terms of the Preferred Stock of each class or series will be fixed by the articles supplementary relating to such class or series. A Prospectus Supplement, relating to each class or series, will specify the terms of the Preferred Stock as follows: (1) The title and stated value of such Preferred Stock; (2) The number of shares of such Preferred Stock offered, the liquidation preference per share and the offering price of such Preferred Stock; (3) The dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Stock; (4) Whether such Preferred Stock is cumulative or not and, if cumulative, the date from which dividends on such Preferred Stock shall accumulate; (5) The provision for a sinking fund, if any, for such Preferred Stock; (6) The provision for redemption, if applicable, of such Preferred Stock; 17 20 (7) Any listing of such Preferred Stock on any securities exchange; (8) The terms and conditions, if applicable, upon which such Preferred Stock will be converted into Common Stock of the Company, including the conversion price (or manner of calculation thereof); (9) A discussion of any material federal income tax considerations applicable to such Preferred Stock; (10) Any limitations on direct or beneficial ownership and restrictions on transfer, in each case as may be appropriate to preserve the status of the Company as a REIT; (11) The relative ranking and preferences of such Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (12) Any limitations on issuance of any class or series of preferred stock ranking senior to or on a parity with such class or series of Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (13) Any other specific terms, preferences, rights, limitations or restrictions of such Preferred Stock; and (14) Any voting rights of such Preferred Stock. RANK Any Preferred Stock offered hereby will rank, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, junior to the Convertible Preferred Stock and on a parity or junior to the Series B Preferred Stock, unless the holders of the Convertible Preferred Stock and/or the holders of the Series B Preferred Stock, as the case may be, otherwise consent. See "Description of Convertible Preferred Stock and Series B Preferred Stock." Subject to the foregoing, unless otherwise specified in the Prospectus Supplement, the Preferred Stock will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, rank (i) senior to all classes or series of Common Stock and Excess Stock of the Company, and to all equity securities ranking junior to such Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company; (ii) on a parity with all equity securities issued by the Company the terms of which specifically provide that such equity securities rank on a parity with the Preferred Stock with respect to dividends rights or rights upon liquidation, dissolution or winding up of the Company; and (iii) junior to all equity securities issued by the Company the terms of which specifically provide that such equity securities rank senior to the Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company. CONVERSION RIGHTS The terms and conditions, if any, upon which any shares of any class or series of Preferred Stock are convertible into Common Stock will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include the number of shares of Common Stock into which the shares of Preferred Stock are convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of such class or series of Preferred Stock or the Company, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such class or series of Preferred Stock. RESTRICTIONS ON TRANSFER In order for the Company to qualify as a REIT under the Code, among other requirements, not more than 50% in value of its outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code) during the last half of a taxable year, the stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. See "Federal Income Tax Considerations -- Requirements for Qualification." To enable the Company to continue to qualify as a REIT, the Charter restricts the acquisition of shares of common stock 18 21 and preferred stock. The Charter provides that, subject to certain exceptions specified in the Charter, no stockholder, other than George M. Marcus, may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 6.0% of the value of the outstanding Equity Stock. See "Description of Common Stock -- Restrictions on Transfer." The applicable Prospectus Supplement will also specify any additional ownership limitations relating to a series of Preferred Stock. DESCRIPTION OF CONVERTIBLE PREFERRED STOCK AND SERIES B PREFERRED STOCK CONVERTIBLE PREFERRED STOCK Pursuant to the Stock Purchase Agreement, Tiger/Westbrook purchased 1,600,000 shares of Convertible Preferred Stock for an aggregate purchase price of $40.0 million. Tiger/Westbrook is the sole stockholder of the Convertible Preferred Stock. On July 1, 1996, the Company filed articles supplementary setting forth the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption of the Convertible Preferred Stock. The following summarizes certain rights of the holders of the Convertible Preferred Stock. These rights arise under the Stock Purchase Agreement, as amended, and a registration rights agreement by and between the Company and Tiger/ Westbrook dated as of June 20, 1996 (the "Registration Rights Agreement"), as well as the related Articles Supplementary. No shares of the Convertible Preferred Stock shall be offered pursuant to this Prospectus or any Prospectus Supplement relating thereto. Ranking The Convertible Preferred Stock ranks senior to the Common Stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up of the Company. The Company may not authorize, create or increase the authorized amount of any class or series of equity securities that ranks equal with or senior to the Convertible Preferred Stock with respect to the payments of dividends or amounts upon liquidation, dissolution or winding up, without the consent of holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting together as a class. Dividends Tiger/Westbrook as the sole holder of shares of Convertible Preferred Stock is entitled to receive annual cumulative cash dividends, payable quarterly, in an amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share price) or (ii) the dividend (subject to adjustment) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. Unless and until all accrued dividends on the Convertible Preferred Stock through the last preceding dividend payment date have been paid, the Company may not (i) declare or pay any dividend, make any distribution (other than a distribution payable solely in shares of Common Stock), or set aside any funds or assets for payment or distribution with regard to any Common Stock (or any other stock junior to the Convertible Preferred Stock, together with Common Stock ("Junior Shares")), (ii) redeem or purchase (directly or through subsidiaries), or set aside any funds or other assets for the redemption or purchase of, any Junior Shares or (iii) authorize, take or cause to be taken any action as general partner of the Operating Partnership that will result in (A) the declaration or payment by the Operating Partnership of any distribution to its partners (other than distributions payable to the Company as general partner that will be used by the Company to fund the payment of dividends on the Convertible Preferred Stock (such distributions to the Company being referred to as "Authorized GP Distributions")), or set aside any funds or assets for payment of any distributions (other than Authorized GP Distributions) or (B) the redemption or purchase (directly or through subsidiaries), or the setting aside of any funds or other assets for the redemption or purchase of, any partnership interests in the Operating Partnership. 19 22 In determining whether a distribution (other than upon voluntary or involuntary liquidation) by dividend, redemption or other acquisition of shares or otherwise, is permitted under the MGCL, amounts that would be needed if the Company were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of holders of the Company's Convertible Preferred Stock whose preferential rights upon dissolution are superior to those receiving the distribution shall not be added to the Company's total liabilities. Liquidation Preference Upon the liquidation, dissolution or winding up of the Company, the holders of the Convertible Preferred Stock, will be entitled to receive out of the assets of the Company available for distribution to its stockholders, before any distribution is made to holders of the Common Stock, an amount per share (the "Liquidation Preference") equal to 105% of the sum of (i) $25.00 (the "Stated Value") plus (ii) all accrued dividends with respect to the Convertible Preferred Stock to the date of final distribution (whether or not declared). After payment of the full amount of the Liquidation Preference, the holders of Convertible Preferred Stock will not be entitled to any further distribution of assets of the Company. Until the holders of the Convertible Preferred Stock have been paid the Liquidation Preference in full, no payment will be made to any holder of Common Stock upon the liquidation, dissolution or winding up of the Company. If, upon such liquidation, dissolution or winding up, the assets of the Company, or the proceeds thereof, distributable among the holders of the shares of the Convertible Preferred Stock are insufficient to pay in full the Liquidation Preference, then such assets, or the proceeds thereof, will be distributed pro rata to the holders of shares of the Convertible Preferred Stock in accordance with their respective holdings thereof. Neither a consolidation or merger of the Company with another corporation, nor a sale or transfer of all or any part of the Company's assets for cash or securities, will be considered a liquidation, dissolution or winding up of the Company. Voting Rights Except as indicated below with respect to the election of directors of the Company, certain amendments to the Charter and certain other specified matters, the holders of shares of Convertible Preferred Stock have no voting rights. On those matters for which the holders of the Convertible Preferred Stock have the right to vote, each share of the Convertible Preferred Stock is entitled to one vote. Election of Directors The holders of the Convertible Preferred Stock as a class ordinarily have the right to elect one director. Under the current Charter, the holders of the Convertible Preferred Stock, voting as a separate class, have the right, to elect up to four additional directors, as follows: (i) if the Company breaches any of the protective provisions discussed in "-- Senior Securities; Amendments; Other Matters" (a "Charter Breach"), the holders of the Convertible Preferred Stock will be entitled to elect an aggregate of four directors; and (ii) in the event of a Dividend Default (as hereinafter defined) or in the event of both a Dividend Default and a Charter Breach, the holders of the Preferred Stock will be entitled to elect an aggregate of five directors. All such additional directors will be elected as soon as practicable after any such default. A "Dividend Default" shall occur if, at any time, dividends are not paid in full with respect to all shares of Convertible Preferred Stock on any four dividend payment dates such that dividends due on such four dates have not been fully paid and are outstanding in whole or in part at the same time. In the event of a Dividend Default and/or a Charter Breach, the number of Directors elected by the holders of the Convertible Preferred Stock at each subsequent annual meeting of stockholders shall be increased as provided in the previous paragraph, e.g., if a Charter Breach has occurred, the holders of Convertible Preferred Stock shall elect four Directors at subsequent annual meetings and, if a Dividend Default has occurred, or if both a Dividend Default and a Charter Breach have occurred, the holders of Convertible Preferred Stock shall elect five directors at subsequent annual meetings, subject to classification as provided in the Bylaws. 20 23 Senior Securities; Amendments; Other Matters The approval of holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting as a class, is required to (i) increase the number of authorized shares of Convertible Preferred Stock or issue any shares of Convertible Preferred Stock other than to existing holders of Convertible Preferred Stock, (ii) increase the authorized number of shares of or create, reclassify or issue any class of stock ranking prior to or on a parity with the Convertible Preferred Stock either as to dividends or upon liquidation, (iii) amend, alter or repeal any of the provisions of the Charter so as to impair the rights and privileges of the Convertible Preferred Stock, (iv) amend, alter or repeal certain provisions of the Bylaws in a manner which would adversely affect the rights of the holders of the Convertible Preferred Stock, (v) authorize any reclassification of the Convertible Preferred Stock, (vi) except pursuant to a conversion of the Convertible Preferred Stock, require the exchange of Convertible Preferred Stock for other securities, or (vii) effect a voluntary liquidation, dissolution or winding up of the Company, the sale of substantially all of the assets of the Company, the merger or consolidation or major recapitalization of the Company or the Operating Partnership. In addition, the approval of holders of a majority of the outstanding shares of Convertible Preferred Stock, voting as a class, is required for the Company to take any of the following actions: (i) the sale, transfer or assignment of beneficial interests in or voting rights with respect to assets of the Company or the Operating Partnership in excess of $45,000,000 within any 90-day period or $125,000,000 within any 360-day period; (ii) the Company's termination of its status as a REIT; (iii) any alteration in the Company's or the Operating Partnership's business such that (A) less than 65% of the Company's or the Operating Partnership's assets are located in the States of California, Oregon and Washington, (B) less than 80% of the Company's or the Operating Partnership's assets are located west of the Mississippi River or (C) less than 80% of the Company's or the Operating Partnership's assets are classified as multi-family residential properties; or (iv) any change in control of the Company or the Operating Partnership. Conversion Rights The Convertible Preferred Stock is subject to both conversion at the option of the holder thereof and mandatory conversion required by the Company, subject to the terms and conditions described below. Optional Conversion. Currently, 1,200,000 shares of Convertible Preferred Stock are convertible at the option of the holder thereof. On March 20, 1998, all of the outstanding 1,600,000 shares of Convertible Preferred Stock will be convertible. Each share of Convertible Preferred Stock subject to conversion shall be generally convertible into a number of fully paid and non-assessable shares of Common Stock (calculated as to each conversion to the nearest 1/100 of a share) equal to Stated Value plus the amount, if any, of accrued dividends as of the effective date of the conversion, divided by the Conversion Price (as defined below) then in effect. Notwithstanding the foregoing, in the case of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, shares of Convertible Preferred Stock shall, at the option of the holder thereof, immediately become convertible into Common Stock. As of the date hereof, no shares of Convertible Preferred Stock have been converted. Mandatory Conversion. If after June 20, 2001, the closing price of the Common Stock on each of at least 20 trading days (including the trading day immediately before the notice of mandatory conversion is delivered by the Company) out of the preceding period of 30 consecutive trading days immediately prior to the notice of mandatory conversion shall be greater than the Conversion Price in effect on each of such 20 trading days, the Company shall, subject to the holders' redemption rights (see "Redemption at Holder's Option After Notice of Mandatory Conversion"), have the right, to convert all, but not less than all, of the outstanding shares of Convertible Preferred Stock into a number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100 of a share) equal to Stated Value plus the amount, if any, of accrued dividends as of the effective date of the conversion, divided by the Conversion Price then in effect. Fractional Shares. No fractional shares of Common Stock will be issued upon conversion of shares of Convertible Preferred Stock. Any fractional interest in a share of Common Stock resulting from conversion of 21 24 shares of Convertible Preferred Stock will be paid in cash (computed to the nearest cent) based on the current market price of the Common Stock on the trading day preceding the day of conversion. Conversion Price. The "Conversion Price" per share of Convertible Preferred Stock will initially be $21.875, and will be equitably adjusted so as to preserve the ownership interests of the holders of the Convertible Preferred Stock if the Company (i) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock, (ii) subdivides its outstanding Common Stock into a greater number of shares, (iii) combines its outstanding Common Stock into a smaller number of shares, (iv) issues rights or warrants to the holders of its Common Stock as a class entitling them to purchase Common Stock at a price per share less than the then Conversion Price, (v) distributes to the holders of its Common Stock as a class any shares of stock of the Company (other than Common Stock) or evidences of indebtedness or assets (other than cash dividends or distributions) or rights or warrants (other than those referred to in the previous clause) to purchase any of its securities, (vi) subject to certain exceptions, issues or sells (or the Operating Partnership issues or sells) any equity or debt securities which are convertible into or exchangeable for shares of Common Stock ("Convertible Securities") or any rights, options or warrants to purchase Common Stock at a price per share which is less than the Conversion Price, or (vii) issues or sells any Common Stock (other than on conversion or exchange of Convertible Securities or exercise of rights, options or warrants to which any of the three preceding clauses applies) for a consideration per share less than the Conversion Price. The Company will seek to list the shares of Common Stock required to be delivered upon conversion of the Convertible Preferred Stock on each national securities exchange, if any, on which the outstanding shares of Common Stock are listed at the time of delivery of the Common Stock. The Company will pay any documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of Convertible Preferred Stock. Redemption at Holder's Option After Notice of Mandatory Conversion In the event that the Company exercises its right to require a mandatory conversion of Convertible Preferred Stock (but in no other circumstances), each holder of Convertible Preferred Stock will have the right to require the Company to redeem any or all the shares of Convertible Preferred Stock owned of record by the holder, at a redemption price per share (the "Redemption Price") equal to the applicable Redemption Percentage as defined below, multiplied by the sum of (i) Stated Value plus (ii) the sum of all accrued dividends with regard to the Convertible Preferred Stock through the date of redemption. As used herein, the "Redemption Percentage" means a percentage beginning at 105% and decreasing annually by 1% to a floor of 100%. At such time as there are 40,000 shares or fewer of Convertible Preferred Stock outstanding, the Company may at its option purchase all of the outstanding shares of the Convertible Preferred Stock from the holders thereof at a price equal to the greater of (a) 110% of the sum of the Stated Value of such shares (together with all accrued dividends thereon) and (b) the fair market value of such shares, which shall be equal to the fair market value of the Common Stock, as of such date, issuable upon conversion of such shares, together with all accrued dividends thereon. Right of Tiger/Westbrook to Participate in Offerings Pursuant to the terms of the Stock Purchase Agreement, Tiger/Westbrook has, for so long as the Convertible Preferred Stock is outstanding, the preemptive right to purchase a pro rata share on an as converted basis as of the date of the Company Notice (as defined herein) of any stock (or options, warrants or rights to purchase such stock or securities convertible into such stock) (collectively, "Eligible Securities"), for the price and upon the terms specified by the Company in its notice to Tiger/Westbrook (the "Company Notice") of a Company issuance of Eligible Securities, which price cannot be greater than that offered to third parties. If Tiger/Westbrook fails to timely exercise in full its preemptive rights, then the Company may sell the unsold Eligible Securities at any time within 180 days (60 days in the case of a public offering) thereafter at a price and upon terms no more favorable to the purchasers thereof than specified to Tiger/Westbrook. Tiger/Westbrook's preemptive rights do not apply to any Eligible Securities, among other 22 25 things, (i) issuable in connection with stock splits, stock dividends or recapitalizations as to the effects of which other adjustments are provided for, or (ii) issuable to employees and prospective employees pursuant to any plan or pattern of employee equity participation or issuable in connection with the Company's dividend reinvestment plan. In addition, the Stock Purchase Agreement provides Tiger/Westbrook with preemptive rights to purchase a pro rata share of the Company's equity offerings. Registration Rights The outstanding shares of Convertible Preferred Stock, together with any shares of Common Stock to which such shares of Convertible Preferred Stock may be converted, are not registered under the Securities Act or the securities laws of any state. Accordingly, such Convertible Preferred Stock or Common Stock may be sold only in one or more transactions registered under the Securities Act and, where applicable, state securities laws or as to which an exemption from registration requirements of the Securities Act and, where applicable, state securities laws is available. Pursuant to the Registration Rights Agreement, Tiger/Westbrook may request the Company to register (at the Company's expense) the then outstanding Convertible Preferred Stock and other Registrable Securities (as defined herein), under the terms and conditions described below. "Registrable Securities" means, subject to certain exceptions, (i) the Convertible Preferred Stock, (ii) all Common Stock issuable or issued upon conversion of the Convertible Preferred Stock, and (iii) any Common Stock of the Company issued as a dividend or distribution or issuable upon the conversion or exercise of any warrant, right or other security which is issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such Convertible Preferred Stock or Common Stock. At Tiger/Westbrook's request, the Company will use its best efforts to cause all outstanding Convertible Preferred Stock or all or a portion of shares of Common Stock which are Registrable Securities to be registered under the Securities Act (including, under certain circumstances pursuant to an offering on a continuous or delayed basis in the future (a "Shelf Registration")), subject to certain limitations, including, without limitation, as to the value of the shares included in the registration (generally, a minimum of $7,000,000 or, in the case of a Shelf Registration, all of the applicable Registrable Securities outstanding), size of the registration (the registration must be for all of the outstanding Convertible Preferred Stock or at least 25% of Tiger/Westbrook's Common Stock), and timing (the Company is not required to make more than one registration per year). With respect to a Shelf Registration, the Company shall use its best efforts to keep the Shelf Registration continuously effective for up to two years. Subject to certain limitations, if, the Company registers (or decides to issue under its current Shelf Registration) any Common Stock, at the request of Tiger/Westbrook, the Company will use its best efforts to register all (or any portion) of the shares of Common Stock (but not Convertible Preferred Stock) as specified by Tiger/Westbrook. Tiger/Westbrook's registration rights are assignable to any transferee of the Convertible Preferred Stock or Common Stock owned by Tiger/Westbrook, provided, only Tiger/Westbrook may request registration pursuant to the Registration Rights Agreement. As of the date hereof, Tiger/Westbrook has not requested registration of any Registrable Securities. SERIES B PREFERRED STOCK General On February 6, 1998, the Operating Partnership completed the private placement of 1,200,000 units of 7.875% Series B Preferred Limited Partnership Units (the "Series B Preferred Units"), representing a limited partnership interest in the Operating Partnership, to an institutional investor in return for a contribution to the Operating Partnership of $60 million. The Series B Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time on or after the tenth anniversary of the date of this private placement (or earlier under certain circumstances) for shares of the Company's 7.875% Series B Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series B Preferred Stock will have certain rights to cause the Company to register such shares of Series B Preferred Stock. On February 10, 1998, the Company filed Articles Supplementary reclassifying 2,000,000 shares of its Common Stock, par value $.0001 per share, as 2,000,000 shares of Series B Preferred Stock and 23 26 setting forth the rights, preferences and privileges of the Series B Preferred Stock. Presently, no shares of Series B Preferred Stock are outstanding. Upon the exchange of all the Series B Preferred Units, there would be 1,200,000 shares of Series B Preferred Stock outstanding. The following description of the Series B Preferred Stock is in all respects subject to and qualified in its entirety by reference to the applicable provisions of the Charter, including the Articles Supplementary applicable to the Series B Preferred Stock, and Bylaws. Subject to the rights of holders of the Convertible Preferred Stock and any other parity preferred stock as to the payment of distributions, holders of Series B Preferred Stock are entitled to receive, when, as and if declared by the Company, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate per annum of 7.875% of the $50.00 liquidation preference per share of Series B Preferred Stock. Such distributions are cumulative, accrue from the original date of issuance and are payable quarterly in arrears, on or before the 15th of February, May, August and November of each year (each a "Preferred Stock Distribution Payment Date"), commencing in each case on the first Preferred Stock Distribution Payment Date after the original date of issuance. No shares of Series B Preferred Stock shall be offered pursuant to this Prospectus or any Prospectus Supplement relating thereto. Redemption The Series B Preferred Stock may be redeemed, at the Company's option, on and after February 6, 2003, from time to time, at a redemption price payable in cash equal to $50.00 per share of Series B Preferred Stock, plus any accumulated and unpaid dividends to the date of redemption. The redemption price of the Series B Preferred Stock (other than the portions thereof consisting of accumulated but unpaid dividends) will be payable solely out of the sale proceeds of capital stock of the Company. The Corporation may not redeem fewer than all of the outstanding shares of Series B Preferred Stock unless all accumulated and unpaid distributions have been paid on all Series B Preferred Stock for all quarterly distribution periods terminating on or prior to the date of redemption. Limited Voting Rights If at any time full distributions shall not have been timely made on any Series B Preferred Stock with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, the holders of such Series B Preferred Stock, voting together as a single class with the holders of each class or series of parity preferred stock, will have the right to elect two additional directors to the Board of Directors at a special meeting called by the holders of record of at least 10% of the then outstanding shares of Series B Preferred Stock, or any parity preferred stock, or at the next annual meeting of stockholders, and at each subsequent annual meeting of stockholders or special meeting held in place thereof, until all such distributions in arrears and distributions for the current quarter have been paid in full. Thereafter, the holders of Series B Preferred Stock will be divested of their voting rights and the term of any member of the Board of Directors elected by the holders of Series B Preferred Stock and holders of any shares of parity preferred stock shall terminate. In addition, while any shares of the Series B Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of at least two-thirds (2/3) of the Series B Preferred Stock outstanding at the time (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares ranking prior to the Series B Preferred Stock with respect to payment of distributions or rights upon liquidation, dissolution or winding-up or reclassify any authorized shares of the Company into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares or (ii) either amend, alter or repeal the provisions of the Company's Charter (including the Articles Supplementary pertaining to the Series B Preferred Stock) or Bylaws, that would materially and adversely affect the preferences, other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or terms and conditions of redemption, of any outstanding shares of the Series B Preferred Stock. Further, while any shares of the Series B Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of at least two-thirds (2/3) of 24 27 the Series B Preferred Stock outstanding at the time consolidate, amalgamate, merge with or into, or convey, transfer or lease its assets substantially as an entirety to, any corporation or other entity, unless (a) the Company is the surviving entity and the shares of the Series B Preferred Stock remain outstanding with the terms thereof unchanged, (b) the resulting, surviving or transferee entity is a corporation or other entity organized under the laws of any state and substitutes for the Series B Preferred Stock other preferred stock having substantially the same terms and same rights as the Series B Preferred Stock, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, or (c) such merger, consolidation, amalgamation or asset transfer does not adversely affect the powers, special rights, preferences and privileges of the holders of the Series B Preferred Stock in any material respect. The Series B Preferred Stock will have no voting rights other than as discussed above and as otherwise provided by applicable law. Liquidation Preference Subject to the rights of the holders of the Convertible Preferred Stock and any other parity preferred stock, each share of Series B Preferred Stock is entitled to a liquidation preference of $50.00 per share, plus any accrued and unpaid dividends, in preference to any other class or series of capital stock of the Company. DESCRIPTION OF DEPOSITARY SHARES GENERAL The Company may issue Depositary Shares, each of which will represent a fractional interest of a share of a particular class or series of Preferred Stock, as specified in the applicable Prospectus Supplement. Shares of a class or series of Preferred Stock represented by Depositary Shares will be deposited under a separate deposit agreement (each, a "Deposit Agreement") among the Company, the depositary named therein (the "Preferred Stock Depositary") and the holders from time to time of the depositary receipts issued by the Preferred Stock Depositary which will evidence the Depositary Shares ("Depositary Receipts"). Subject to the terms of the Deposit Agreement, each owner of a Depositary Receipt will be entitled, in proportion to the fractional interest of a share of a particular class or series of Preferred Stock represented by the Depositary Shares evidenced by such Depositary Receipt, to all the rights and preferences of the class or series of the Preferred Stock represented by such Depositary Shares (including dividend, voting, conversion, redemption and liquidation rights). The Depositary Shares will be evidenced by Depositary Receipts issued pursuant to the applicable Deposit Agreement. Immediately following the issuance and delivery of the Preferred Stock by the Company to a Preferred Stock Depositary, the Company will cause such Preferred Stock Depositary to issue, on behalf of the Company, the Depositary Receipts. Copies of the applicable form of Deposit Agreement and Depositary Receipt may be obtained from the Company upon request, and the statements made hereunder relating to the Deposit Agreement and the Depositary Receipt to be issued thereunder are summaries of certain anticipated provisions thereof and do not purport to be complete and are subject to, and qualified in their entirety by reference to, all of the provisions of the applicable Deposit Agreement and related Depositary Receipts. DIVIDENDS AND OTHER DISTRIBUTIONS The Preferred Stock Depositary will distribute all cash dividends or other cash distributions received in respect of a class or series of Preferred Stock to the record holders of Depositary Receipts evidencing the related Depositary Shares in proportion to the number of the Depositary Receipts owned by such holders, subject to certain obligations of holders to file proofs, certificates and other information and to pay certain charges and expenses to such Preferred Stock Depositary. In the event of a distribution other than in cash, the Preferred Stock Depositary will distribute property received by it to the record holders of Depositary Receipts entitled thereto, subject to certain obligations of 25 28 holders to file proofs, certificates and other information and to pay certain charges and expenses to the Preferred Stock Depositary, unless such Preferred Stock Depositary determines that it is not feasible to make such distribution, in which case the Preferred Stock Depositary may, with the approval of the Company, sell such property and distribute the net proceeds from such sale to such holders. No distribution will be made in respect of any Depositary Share to the extent that it represents any class or series of Preferred Stock converted into Excess Stock or otherwise converted or exchanged. WITHDRAWAL OF STOCK Upon surrender of the Depositary Receipts at the corporate trust office of the Preferred Stock Depositary (unless the related Depositary Shares have previously been called for redemption or converted or converted into Excess Stock or otherwise), the holders thereof will be entitled to delivery at such office, to or upon each such holder's order, of the number of whole or fractional shares of the class or series of Preferred Stock and any money or other property represented by the Depositary Shares evidenced by such Depositary Receipts. Holders of Depositary Receipts will be entitled to receive whole or fractional shares of the related class or series of Preferred Stock on the basis of the proportion of Preferred Stock represented by each Depositary Share as specified in the applicable Prospectus Supplement, but holders of such shares of Preferred Stock will not thereafter be entitled to receive Depositary Shares therefor. If the Depositary Receipts delivered by the holder evidence a number of Depositary Shares in excess of the number of Depositary Shares representing the number of shares of Preferred Stock to be withdrawn, the Preferred Stock Depositary will deliver to such holder at the same time a new Depositary Receipt evidencing such excess number of Depositary Shares. REDEMPTION OF DEPOSITARY SHARES Whenever the Company redeems shares of Preferred Stock held by the Preferred Stock Depositary, the Preferred Stock Depositary will redeem as of the same redemption date the number of the Depositary Shares representing shares of such class or series of Preferred Stock so redeemed, provided the Company shall have paid in full to the Preferred Stock Depositary the redemption price of the Preferred Stock to be redeemed plus an amount equal to any accrued and unpaid dividends thereon to the date fixed for redemption. The redemption price per Depositary Share will be equal to the corresponding proportion of the redemption price and any other amounts per share payable with respect to such class or series of Preferred Stock. If fewer than all the Depositary Shares are to be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as nearly as may be practicable without creating fractional Depositary Shares) or by any other equitable method determined by the Company that will not result in the issuance of any Excess Stock. From and after the date fixed for redemption, all dividends in respect of the shares of a class of series of Preferred Stock so called for redemption will cease to accrue, the Depositary Shares so called for redemption will no longer be deemed to be outstanding and all rights of the holders of the Depositary Receipts evidencing the Depositary Shares so called for redemption will cease, except the right to receive any moneys payable upon such redemption and any money or other property to which the holders of such Depositary Receipts were entitled upon such redemption upon surrender thereof to the Preferred Stock Depositary. VOTING OF THE PREFERRED STOCK Upon receipt of notice of any meeting at which the holders of a class or series of Preferred Stock deposited with the Preferred Stock Depositary are entitled to vote, the Preferred Stock Depositary will mail the information contained in such notice of meeting to the record holders of the Depositary Receipts evidencing the Depositary Shares which represent such class or series of Preferred Stock. Each record holder of Depositary Receipts evidencing Depositary Shares on the record date (which will be the same date as the record date for such class or series of Preferred Stock) will be entitled to instruct the Preferred Stock Depositary as to the exercise of the voting rights pertaining to the amount of Preferred Stock represented by such holder's Depositary Shares. The Preferred Stock Depositary will vote the amount of such class or series of Preferred Stock represented by such Depositary Shares in accordance with such instructions, and the Company will agree to take all reasonable action which may be deemed necessary by the Preferred Stock 26 29 Depositary in order to enable the Preferred Stock Depositary to do so. The Preferred Stock Depositary will abstain from voting the amount of Preferred Stock represented by such Depositary Shares to the extent it does not receive specific instructions from the holders of Depositary Receipts evidencing such Depositary Shares. The Preferred Stock Depositary will not be responsible for any failure to carry out any instruction to vote, or for the manner or effect of any such vote made, as long as any such action or non-action is in good faith and does not result from negligence or willful misconduct of the Preferred Stock Depositary. LIQUIDATION PREFERENCE In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of each Depositary Receipt will be entitled to the fraction of the liquidation preference accorded each share of Preferred Stock represented by the Depositary Share evidenced by such Depositary Receipt as set forth in the applicable Prospectus Supplement. CONVERSION OF PREFERRED STOCK The Depositary Shares, as such, will not be convertible into Common Stock or any other securities or property of the Company, except in connection with certain exchanges in connection with the preservation of the Company's status as a REIT. See "Description of Common Stock -- Restrictions on Transfer." Nevertheless, if so specified in the applicable Prospectus Supplement relating to an offering of Depositary Shares, the Depositary Receipts may be surrendered by holders thereof to the applicable Preferred Stock Depositary with written instructions to the Preferred Stock Depositary to instruct the Company to cause conversion of a class or series of Preferred Stock represented by the Depositary Shares evidenced by such Depositary Receipts into whole shares of Common Stock, other shares of a class or series of Preferred Stock (including Excess Stock) of the Company or other shares of stock, and the Company has agreed that upon receipt of such instructions and any amounts payable in respect thereof, it will cause the conversion thereof utilizing the same procedures as those provided for delivery of Preferred Stock to effect such conversion. If the Depositary Shares evidenced by a Depositary Receipt are to be converted in part only, a Depositary Receipt or Receipts will be issued for any Depositary Shares not to be converted. No fractional shares of Common Stock will be issued upon conversion, and if such conversion will result in a fractional share being issued, an amount will be paid in cash by the Company equal to the value of the fractional interest based upon the closing price of the Common Stock on the last business day prior to the conversion. AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT The form of Depositary Receipt evidencing Depositary Shares which represent the Preferred Stock and any provision of the Deposit Agreement may at any time be amended by agreement between the Company and the Preferred Stock Depositary. However, any amendment that materially and adversely alters the rights of the holders of Depositary Receipts or that would be materially and adversely inconsistent with the rights granted to the holders of the related Preferred Stock will not be effective unless such amendment has been approved by the existing holders of at least two-thirds of the applicable Depositary Shares evidenced by the applicable Depositary Receipts then outstanding. No amendment shall impair the right, subject to certain anticipated exceptions in the Deposit Agreements, of any holder of Depositary Receipts to surrender any Depositary Receipt with instructions to deliver to the holder the related class or series of Preferred Stock and all money and other property, if any, represented thereby, except in order to comply with law. Every holder of an outstanding Depositary Receipt at the time any such amendment becomes effective shall be deemed, by continuing to hold such Depositary Receipt, to consent and agree to such amendment and to be bound by the applicable Deposit Agreement as amended thereby. The Deposit Agreement may be terminated by the Company upon not less than 30 days' prior written notice to the Preferred Stock Depositary if (i) such termination is necessary to preserve the Company's status as a REIT or (ii) a majority of each series or class of Preferred Stock subject to such Deposit Agreement consents to such termination, whereupon the Preferred Stock Depositary will deliver or make available to each holder of Depositary Receipts, upon surrender of the Depositary Receipts held by such holder, such number of whole or fractional shares of each Preferred Stock as are represented by the Depositary Shares evidenced by 27 30 such Depositary Receipts together with any other property held by Preferred Stock Depositary with respect to such Depositary Receipts. The Company has agreed that if the Deposit Agreement is terminated to preserve the Company's status as a REIT, then the Company will use its best efforts to list each class or series of Preferred Stock issued upon surrender of the related Depositary Shares. In addition, the Deposit Agreement will automatically terminate if (i) all outstanding Depositary Shares shall have been redeemed, (ii) there shall have been a final distribution in respect of each class or series of Preferred Stock in connection with any liquidation, dissolution or winding up of the Company and such distribution shall have been distributed to the holders of the Depositary Receipts evidencing the Depositary Shares representing such class or series of Preferred Stock or (iii) each share of the related Preferred Stock shall have been converted into stock of the Company not so represented by Depositary Shares. CHARGES OF A PREFERRED STOCK DEPOSITARY The Company will pay all transfer and other taxes and governmental charges arising solely from the existence of the Deposit Agreement. In addition, the Company will pay the fees and expenses of the Preferred Stock Depositary in connection with the performance of its duties under the Deposit Agreement. However, holders of Depositary Receipts will pay the fees and expenses of the Preferred Stock Depositary for any duties requested by such holders to be performed which are outside of those expressly provided for in the Deposit Agreement. RESIGNATION AND REMOVAL OF DEPOSITARY The Preferred Stock Depositary may resign at any time by delivering to the Company notice of its election to do so, and the Company may at any time remove the Preferred Stock Depositary, any such resignation or removal to take effect upon the appointment of a successor Preferred Stock Depositary. A successor Preferred Stock Depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $50,000,000. MISCELLANEOUS The Preferred Stock Depositary will forward to holders of Depositary Receipts any reports and communications from the Company which are received by the Preferred Stock Depositary with respect to the related Preferred Stock. Neither the Preferred Stock Depositary nor the Company will be liable if it is prevented from or delayed in, by law or any circumstances beyond its control, performing its obligations under the Deposit Agreement. The obligations of the Company and the Preferred Stock Depositary under the Deposit Agreement will be limited to performing their duties thereunder in good faith and without negligence (in the case of any action or inaction in the voting of a class or series of Preferred Stock represented by the Depositary Shares), gross negligence or willful misconduct, and the Company and the Preferred Stock Depositary will not be obligated to prosecute or defend any legal proceeding in respect of any Depositary Receipts, Depositary Shares or shares of a class or series of Preferred Stock represented thereby unless satisfactory indemnity is furnished. The Company and the Preferred Stock Depositary may rely on written advice of counsel or accountants, or information provided by persons presenting shares of Preferred Stock represented thereby for deposit, holders of Depositary Receipts or other persons believed in good faith to be competent to give such information, and on documents believed in good faith to be genuine and signed by a proper party. In the event a Preferred Stock Depositary shall receive conflicting claims, requests or instructions from any holders of Depositary Receipts, on the one hand, and the Company, on the other hand, the Preferred Stock Depositary shall be entitled to act on such claims, requests or instructions received from the Company. 28 31 DESCRIPTION OF WARRANTS The Company has no Warrants outstanding (other than options issued under the Company's stock option plans and the M&M Stock Option, see "Description of Common Stock -- Stock -- General"). The Company may issue Warrants for the purchase of Preferred Stock or Common Stock. Warrants may be issued independently or together with any other Offered Securities offered by any Prospectus Supplement and may be attached to or separate from such Offered Securities. Each series of Warrants will be issued under a separate warrant agreement (each, a "Warrant Agreement") to be entered into between the Company and a warrant agent specified in the applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent of the Company in connection with the Warrants of such series and will not assume any obligation or relationship of agency or trust for or with any provisions of the Warrants offered hereby. Further terms of the Warrants and the applicable Warrant Agreements will be set forth in the applicable Prospectus Supplement. The applicable Prospectus Supplement will describe the terms of the Warrants in respect of which this Prospectus is being delivered, including, where applicable, the following: (1) the title of such Warrants; (2) the aggregate number of such Warrants; (3) the price or prices at which such Warrants will be issued; (4) the designation, terms and number of shares of Preferred Stock or Common Stock purchasable upon exercise of such Warrants; (5) the designation and terms of the Offered Securities, if any, with which such Warrants are issued and the number of such Warrants issued with each such Offered Security; (6) the date, if any, on and after which such Warrants and the related Preferred Stock or Common Stock will be separately transferable; (7) the price at which each share of Preferred Stock or Common Stock purchasable upon exercise of such Warrants may be purchased; (8) the date on which the right to exercise such Warrants shall commence and the date on which such right shall expire; (9) the minimum or maximum amount of such Warrants which may be exercised at any one time; (10) information with respect to book-entry procedures, if any; (11) a discussion of certain federal income tax considerations; and (12) any other terms of such Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Warrants. DESCRIPTION OF DEBT SECURITIES The following sets forth the material terms and provisions of the Indenture under which the Debt Securities of the Operating Partnership are to be issued. The specific terms of the Debt Securities will be set forth in a Prospectus Supplement relating to such Debt Securities. Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities are to be issued under an Indenture, as amended or supplemented from time to time (the "Indenture"), among the Operating Partnership, the Company and a Trustee chosen by the Operating Partnership and the Company and qualified to act as trustee under the Trust Indenture Act of 1939, as amended (the "TIA") (together with any other trustee(s) appointed in a supplemental indenture with respect to a particular series, the "Trustee"). The Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and will be available for inspection at the corporate trust office of the Trustee, or as described above under "Available Information." The Indenture is subject to, and governed by, the TIA. The statements made hereunder relating to the Indenture and the Debt Securities to be issued hereunder are summaries of all material general provisions thereof and do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture and such Debt Securities. The material terms of a specific series or class of Debt Securities will be set forth in the related Prospectus Supplement. All section references appearing herein are to sections of the Indenture, and capitalized terms used but not defined herein shall have the respective meanings set forth in the Indenture. GENERAL The Debt Securities will be direct, unsecured obligations of the Operating Partnership and will be non-convertible investment grade securities. Except for any series of Debt Securities which is specifically subordinated to other indebtedness of the Operating Partnership, the Debt Securities will rank pari passu with all other unsecured and unsubordinated indebtedness of the Operating Partnership. Under the Indenture, the 29 32 Debt Securities may be issued without limit as to aggregate principal amount, in one or more series, in each case as established from time to time in or pursuant to authority granted by a resolution of the Board of Directors of the Company as sole general partner of the Operating Partnership or as established in one or more indentures supplemental to the Indenture. All Debt Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders of the Debt Securities of such series, for issuances of additional Debt Securities of such series (Section 301). The Debt Securities may be unconditionally guaranteed by the Company as to payment of principal, premium, if any, and interest. (Section 1601). The Indenture provides that there may be more than one Trustee thereunder, each with respect to one or more series of Debt Securities. Any Trustee under the Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Trustee will be appointed to act with respect to such series (Section 608). In the event that two or more persons are acting as Trustee with respect to different series of Debt Securities, each such Trustee shall be a trustee of a trust under the Indenture separate and apart from the trust administered by any other Trustee (Section 609), and, except as otherwise indicated herein, any action described herein to be taken by the Trustee may be taken by each such Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Trustee under the Indenture. TERMS Reference is made to the Prospectus Supplement relating to the series of Debt Securities being offered for the specific terms thereof, including: (1) the title of such Debt Securities, whether such Debt Securities are Senior Securities or Subordinated Securities and whether such Debt Securities are guaranteed by a Guarantee; (2) the aggregate principal amount of such Debt Securities and any limit on such aggregate principal amount; (3) the percentage of the principal amount at which such Debt Securities will be issued and, if other than the principal amount thereof, the portion of the principal amount thereof payable upon declaration of acceleration of the maturity thereof; (4) the date or dates, or the method for determining such date or dates, on which the principal of such Debt Securities will be payable; (5) the rate or rates (which may be fixed or variable), or the method by which such rate or rates shall be determined, at which such Debt Securities will bear interest, if any; (6) the date or dates, or the method for determining such date or dates, from which any such interest will accrue, the Interest Payment Dates on which any such interest will be payable, the Regular Record Dates for such Interest Payment Dates, or the method by which such Dates shall be determined, the Person to whom such interest shall be payable, and the basis upon which interest shall be calculated if other than that of a 360-day year of twelve 30-day months; (7) the place or places where (i) the principal of (and premium, if any) and interest, if any, on such Debt Securities will be payable, (ii) such Debt Securities may be surrendered for registration of transfer or exchange and (iii) notices or demands to or upon the Operating Partnership in respect of such Debt Securities, any applicable Guarantees and the Indenture may be served; (8) the period or periods within which, or the date or dates on which, the price or prices at which and the terms and conditions upon which such Debt Securities may be redeemed, as a whole or in part, at the option of the Operating Partnership, if the Operating Partnership is to have such an option; (9) the obligation, if any, of the Operating Partnership to redeem, repay or repurchase such Debt Securities pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof, and the period or periods within which, or the date or dates on which, the price or prices at which and the 30 33 terms and conditions upon which such Debt Securities are required to be redeemed, repaid or purchased, as a whole or in part, pursuant to such obligation; (10) if other than U.S. dollars, the currency or currencies in which such Debt Securities are denominated and/or payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the terms and conditions relating thereto; (11) whether the amount of payments of principal of (and premium, if any) or interest, if any, on such Debt Securities may be determined with reference to an index, formula or other method (which index, formula or method may, but need not be, based on a currency, currencies, currency unit or units or composite currency or currencies) and the manner in which such amounts shall be determined; (12) any additions to, modifications of or deletions from the terms of such Debt Securities with respect to the Events of Default or covenants or other provisions set forth in the Indenture; (13) whether such Debt Securities will be issued in certificated and/or book-entry form; (14) whether such Debt Securities will be in registered or bearer form and, if in registered form, the denominations thereof if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations thereof and terms and conditions relating thereto; (15) the applicability, if any, of the defeasance and covenant defeasance provisions of Article XIV of the Indenture, or any modification thereof; (16) the terms and conditions, if any, upon which such Debt Securities may be subordinated to other indebtedness of the Operating Partnership; (17) whether and under what circumstances the Operating Partnership will pay Additional Amounts as contemplated in the Indenture on such Debt Securities in respect of any tax, assessment or governmental charge and, if so, whether the Operating Partnership will have the option to redeem such Debt Securities in lieu of making such payment; and (18) any other terms of such Debt Securities not inconsistent with the provisions of the Indenture (Section 301). The Debt Securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof ("Original Issue Discount Securities"). Special U.S. federal income tax, accounting and other considerations applicable to the Original Issue Discount Securities will be described in the applicable Prospectus Supplement. The Indenture does not contain any provisions that would limit the ability of the Operating Partnership to incur indebtedness or that would afford Holders of Debt Securities protection in the event of a highly leveraged or similar transaction involving the Operating Partnership. However, restrictions on ownership and transfers of the Company's common stock and preferred stock, designed to preserve the Company's status as a REIT, may prevent or hinder a change of control. Reference is made to the applicable Prospectus Supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or covenants of the Operating Partnership that are described below, including any addition of a covenant or other provision providing event risk or similar protection. GUARANTEES If specified in the applicable Prospectus Supplement, the Debt Securities may be unconditionally and irrevocably guaranteed by Guarantees of the Company, on a senior or subordinated basis, which will guarantee the due and punctual payment of principal of, premium, if any, and interest on such Debt Securities, and the due and punctual payment of any sinking fund payments thereon, when and as the same shall become due and payable whether at a maturity date, by declaration of acceleration, call for redemption or otherwise. The applicability and terms of any such Guarantee relating to a series of Debt Securities will be set forth in the Prospectus Supplement relating to such Debt Securities. (Section 1601). 31 34 DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series will be issuable in denominations of $1,000 and integral multiples thereof (Section 302). Unless otherwise specified in the applicable Prospectus Supplement, the principal of (and premium, if any) and interest on any series of Debt Securities will be payable at the corporate trust office of the Trustee, provided that, at the option of the Holder, payment of interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Security Register or by wire transfer of funds to such Person at an account maintained within the United States (Sections 301, 305, 307 and 1002). All amounts paid by the Operating Partnership to a paying agent or a Trustee for the payment of the principal of or any premium or interest on any Debt Security which remain unclaimed at the end of two years after the principal, premium or interest has become due and payable will be repaid to the Operating Partnership, and the holder of the Debt Security thereafter may look only to the Operating Partnership for payment thereof. (Section 1003). Any interest not punctually paid or duly provided for on any Interest Payment Date with respect to a Debt Security ("Defaulted Interest") will forthwith cease to be payable to the Holder on the applicable Regular Record Date and may either be paid to the person in whose name such Debt Security is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of such Debt Security not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner, all as more completely described in the Indenture (Sections 101 and 307). Subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series, of a like aggregate principal amount and tenor, of different authorized denominations upon surrender of such Debt Securities at the corporate trust office of the Trustee. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series may be surrendered for conversion or registration of transfer thereof at the corporate trust office of the Trustee referred to above. Every Debt Security surrendered for conversion, redemption, registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of any Debt Securities, but the Operating Partnership may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 305). If the applicable Prospectus Supplement refers to any transfer agent (in addition to the Trustee) initially designated by the Operating Partnership with respect to any series of Debt Securities, the Operating Partnership may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Operating Partnership will be required to maintain a transfer agent in each Place of Payment for such series. The Operating Partnership may at any time designate additional transfer agents with respect to any series of Debt Securities (Section 1002). Neither the Operating Partnership nor the Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business of the day of mailing of the relevant notice of redemption; (ii) register the transfer of or exchange any Debt Security, or portion thereof, called for redemption, except the unredeemed portion of any Debt Security being redeemed in part; or (iii) issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the Holder, except that portion, if any, of such Debt Security which is not to be so repaid (Section 305). MERGER, CONSOLIDATION OR SALE The Operating Partnership may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other person, provided (a) either the Operating Partnership shall be the continuing person, or the successor (if other than the Operating Partnership) formed by or resulting from any 32 35 such consolidation or merger or which shall have received the transfer of such assets shall expressly assume payment of the principal of (and premium, if any) and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions contained in the Indenture; (b) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Operating Partnership or any Subsidiary as a result thereof as having been incurred by the Operating Partnership or such Subsidiary at the time of such transaction, no Event of Default under the Indenture, and no event which, after notice or the lapse of time, or both, would become such an Event of Default, shall have occurred and be continuing; and (c) an officers' certificate of the Company as General Partner of the Operating Partnership and an opinion of counsel covering such conditions shall be delivered to the Trustee (Sections 801 and 803). CERTAIN COVENANTS Existence. Except as permitted under "Merger, Consolidation or Sale," the Indenture requires each of the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) to do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (partnership and statutory) and franchises; provided, however, that each of the Operating Partnership and the Company shall not be required to preserve any right or franchise if the Board of Directors of the Company determines that the preservation thereof is no longer desirable in the conduct of the business of the Operating Partnership and that the loss thereof is not disadvantageous in any material respect to the Holders of the Debt Securities (Section 1004). Maintenance of Properties. The Indenture requires each of the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) to cause all of its material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order, all as in the judgment of the Operating Partnership may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the Operating Partnership or the Company, as the case may be, and its Subsidiaries shall not be prevented from selling or otherwise disposing of their properties for value in the ordinary course of business. (Section 1006). Insurance. The Indenture requires the Operating Partnership and each of its Subsidiaries to keep its insurable Properties insured against loss or damage with commercially reasonable amounts and types of insurance provided by insurers of recognized responsibility. (Section 1007). Payment of Taxes and Other Claims. The Indenture requires each of the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) to pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon its income, profits or property or that of any Subsidiary and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Operating Partnership or any Subsidiary; provided, however, that the Operating Partnership or the Company shall not be required to pay or discharge or cause to be paid or discharged any tax, assessment, charge or claim whose amount or applicability is being contested in good faith. (Section 1008). Provision of Financial Information. The Operating Partnership will file with the Trustee copies of annual reports, quarterly reports and other documents (the "Financial Reports") which the Operating Partnership files with the Commission or would be required to file with the Commission pursuant to Sections 13 or 15(d) of the Exchange Act if the Operating Partnership were subject to such Sections; provided, however, that if the Operating Partnership is not subject to such Sections, it may, in lieu of filing Financial Reports of the Operating Partnership with the Trustee, file Financial Reports of the Company if they would be materially the same as those that would have been filed by the Operating Partnership with the Commission pursuant to Sections 13 or 15(d) of the Exchange Act. Additional Covenants. Reference is made to the applicable Prospectus Supplement for information with respect to any additional covenants specific to a particular series of Debt Securities. 33 36 EVENTS OF DEFAULT, NOTICE AND WAIVER Unless otherwise provided in the Prospectus Supplement, the Indenture provides that the following events are "Events of Default" with respect to any series of Debt Securities issued thereunder: (a) default for 30 days in the payment of any interest on any Debt Security of such series; (b) default in the payment of any principal of (or premium, if any, on) any Debt Security of such series when due; (c) default in making any sinking fund payment as required for any Debt Security of such series; (d) default in the performance of any other covenant or warranty of the Operating Partnership or the Company contained in the Indenture with respect to any Debt Security of such series, continued for 60 days after written notice as provided in the Indenture; (e) default in the payment of an aggregate principal amount exceeding $10,000,000 of any evidence of indebtedness of the Operating Partnership or the Company (if the Company or any subsidiary of the Company has guaranteed any indebtedness of the Operating Partnership) or any mortgage, indenture, note, bond, capitalized lease or other instrument under which such indebtedness is issued or by which such indebtedness is secured, such default having continued after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such indebtedness, but only if such indebtedness is not discharged or such acceleration is not rescinded or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities), or any Significant Subsidiary or all or substantially all of any of their respective property; and (g) any other Event of Default provided with respect to a particular series of Debt Securities (Section 501). The term "Significant Subsidiary" means each significant Subsidiary (as defined in Regulation S-X promulgated under the Securities Act) of the Operating Partnership or the Company, as the case may be. (Section 101). If an Event of Default under the Indenture with respect to Debt Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of that series may declare the principal amount (or, if the Debt Securities of that series are Original Issue Discount Securities or Indexed Securities, such portion of the principal amount as may be specified in the terms thereof) of all of the Debt Securities of that series to be due and payable immediately by written notice thereof to the Company (if the Company has guaranteed any Debt Securities under such Indenture) and the Operating Partnership (and to the Trustee if given by the Holders). However, any time after such a declaration of acceleration with respect to Debt Securities of such series has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the Holders of not less then a majority in principal amount of Outstanding Debt Securities of such series may rescind and annul such declaration and its consequences if (a) the Operating Partnership shall have paid or deposited with the Trustee all required payments of the principal of (and premium, if any) and interest on the Debt Securities of such series plus certain fees, expenses, disbursements and advances of the Trustee and (b) all Events of Default, other than the nonpayment of accelerated principal or interest with respect to Debt Securities of such series have been cured or waived as provided in the Indenture (Section 502). The Indenture also provides that the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series may waive any past default with respect to such series and its consequences, except a default (x) in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or (y) in respect of a covenant or provision contained in the Indenture that cannot be modified or amended without the consent of the Holder of each Outstanding Debt Security affected thereby (Section 513). The Trustee is required to give notice to the Holders of Debt Securities within 90 days of a default under the Indenture; provided, however, that the Trustee may withhold notice to the Holders of any series of Debt Securities of any default with respect to such series (except a default in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or in the payment of any sinking fund installment in respect of any Debt Security of such series) if the Responsible Officers of the Trustee consider such withholding to be in the interest of such Holders (Section 601). The Indenture provides that no Holders of Debt Securities of any series may institute any proceedings, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an 34 37 Event of Default from the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of that series, as well as an offer of reasonable indemnity (Section 507). This provision will not prevent, however, any Holder of Debt Securities from instituting suit for the enforcement of payment of the principal of (and premium, if any) and interest on such Debt Securities at the respective due date thereof (Section 508). Subject to provisions in the Indenture relating to its duties in case of default, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any Holders of Debt Securities of any series then Outstanding under the Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity (Section 602). The Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred upon the Trustee. However, the Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the Holders of Debt Securities of such series not joining therein (Section 512). Within 120 days after the close of each fiscal year, the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) must deliver to the Trustee a certificate, signed by one of several specified officers of the Company, stating whether or not such officer has knowledge of any default under the Indenture and, if so, specifying each such default and the nature and status thereof (Section 1005). MODIFICATION OF THE INDENTURE Modifications and amendments of provisions of the Indenture applicable to any series may be made only with consent of the Holders of not less than a majority in principal amount of all Outstanding Debt Securities which are affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each such Debt Security affected thereby, (a) change the Stated Maturity of the principal of, or any installment of principal of or interest (or premium, if any) on, any such Debt Security; (b) reduce the principal amount of, or the rate or amount of interest on, or any premium payable on redemption of, any such Debt Security, or reduce the amount of principal of an Original Issue Discount Security that would be due and payable upon declaration of acceleration of the maturity thereof or would be provable in bankruptcy, or adversely affect any right of repayment of the Holder of any such Debt Security; (c) change the Place of Payment, or the coin or currency, for payment of principal of, premium, if any, or interest on any such Debt Security; (d) impair the right to institute suit for the enforcement of any payment on or with respect to any such Debt Security on or after the Stated Maturity thereof; (e) reduce the above-stated percentage of Outstanding Debt Securities of any series necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder or to reduce the quorum or voting requirements set forth in the Indenture; or (f) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the Holder of such Debt Security (Section 902). The Holders of not less than a majority in principal amount of Outstanding Debt Securities of a particular series have the right to waive compliance by the Operating Partnership or the Company with certain covenants in the Indenture relating to such series (Section 1010). Modifications and amendments of the Indenture may be made by the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) and the Trustee without the consent of any Holder of Debt Securities for any of the following purposes: (i) to evidence the succession of another Person to the Operating Partnership as obligor under the Indenture or succession of another Person as Guarantor; (ii) to add to the covenants of the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) for the benefit of the Holders of all or any series of Debt Securities or to surrender any right or power conferred upon the Operating Partnership or the Company in the Indenture; (iii) to add Events of Default for the benefit of the Holders of all or any series of Debt Securities; (iv) to add or change any 35 38 provisions of the Indenture to facilitate the issuance of Debt Securities in bearer form, or to permit or facilitate the issuance of Debt Securities in uncertificated form, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect; (v) to change or eliminate any provisions of the Indenture, provided that any such change or elimination shall become effective only when there are not Debt Securities Outstanding of any series created prior thereto which are entitled to the benefit of such provision; (vi) to secure the Debt Securities or Guarantees; (vii) to establish the form or terms of Debt Securities of any series and any related Guarantees; (viii) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trust under the Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or inconsistency in the Indenture, provided that such action shall not adversely affect the interests of Holders of Debt Securities of any series in any material respect; and (x) to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate defeasance and discharge of any series of such Debt Securities, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect (Section 901). The Indenture provides that in determining whether the Holders of the requisite principal amount of Outstanding Debt Securities of a series have given any request, demand, authorization, direction, notice, consent or waiver thereunder or whether a quorum is present at a meeting of Holders of Debt Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon declaration of acceleration of the maturity thereof, (ii) the principal amount of a Debt Security denominated in a Foreign Currency that shall be deemed outstanding shall be the U.S. dollar equivalent, determined on the issue date for such Debt Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent on the issue date of such Debt Security of the amount determined as provided in (i) above), (iii) the principal amount of an Indexed Security that shall be deemed outstanding shall be the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Indexed Security pursuant to Section 301 of the Indenture, and (iv) Debt Securities owned by the Operating Partnership or any other obligor upon the Debt Securities or any Affiliate of the Operating Partnership or of such other obligor shall be disregarded (Section 101). The Indenture contains provisions for convening meetings of the Holders of Debt Securities of a series (Section 1501). A meeting may be called at any time by the Trustee, and also, upon request, by the Operating Partnership or the Holders of at least 25% in principal amount of the Outstanding Debt Securities of such series, in any such case upon notice given as provided in the Indenture (Section 1502). Except for any consent that must be given by the Holder of each Debt Security affected by certain modifications and amendments of the Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Debt Securities of that series; provided, however, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Debt Securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Debt Securities of that series. Any resolution passed or decision taken at any meeting of Holders of Debt Securities of any series duly held in accordance with the Indenture will be binding on all Holders of Debt Securities of that series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the Outstanding Debt Securities of a series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Debt Securities of a series, the Persons holding or representing such specified percentage in principal amount of the Outstanding Debt Securities of such series will constitute a quorum (Section 1504). Notwithstanding the foregoing provisions, if any action is to be taken at a meeting of Holders of Debt Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver 36 39 or other action that the Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Debt Securities affected thereby, or of the Holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting and (ii) the principal amount of the Outstanding Debt Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under the Indenture (Section 1504). DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE Unless otherwise provided in the Prospectus Supplement, the Operating Partnership or the Company (if the Company has guaranteed any Debt Securities under such Indenture) may discharge certain obligations to Holders of any series of Debt Securities that have not already been delivered to the Trustee for cancellation and that either have become due and payable or will become due and payable within one year (or are scheduled for redemption within one year) by irrevocably depositing with the Trustee, in trust, funds in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable in an amount sufficient to pay the entire indebtedness on such Debt Securities in respect of principal (and premium, if any) and interest to the date of such deposit (if such Debt Securities have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be (Section 401). The Indenture provides that, unless otherwise provided in the Prospectus Supplement, if the provisions of Article Fourteen are made applicable to the Debt Securities of any series pursuant to Section 301 of the Indenture, the Operating Partnership may elect either (a) to decease and be discharged from any and all obligations with respect to such Debt Securities (except for the obligation to pay Additional Amounts, if any, upon the occurrence of certain events of tax, assessment or governmental charge with respect to payments on such Debt Securities and the obligations to register the transfer or exchange of such Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or agency in respect of such Debt Securities to compensate the Trustee and to hold moneys for payment in trust) ("defeasance") (Section 1402) or (b) to be released from its obligations with respect to such Debt Securities under Sections 1006 through 1008, inclusive, of the Indenture (being the restrictions described under "Certain Covenants") or, if provided pursuant to Section 301 of the Indenture, its obligations with respect to any other covenant, and any omission to comply with such obligations shall not constitute a default or an Event of Default with respect to such Debt Securities ("covenant defeasance") (Section 1403), in either case upon the irrevocable deposit by the Operating Partnership or the Company, as the case may be, with the Trustee, in trust, of any amount, in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable at Stated Maturity, or Government Obligations (as defined below), or both applicable to such Debt Securities which through the scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) and interest on such Debt Securities, and any mandatory sinking fund or analogous payments thereon, on the scheduled due dates therefor. Such a trust may only be established if, among other things, the Operating Partnership has delivered to the Trustee an Opinion of Counsel (as specified in the Indenture) to the effect that the Holders of such Debt Securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such Opinion of Counsel, in the case of defeasance, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture (Section 1404). "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the Foreign Currency in which the Debt Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such 37 40 government which issued the Foreign Currency in which the Debt Securities of such series are payable, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt (Section 101). Unless otherwise provided in the applicable Prospectus Supplement, if after the Operating Partnership or the Company, as the case may be, has deposited funds and/or Government Obligations to effect defeasance or covenant defeasance with respect to Debt Securities of any series, (a) the Holder of a Debt Security of such series is entitled to, and does, elect pursuant to Section 301 of the Indenture or the terms of such Debt Security to receive payment in a currency, currency unit or composite currency other than that in which such deposit has been made in respect of such Debt Security, or (b) a Conversion Event (as defined below) occurs in respect of the currency, currency unit or composite currency in which such deposit has been made, the indebtedness represented by such Debt Security shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any) and interest on such Debt Security as the same becomes due out of the proceeds yielded by converting the amount so deposited in respect of such Debt Security into the currency, currency unit or composite currency in which such Debt Security becomes payable as a result of such election or such cessation of usage based on the applicable market exchange rate (Section 1405). "Conversion Event" means the cessation of use of (i) a currency, currency unit or composite currency either by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions or within the international banking community, (ii) the ECU either within the European Monetary System or for the settlement of transactions by public institutions of or within the European Communities or (iii) any currency unit or composite currency other than the ECU for the purposes for which it was established. (Section 101.) Unless otherwise provided in the applicable Prospectus Supplement, all payments of principal of (and premium, if any) and interest on any Debt Security that is payable in a Foreign Currency that cease to be used by its government of issuance shall be made in U.S. dollars. In the event the Operating Partnership or the Company, as the case may be, effects covenant defeasance with respect to any Debt Securities and such Debt Securities are declared due and payable because of the occurrence of any Event of Default other than the Event of Default described in clause (d) under "Events of Default, Notice and Waiver" with respect to Section 1006 through 1008 of the Indenture (which Sections would no longer be applicable to such Debt Securities) or described in clause (g) under "Events of Default, Notice and Waiver" with respect to any other covenant as to which there has been covenant defeasance, the amount in such currency, currency unit or composite currency in which such Debt Securities are payable, and Government Obligations on deposit with the Trustee, will be sufficient to pay amounts due on such Debt Securities at the time of their Stated Maturity but may not be sufficient to pay amounts due on such Debt Securities at the time of the acceleration resulting from such Event of Default. However, the Operating Partnership and the Company (if the Company has guaranteed any Debt Securities) would remain liable to make payment of such amounts due at the time of acceleration. The applicable Prospectus Supplement may further describe the provisions, if any, permitting such defeasance or covenant defeasance, including any modifications to the provisions described above, with respect to the Debt Securities of a particular series. SUBORDINATION The terms and conditions, if any, upon which the Debt Securities are subordinated to other indebtedness of the Operating Partnership will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include a description of the indebtedness ranking senior to the Debt Securities, the restrictions on 38 41 payments to the Holders of such Debt Securities while a default with respect to such senior indebtedness in continuing, the restrictions, if any, on payments to the Holders of such Debt Securities following an Event of Default, and provisions requiring Holders of such Debt Securities to remit certain payments to holders of senior indebtedness. CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS Certain provisions of the Company's Charter and Bylaws might discourage certain types of transactions that involve an actual or threatened change of control of the Company. The Charter provides that the Company must seek the consent of holders of two-thirds of the issued and outstanding shares of Convertible Preferred Stock before the Company or the Operating Partnerships may merge or consolidate with any other entity or sell all or substantially all of the Company's or the Operating Partnership's assets. Also, the Charter requires that the Company must obtain the consent of holders of more than 50% of the issued and outstanding shares of Convertible Preferred Stock before it may undergo a change in control. See "Description of Preferred Stock -- Convertible Preferred Stock -- Senior Securities; Amendments; Other Matters." The Ownership Limit may delay or impede a transaction or a change in control of the Company that might involve a premium price for the Company's capital stock or otherwise be in the best interest of the stockholders. See "Description of Common Stock -- Restrictions on Transfer." Pursuant to the Company's Charter and Bylaws, the Company's Board of Directors is divided into three classes of directors, each class serving staggered three-year terms. The staggered terms of directors may reduce the possibility of a tender offer or an attempt to change control of the Company. The issuance of Preferred Stock by the Board of Directors may also have the effect of delaying, deferring or preventing a change in control of the Company. See "Description of Preferred Stock -- General." FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations is based on current law and does not purport to deal with all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including insurance companies, financial institutions and broker-dealers, tax exempt organizations, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. Certain federal income tax considerations relevant to holders of the Offered Securities may be provided in the applicable Prospectus Supplement relating thereto. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. GENERAL The Company believes that since its formation it has operated, and intends to continue to operate, in a manner that permits it to satisfy the requirements for taxation as a REIT under the applicable provisions of the Code. No assurance can be given, however, that such requirements will be met. The provisions of the Code relating to qualification and operation as a REIT are highly technical and complex. The following sets forth the material aspects of the Code provisions that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations thereunder, and administrative and judicial interpretations thereof, all of which are subject to change with retroactive effect. Morrison & Foerster LLP has acted as tax counsel to the Company in connection with Company's election to be taxed as a REIT. 39 42 In the opinion of Morrison & Foerster LLP, commencing with the Company's taxable year ended December 31, 1994, the Company has been organized in conformity with the requirements for qualification as a REIT, and its method of operation has and will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion is based upon various assumptions and is conditioned upon certain representations made by the Company as to factual matters. Such representations are set forth in a certificate of the Company filed with the opinion of Morrison & Foerster LLP relating to certain tax matters which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Moreover, such qualification and taxation as a REIT depends upon the Company's ability to meet, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code discussed below, the results of which will not be reviewed by Morrison & Foerster LLP. Accordingly, no assurance can be given that the actual results of the Company's operations for any particular taxable year will satisfy such requirements. See "-- Requirements for Qualification -- Failure to Qualify." An opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the Company's eligibility for taxation as a REIT. If the Company fails to qualify as a REIT in any year, it will be subject to federal and state income tax as if it were a domestic corporation, and its stockholders will be taxed in the same manner as stockholders of ordinary corporations. In this event, the Company could be subject to potentially significant tax liabilities and the amount of cash available for distribution to its stockholders could be reduced. TAXATION OF THE COMPANY In any year in which the Company qualifies as a REIT, it will generally not be subject to federal income tax on that portion of its net income that it distributes to stockholders. This treatment substantially eliminates the "double taxation" on income at the corporate and stockholder levels that generally results from investment in a corporation. However, a REIT will be subject to federal income tax as follows. First, a REIT will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. (However, a REIT can elect to "pass through" any of its taxes paid on retained capital gains to its shareholders on a pro rata basis.) Second, under certain circumstances, a REIT may be subject to the "alternative minimum tax" on its items of tax preference. Third, if a REIT has (i) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if a REIT has net income from "prohibited transactions," such income will be subject to a 100% tax. A "prohibited transaction" is a sale of "dealer property" (defined below), foreclosure property and property involuntarily converted. Fifth, if a REIT should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the REIT fails the 75% or 95% test. Sixth, if a REIT should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the REIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. For purposes of the excise tax, dividends declared in October, November, or December of one calendar year and paid by January 31 of the following calendar year are deemed paid December 31 of the initial calendar year. Seventh, if a REIT acquires any asset from a C corporation (i.e., generally a corporation subject to full corporate-level tax) in a transaction in which the basis of the asset in the REIT's hands is determined by reference to the basis of the asset (or any other property) in the hands of the C corporation, and the REIT recognizes gain on the disposition of such asset during the 10 year period beginning on the date on which such asset was acquired by the REIT, then, to the extent of any built-in gain at the time of acquisition, such gain will be subject to tax at the highest regular corporate rate. 40 43 REQUIREMENTS FOR QUALIFICATION The Code defines a real estate investment trust as a corporation, trust or association (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; (4) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code) at any time during the last half of each taxable year; and (7) which meets certain other tests, described below, regarding the nature of income and assets. The Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. A REIT must also report its income based on the calendar year. In order to ensure compliance with the ownership tests described above, the Company has placed certain restrictions on the transfer of the common stock and preferred stock to prevent further concentration of stock ownership. Moreover, to evidence compliance with these requirements, the Company must maintain records which disclose the actual ownership of its outstanding common stock and preferred stock. In fulfilling its obligations to maintain records, the Company must and will demand written statements each year from the record holders of designated percentages of its common stock and preferred stock disclosing the actual owners of such common stock and preferred stock. A list of those persons failing or refusing to comply with such demand must be maintained as part of the Company's records. A stockholder failing or refusing to comply with the Company's written demand must submit with his tax returns a similar statement disclosing the actual ownership of common stock and preferred stock and certain other information. In addition, the Charter provides restrictions regarding the transfer of its shares that are intended to assist the Company in continuing to satisfy the share ownership requirements. See "Description of Common Stock -- Restrictions on Transfer." Furthermore, the Company reports its income based on the calendar year. Although the Company intends to satisfy the shareholder demand letter rules described in the preceding paragraph, beginning in 1998, its failure to satisfy these requirements will not result in its disqualification as a REIT but may result in the imposition of IRS penalties against the Company. In addition, beginning in 1998, a REIT's failure to satisfy the requirement that not more than 50% of the value of its outstanding stock be owned by five or fewer individuals (as defined in the Code) during a taxable year would not result in its disqualification as a REIT under the Code as long as (i) the REIT satisfied the shareholder demand letter rules, and (ii) the REIT did not know, and exercising due diligence, would not have known, whether it had failed the requirement. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership shall retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests, described below. Thus, the Company's proportionate share of the assets, liabilities and items of income of the Operating Partnership will be treated as assets, liabilities and items of income of the Company for purposes of applying the requirements described below. Asset Tests At the close of each quarter of the Company's taxable year, the Company must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items and government securities (as well as certain temporary investments in stock or debt instruments purchased with the proceeds of new capital raised by the Company). Second, although the remaining 25% of the Company's assets generally may be invested without restriction, securities in this class may not exceed either (i) 5% of the 41 44 value of the Company's total assets as to any one non-government issuer, or (ii) 10% of the outstanding voting securities of any one issuer. The Company believes its investments in the Properties through its interest in the Operating Partnership constitute qualified assets for purposes of the 75% asset test. In addition, the Company may own 100% of a "qualified REIT subsidiary" as defined in the Code. All assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary will be treated as owned and realized directly by the Company. The Operating Partnership owns 100% of the non-voting preferred stock of Essex Management Corporation, Essex Sacramento, Inc. and Essex Fidelity I Corporation (the "Essex Preferred Stock Subsidiaries") and none of the voting common stock of the Essex Preferred Stock Subsidiaries. By virtue of its partnership interest in the Operating Partnership, the Company will be deemed to own its pro rata share of the assets of the Operating Partnership, including the securities of the Essex Preferred Stock Subsidiaries, as described above. Because the Operating Partnership will not own any of the voting securities of Essex Management Corporation, Essex Sacramento, Inc. and Essex Fidelity I Corporation and, in each case, the preferred stock's approval right is limited to certain fundamental corporate actions that could adversely affect the preferred stock as a class, the 10% limitation on holdings of voting securities of any one issuer will not be exceeded by the Company. Based upon its analysis of the total estimated value of the securities of the Essex Preferred Stock Subsidiaries owned by the Operating Partnership relative to the estimated value of the total assets owned by the Operating Partnership and the other assets of the Company, the Company believes that its pro rata share of the preferred non-voting stock of each of the Essex Preferred Stock Subsidiaries held by the Operating Partnership represents, in each case, less than 5% of the Company's total assets and, together with any other nonqualifying assets represents less than 25% of the Company's total assets. Although the Company plans to take steps to ensure that it satisfies the 5% value test for any quarter with respect to which retesting is to occur, there can be no assurance that such steps will always be successful or will not require a reduction in the Company's overall interest in the Operating Partnership. Gross Income Tests There are three (two beginning in 1998) separate percentage tests relating to the sources of the Company's gross income which must be satisfied for each taxable year. For purposes of these tests, where the Company invests in a partnership, the Company will be treated as receiving its share of the income and loss of the partnership, and the gross income of the partnership will retain the same character in the hands of the Company as it has in the hands of the partnership. See "-- Tax Aspects of the Company's Investment in the Operating Partnerships -- General." THE 75% TEST. At least 75% of the Company's gross income for the taxable year must be "qualifying income." Qualifying income generally includes (i) rents from real property (except as modified below); (ii) interest on obligations collateralized by mortgages on, or interests in, real property; (iii) gains from the sale or other disposition of interests in real property and real estate mortgages, other than gain from property held primarily for sale to customers in the ordinary course of the Company's trade or business ("dealer property"); (iv) dividends or other distributions on shares in other REITs, as well as gain from the sale of such shares; (v) abatements and refunds of real property taxes; (vi) income from the operation, and gain from the sale, of property acquired at or in lieu of a foreclosure of the mortgage collateralized by such property ("foreclosure property"); and (vii) commitment fees received for agreeing to make loans collateralized by mortgages on real property or to purchase or lease real property. For purposes of determining whether the Company complies with the 75% test (and 95% test described below), gross income does not include income from prohibited transactions. See "-- Taxation of the Company" and "-- Tax Aspects of the Company's Investment in the Operating Partnership -- Sale of the Properties." In addition, rents received from a tenant will not qualify as rents from real property in satisfying the 75% test (or the 95% test described below) if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant (a "related party tenant"). In addition, if rent attributable 42 45 to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as rents from real property. Moreover, an amount received or accrued will generally not qualify as rents from real property (or as interest income) for purposes of the 75% and 95% tests if it is based in whole or in part on the income or profits of any person. Rent or interest will not be disqualified, however, solely by reason of being based on a fixed percentage or percentages of receipts or sales. Finally, for rents received to qualify as rents from real property, the Company must generally not operate or manage the property or furnish or render services to tenants, other than through an "independent contractor" from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent that the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only, and are not otherwise considered "rendered to the occupant." For both the related party tenant rules and determining whether an entity qualifies as an independent contractor, certain attribution rules of the Code apply, pursuant to which shares of a REIT held by one entity are deemed held by another. Under prior law, if a REIT provides impermissible services to its tenants, all of the rent from those tenants can be disqualified from satisfying the 75% and 95% tests. Beginning in 1998, rents will not be disqualified if a REIT provides de minimis, impermissible services. For this purpose, services provided to tenants of a property are considered de minimis where income derived from the services rendered equals 1% or less of all income derived from the property (threshold determined on a property-by-property basis). For purposes of the 1% threshold, the amount treated as received for any service shall not be less than 150% of the direct cost incurred in furnishing or rendering the service. The Company, through the Operating Partnership (which will not be an independent contractor), will provide certain services with respect to the Properties and any newly acquired Properties. The Company believes that the services provided by the Operating Partnership are usually or customarily rendered in connection with the rental of space of occupancy only, and therefore that the provision of such services will not cause the rents received with respect to the Properties to fail to qualify as rents from real property for purposes of the 75% and 95% tests. Essex does not intend to rent to any related party (other than with respect to the Headquarters Building), to base any rent on the income or profits of any person (other than rents that are based on a fixed percentage or percentages of receipts or sales), or to charge rents that would otherwise not qualify as rents from real property. Essex rents a portion of its Headquarters Building to M&M, who is considered to be a related party tenant. Rent received by Essex from M&M will therefore not qualify as rents from real property for purposes of satisfying the 75% and 95% tests. It is not expected that the rent received from any related party (including M&M), together with other income not qualifying for the 95% test described below, will constitute in the aggregate more than 4% of Essex's gross income with respect to any taxable year. THE 95% TEST. In addition to deriving 75% of its gross income from the sources listed above, at least 95% of the Company's gross income for the taxable year must be derived from the above-described qualifying income, or from dividends, interest or gains from the sale or disposition of stock or other securities that are not dealer property. Dividends and interest on any obligation not collateralized by an interest on real property are included for purposes of the 95% test, but not for purposes of the 75% test. Furthermore, income earned on interest rate swaps and caps entered into as liability hedges against variable rate indebtedness qualify for the 95% test (but not the 75% test). Beginning in 1998, income earned on liability hedges against all of a REIT's indebtedness, such as options, futures, and forward contracts, will qualify for the 95% test (but not the 75% test). In certain cases, Treasury Regulations treat a variable rate debt instrument and a liability hedge as a synthetic debt instrument for all purposes of the Code. If a liability hedge entered into by a REIT is subject to these Treasury Regulations, income earned on the liability hedge will operate to reduce its interest expense, and, therefore, such income will not affect the REIT's compliance with either the 75% or 95% tests. Essex Management Corporation also anticipates receiving fee income in consideration of the performance of property management and other services with respect to properties not owned by Essex or the Operating Partnership; however, substantially all income derived by Essex from Essex Management Corporation will be in the form of dividends on Essex Management Corporation's preferred stock owned by the Operating Partnership. Such dividends, together with dividends from the other Essex Preferred Stock Subsidiaries, will 43 46 satisfy the 95%, but not the 75%, tests (as discussed above). Essex intends to closely monitor its non-qualifying income, but the Company anticipates that such income, including such dividend income and liability hedge income (if any), will not result in Essex's failing either the 75% or the 95% tests. Even if the Company fails to satisfy one or both of the 75% or 95% tests for any taxable year, it may still qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will generally be available if: (i) the Company's failure to comply was due to reasonable cause and not to willful neglect; (ii) the Company reports the nature and amount of each item of its income included in the 75% and 95% tests on a schedule attached to its tax return; and (iii) any incorrect information on this schedule is not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. If these relief provisions apply, the Company will, however, still be subject to a special tax upon the greater of the amount by which it fails either the 75% or 95% test for that year. THE 30% TEST. Prior to January 1, 1998, the Company must have derived less than 30% of its gross income for each taxable year from the sale or other disposition of (i) real property held for less than four years (other than foreclosure property and involuntary conversions), (ii) stock or securities held for less than one year, and (iii) property in a prohibited transaction. For tax years beginning after December 31, 1997, the 30% Test has been repealed. Annual Distribution Requirements The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders each year in an amount at least equal to (A) the sum of (i) 95% of the Company's REIT taxable income (computed without regard to the dividends paid deduction and the REIT's net capital gain) and (ii) 95% of the net income (after tax, if any) from foreclosure property, minus (B) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amount at regular capital gains or ordinary corporate tax rates, as the case may be. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. For this and other purposes, dividends declared on a date in October, November, or December to stockholders of record of such month of one calendar year and paid by January 31 of the following calendar year are deemed paid December 31 of the initial calendar year. The Company believes that it has made timely distributions sufficient to satisfy the annual distribution requirements. In this regard, the partnership agreement of the Operating Partnership authorizes the Company, as general partner, to take such steps as may be necessary to cause the Operating Partnership to distribute to its partners an amount sufficient to permit the Company to meet these distribution requirements. It is possible that in the future the Company may not have sufficient cash or other liquid assets to meet the 95% distribution requirement, due to timing differences between the actual receipt of income and actual payment of expenses on the one hand, and the inclusion of such income and deduction of such expenses in computing the Company's REIT taxable income on the other hand. Further, as described below, it is possible that, from time to time, the Company may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds its allocable share of cash attributable to that sale. The Company will closely monitor the relationship between its REIT taxable income and cash flow and, where necessary, will borrow funds (or cause the Operating Partnership or other affiliates to borrow funds) to satisfy the 95% distribution requirement. The Company (through the Operating Partnership) may be required to borrow funds at times when market conditions are not favorable. 44 47 Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year as a result of an adjustment to the Company's tax return by the IRS by paying "deficiency dividends" to shareholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. Thus, the Company will be able to maintain its REIT status and avoid being taxed on amounts distributed as deficiency dividends following an IRS adjustment; however, the Company will be required to pay interest and possibly penalties based on the amount of any deduction taken for deficiency dividends. Failure to Qualify If the Company fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which the Company fails to qualify will not be deductible by the Company, nor will they be required to be made. In such event, to the extent of the Company's current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether the Company would be entitled to such statutory relief. TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP The following discussion summarizes certain federal income tax considerations applicable solely to the Company's investment in the Operating Partnership. The discussion does not cover state or local tax laws or any federal tax laws other than income tax laws. It should be noted that the Company has not received an opinion of counsel with respect to the following discussion. General The Company holds a direct ownership interest in the Operating Partnership. In general, partnerships are "pass-through" entities which are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. The Company includes its proportionate share of the foregoing Operating Partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. See "-- Taxation of the Company" and "-- Requirements for Qualification -- Gross Income Tests." Any resultant increase in the Company's REIT taxable income increases its distribution requirements (see "-- Requirements for Qualification -- Annual Distribution Requirements"), but is generally not subject to federal income tax in the hands of the Company, if such income is distributed by the Company to its stockholders. Moreover, for purposes of the REIT asset tests (see "-- Requirements for Qualification -- Asset Tests"), the Company includes its proportionate share of assets held by the Operating Partnership. Tax Allocations with Respect to the Properties Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership (such as the Properties), must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of contributed property at the time of contribution, and the adjusted tax basis of such property at the time of contribution (the "Book-Tax Difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Operating Partnership was formed by way of contributions of appreciated property 45 48 (including the Properties). Consequently, the partnership agreement of the Operating Partnership requires such allocations to be made in a manner consistent with Section 704(c) of the Code. In general, the limited partners of the Operating Partnership will be allocated lower amounts of depreciation deductions for tax purposes and increased taxable income and gain on sale by the Operating Partnership of the contributed assets (including the Properties). This will tend to eliminate the Book-Tax Difference over the life of the Operating Partnership. However, the special allocation rules under Section 704(c) do not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands of the Operating Partnership may cause the Company to be allocated lower depreciation and other deductions, and possibly greater amounts of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause the Company to recognize taxable income in excess of cash proceeds, which might adversely affect the Company's ability to comply with the REIT distribution requirements. See "-- Requirements for Qualification -- Annual Distribution Requirements." With respect to any property purchased or to be purchased by the Operating Partnership (other than through the issuance of interests in the Operating Partnership) subsequent to the formation of the Company, such property will initially have a tax basis equal to its fair market value and the special allocation provisions described above will not apply. Sale of the Properties Generally, any gain realized by the Operating Partnership on the sale of real property held by the Operating Partnership for more than one year will be long-term capital gain. The Company's share of any gain realized by the Operating Partnership on the sale of any dealer property will generally be treated as income from a prohibited transaction that is subject to a 100% tax. See "-- Taxation of the Company" and "-- Requirements for Qualification -- Gross Income Tests -- The 95% Test." Under existing law, whether property is dealer property is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Operating Partnership intends to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning and operating the Properties, and to make such occasional sales of the Properties as are consistent with the Company's investment objectives. Based upon such investment objectives, the Company believes that in general the Properties should not be considered dealer property and that the amount of income from prohibited transactions, if any, will not be material. TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY Dividends; Generally As used herein, the terms "U.S. Stockholder" means a holder of shares of Company stock who (for U.S. federal income tax purposes) (i) is a citizen or resident of the United States, (ii) is a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) is an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) is a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in regulations, certain trusts in existence on August 20, 1996, and treated as U.S. persons prior to such date that elect to continue to be treated as U.S. persons, shall also be considered U.S. Stockholders. As long as the Company qualifies as a REIT, distributions made by the Company out of its current or accumulated earnings and profits (and not designated as capital gain dividends) will constitute dividends taxable to its taxable U.S. Stockholders as ordinary income. Such distributions will not be eligible for the dividends-received deduction otherwise available with respect to dividends received by U.S. Stockholders that are corporations. Distributions made by the Company that are properly designated by the Company as capital gain dividends will be taxable to taxable U.S. Stockholders as gains (to the extent that they do not exceed the Company's actual net capital gain for the taxable year) from the sale or disposition of a capital asset. Depending 46 49 on the period of time the Company held the assets which produced such gains, and on certain designations, if any, which may be made by the Company, such gains may be taxable to noncorporate U.S. Stockholders at a 20%, 25% or 28% rate. U.S. Stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. To the extent that the Company makes distributions (not designated as capital gain dividends) in excess of its current and accumulated earnings and profits, such distributions will be treated first as a tax-free return of capital to each U.S. Stockholder, reducing the adjusted basis which such U.S. Stockholder has in his shares of Company stock for tax purposes by the amount of such distribution (but not below zero), with distributions in excess of a U.S. Stockholder's adjusted basis in his shares taxable as capital gain, provided that the shares have been held as a capital asset (which, with respect to a noncorporate U.S. Stockholder, will be taxable as long-term capital gain if the shares have been held for more than eighteen months, midterm capital gain if the shares have been held for more than one year but not more than eighteen months, or short-term capital gain if the shares have been held for one year or less). Dividends declared by the Company in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by the Company on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any net operating losses or capital losses of the Company. Distributions made by the Company and gain arising from the sale or exchange by a U.S. Stockholder of shares of Company stock will not be treated as passive activity income, and, as a result, U.S. Stockholders generally will not be able to apply any "passive losses" against such income or gain. Distributions made by the Company (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of computing the investment interest limitation. Gain arising from the sale or other disposition of Company stock (or distributions treated as such), however, will not be treated as investment income under certain circumstances. The Company may elect to retain, rather than distribute as a capital gain dividend, its net long-term capital gains. In such event, the Company would pay tax on such retained net long-term capital gains. In addition to the extent designated by the Company, a U.S. Stockholder generally would (i) include his proportionate share of such undistributed long-term capital gains in computing his long-term capital gains in his return for his taxable year in which the last day of the Company's taxable year falls (subject to certain limitations as to the amount so includable), (ii) be deemed to have paid the capital gains tax imposed on the Company on the designated amounts included in such U.S. Stockholder's long-term capital gains, (iii) receive a credit or refund for such amount of tax deemed paid by it, (iv) increase the adjusted basis of his shares by the difference between the amount of such includable gains and the tax deemed to have been paid by him, and (v), in the case of a U.S. Stockholder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in accordance with Treasury Regulations (which have not yet been issued). Upon any sale or other taxable disposition of Company stock, a U.S. Stockholder will recognize gain or loss for federal income tax purposes in an amount equal to the difference between (i) the amount of cash and the fair market value of any property received on such sale or other disposition and (ii) the holder's adjusted basis in such shares of Company stock for tax purposes. Such gain or loss will be capital gain or loss if the shares have been held by the U.S. Stockholder as a capital asset and, with respect to a noncorporate U.S. Stockholder, will be mid-term or long-term gain or loss if such shares have been held for more than one year or more than eighteen months, respectively. In general, any loss recognized by a U.S. Stockholder upon the sale or other disposition of shares of Common Stock that have been held for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss, to the extent of capital gain dividends received by such U.S. Stockholder from the Company which were required to be treated as long-term capital gains. Backup Withholding The Company must report annually to the IRS and to each U.S. stockholder the amount of dividends paid to and the amount of tax withheld, if any, with respect to, each U.S. stockholder. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to 47 50 dividends paid and redemption proceeds unless such stockholder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. The Company may nonetheless institute backup withholding with respect to a stockholder if instructed to do so by the IRS. A stockholder that does not provide the Company with its correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's federal income tax liability. TAXATION OF TAX-EXEMPT STOCKHOLDERS The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a tax-exempt employees' pension trust do not constitute unrelated business taxable income ("UBTI"). Revenue rulings, however, are interpretive in nature and are subject to revocation or modification by the IRS. Based upon the ruling and the analysis therein, distributions by the Company to a stockholder that is a tax-exempt entity should not constitute UBTI, provided that the tax-exempt entity has not financed the acquisition of its shares of the Company's stock with "acquisition indebtedness" within the meaning of the Code, and that the shares of the Company's stock are not otherwise used in an unrelated trade or business of the tax-exempt entity. In addition, REITs generally treat the beneficiaries of qualified pension trusts as the beneficial owners of REIT shares owned by such pension trusts for purposes of determining if more than 50% of the REIT's shares are owned by five or fewer individuals. However, if a pension trust owns more than 10% of the REIT's shares, it can be subject to UBTI on all or a portion of REIT dividends made to it, if the Company is treated as a "pension-held REIT." In view of the Ownership Limit, the Company does not expect to be treated as a "pension-held REIT." See "Description of Common Stock -- Restrictions on Transfer." TAXATION OF NON-U.S. STOCKHOLDERS The rules governing U.S. federal income taxation of the ownership and disposition of Company stock by persons that are, for purposes of such taxation, nonresident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of U.S. federal income tax and does not address state, local or foreign tax consequences that may be relevant to a Non-U.S. Stockholder in light of his particular circumstances. In addition, this discussion is based on current law, which is subject to change, and assumes that the Company qualifies for taxation as a REIT. The discussion addresses only certain aspects of U.S. federal income and estate taxation and does not address the impact of any applicable treaty. Prospective Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of federal, state, local and foreign income tax laws with regard to an investment in Company stock, including any reporting requirements. Distributions From the Company. 1. Ordinary Dividends. Distributions that are not attributable to gain from sales or exchanges by the Company or the Operating Partnership of "United States real property interests" ("USRPIs"), as defined in the Code, and not designated by the Company as capital gains dividends will be treated as dividends of ordinary income to the extent they are made out of current or accumulated earnings and profits of the Company. Unless such distributions are effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Holder), the gross amount of the distributions will ordinarily be subject to U.S. withholding tax at a 30% or lower treaty rate. In general, Non-U.S. Stockholders will not be considered engaged in a U.S. trade or business (or, in the case of an income tax treaty, as having a U.S. permanent established) solely by reason of their ownership of the Company's stock. If income on the Company's stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), the Non-U.S. Stockholder generally will be subject to a tax at graduated rates in the same manner as U.S. Stockholders are 48 51 taxed with respect to such distributions (and may also be subject to the 30% branch profits tax in the case of a stockholder that is a foreign corporation). The Company expects to withhold U.S. income tax at the rate of 30% on the gross amount of any distributions of ordinary income made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and proper certification is provided or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the distribution is effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Stockholder). Pursuant to current Treasury Regulations, dividends paid to an address in a country outside the United States are generally presumed to be paid to a resident of such country for purposes of ascertaining the requirement of withholding discussed above and the applicability of an income tax treaty rate. Under temporary Treasury Regulations, however, certain Non-U.S. Stockholders who seek to claim the benefit of an applicable treaty rate are required to satisfy certain certification and other requirements. 2. Non-Dividend Distributions. Unless the Company's stock constitutes a USRPI, distributions in excess of current and accumulated earnings and profits of the Company will not be taxable to a Non-U.S. Stockholder to the extent that such distributions do not exceed the adjusted basis of the Non-U.S. Stockholder's shares but rather will reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a Non-U.S. Stockholder's shares of the Company's capital stock, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his shares, as described below. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distributions will be subject to withholding at the same rate as dividends. If, however, the Company's stock is treated as a USRPI, any distributions in excess of current or accumulated earnings and profits will generally be subject to 10% withholding and, to the extent such distributions also exceed the adjusted basis of a Non-U.S. Stockholder's stock, they will also give rise to gain from the sale or exchange of the stock, the tax treatment of which is described below. Amounts withheld may be refundable if it is subsequently determined that such amounts are in excess of the Non-U.S. Stockholder's tax liability. 3. Capital Gain Dividends. Distributions that are attributable to gain from sales or exchanges by the Company of USRPIs ("USRPI Capital Gains"), such as properties beneficially owned by the Company, will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder as gain effectively connected with a U.S. trade or business, regardless of whether such dividends are designated as capital gain dividends. Non-U.S. Stockholders would thus be taxed at the normal capital gain rates applicable to U.S. Stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals) on such distributions. Also, distributions from USRPI Capital Gains may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S. Stockholder not entitled to treaty exemption or rate reduction. The Company is required by applicable Treasury Regulations to withhold 35% of any distribution consisting of USRPI Capital Gains. This amount may be creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Other distributions attributable to the Company's capital gains, other than its USRPI Capital Gains, generally will not be subject to taxation, unless (i) investment in the shares is effectively connected with the Non-U.S. Stockholder's U.S. trade or business (or, if an income tax treaty applies, it is attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. Stockholders with respect to such gain (except that a foreign corporate Non-U.S. Stockholder may also be subject to the 30% branch profits tax), or (ii) the Non-U.S. Stockholder is a non-resident alien individual who is present in the United States for 183 days or more during the taxable year and either has a "tax home" in the United States or sold his or her shares of Company stock under circumstances in which the sale was attributable to a U.S. office, in which case the non-resident alien individual will be subject to a 30% tax on the individual's capital gains. Disposition of Stock of the Company. Gain recognized by a Non-U.S. Stockholder upon a sale of shares of Company stock will generally not be taxed under FIRPTA if the shares do not constitute a USRPI. Shares 49 52 of Company stock will not be considered a USRPI if the Company is a "domestically controlled REIT," or if the shares are part of a class of stock that is regularly traded on an established securities market and the holder owned less than 5% of the class of stock sold during a specified testing period. A "domestically controlled REIT" is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. The Company believes that it is, and expects that it will continue to be, a "domestically controlled REIT," and therefore the sale of shares will not be subject to taxation under FIRPTA. However, since the Company's Common Stock is publicly traded, no assurance can be given to this effect. If the gain on the sale of shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. Stockholders with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals), and the purchaser of the stock may be required to withhold 10% of the purchase price and remit such amount to the IRS. Gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the shares is effectively connected with a United States trade or business of the Non-U.S. Stockholder (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. Stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a non-resident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the non-resident alien individual will be subject to a 30% tax on the individual's capital gains. Estate Tax. Stock of the Company owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to U.S. federal estate tax on the property includable in the estate for U.S. federal estate tax purposes. Information Reporting and Backup Withholding. The Company must report annually to the IRS and to each Non-U.S. Stockholder the amount of dividends (including any capital gain dividends) paid to, and the tax withheld with respect to, each Non-U.S. Stockholder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these returns may also be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S. Stockholder resides. U.S. backup withholding, which generally is imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the U.S. information reporting requirements, will generally not apply to dividends (including any capital gain dividends) paid on stock of the Company to a Non-U.S. Holder at an address outside the United States. However, the payment of the proceeds from the disposition of stock of the Company to or though a U.S. office of a broker will be subject to information reporting and backup withholding unless the owner, under penalty of perjury, certifies, among other things, its status as a Non-U.S. Holder, or otherwise establishes an exemption. The payment of the proceeds from the disposition of stock to or through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding and information reporting. New Withholding Regulations. Final regulations with withholding tax on income paid to foreign persons and related matters (the "New Withholding Regulations") were recently promulgated. In general, the New Withholding Regulations do not significantly alter the substantive withholding and information reporting requirements, but unify current certification procedures and forms and clarify reliance standards. For example, the New Withholding Regulations adopt a certification rule which was in the proposed regulations under which a Non-U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate with respect to dividends received from a U.S. corporation will be required to satisfy certain certification and other requirements. In addition, the New Withholding Regulations require a corporation that is a REIT to treat as a dividend the portion of a distribution that is not designated as a capital gain dividend or return of basis and apply the 30% withholding tax (subject to any applicable deduction or exemption) to such portion, and to apply the FIRPTA withholding rules (discussed above) with respect to the portion of the distribution 50 53 designated by the REIT as capital gain dividend. The New Withholding Regulations will generally be effective for payments made after December 31, 1998, subject to certain transition rules. EXCEPT AS PROVIDED IN THIS PARAGRAPH, THE DISCUSSION SET FORTH ABOVE UNDER "TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT TO THEM OF THE NEW WITHHOLDING REGULATIONS. OTHER TAX CONSIDERATIONS Essex Preferred Stock Subsidiaries A portion of the cash to be used by the Operating Partnership to fund distributions to partners, including Essex, is expected to come from the Essex Preferred Stock Subsidiaries through dividends on the non-voting stock of the Essex Preferred Stock Subsidiaries held by the Operating Partnership. The Essex Preferred Stock Subsidiaries will pay federal and state income tax at the full applicable corporate rates. The Essex Preferred Stock Subsidiaries will attempt to minimize the amount of such taxes, but there can be no assurance whether or to what extent measures taken to minimize taxes will be successful. Because Essex, the Operating Partnership and the Essex Preferred Stock Subsidiaries are related through stock or partnership ownership, the allocation of certain expenses and reimbursements thereof among Essex, the Essex Preferred Stock Subsidiaries and the Operating Partnership could be subject to additional scrutiny by the IRS. To the extent that the Essex Preferred Stock Subsidiaries are required to pay federal, state or local taxes, the cash available for distribution by Essex to stockholders will be reduced accordingly. Dividend Reinvestment Program Under the Company's dividend reinvestment program, stockholders participating in the program will be deemed to have received the gross amount of any cash distributions which would have been paid by the Company to such stockholders had they not elected to participate. These deemed distributions will be treated as actual distributions from the Company to the participating stockholders and will retain the character and tax effect applicable to distributions from the Company generally. See "Federal Income Tax Considerations -- Taxation of Taxable U.S. Stockholders." Participants in the dividend reinvestment program are subject to federal income tax on the amount of the deemed distributions to the extent that such distributions represent dividends (including capital gains dividends) of the Company, even though they receive no cash. Shares of Company stock received under the program will have a holding period beginning with the day after purchase, and a tax basis equal to their cost (which is the gross amount of the deemed distribution). Possible Legislative or Other Actions Affecting Tax Consequences Prospective investors should recognize that the present federal income tax treatment of an investment in the Company may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in the Company. State and Local Taxes The Company and its stockholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisers regarding the effect of state and local tax laws on an investment in the Common Stock of the Company. 51 54 It should be noted that the Company has not obtained an opinion of counsel with respect to the foregoing disclosure in subsections entitled "Taxation of Taxable Domestic Stockholders," "Taxation of Tax -- Exempt Stockholders," "Taxation of Foreign Stockholders" and "Other Tax Considerations". PLAN OF DISTRIBUTION The Company and the Operating Partnership may sell the Offered Securities to one or more underwriters for public offering and sale by them or may sell the Offered Securities to investors directly or through agents, which agents may be affiliated with the Company. Any such underwriter or agent involved in the offer and sale of the Offered Securities will be named in the applicable Prospectus Supplement. Sales of Offered Securities offered pursuant to any applicable Prospectus Supplement may be effected from time to time in one or more transactions at a fixed price or prices which may be changed, at prices related to the prevailing market prices at the time of sale, or at negotiated prices. The Company and the Operating Partnership also may, from time to time, authorize underwriters acting as the Company's or the Operating Partnership's agents to offer and sell the Offered Securities upon the terms and conditions as set forth in the applicable Prospectus Supplement. In connection with the sale of Offered Securities, underwriters may be deemed to have received compensation from the Company or from the Operating Partnership in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Offered Securities for whom they may act as agent. Underwriters may sell Offered Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensation paid by the Company or the Operating Partnership to underwriters or agents in connection with the offering of Offered Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Offered Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Offered Securities may be deemed to be underwriting discounts and commissions under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company or the Operating Partnership, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. Any such indemnification agreements will be described in the applicable Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, each series of Offered Securities will be a new issue with no established trading market, other than the Common Stock which is listed on the New York Stock Exchange. Any shares of Common Stock sold pursuant to a Prospectus Supplement will be listed on such exchange, subject to official notice of issuance. The Company may elect to list any series of Preferred Stock, Depositary Shares, Warrants or Debt Securities on any exchange, but it is not obligated to do so. It is possible that one or more underwriters may make a market in a series of Offered Securities, but will not be obligated to do so and may discontinue any market making at any time without notice. Therefore, no assurance can be given as to the liquidity of the trading market for the Offered Securities. If so indicated in the applicable Prospectus Supplement, the Company or the Operating Partnership may authorize dealers acting as the Company's or Operating Partnership's agent to solicit offers by certain institutions to purchase Offered Securities from the Company or Operating Partnership at the public offering price set forth in such Prospectus Supplement pursuant to delayed delivery contracts ("Contracts") providing for payment and delivery on the date or dates stated in such Prospectus Supplement. Each Contract will be for an amount not less than, and the aggregate principal amount of Offered Securities sold pursuant to Contracts shall be not less nor more than, the respective amounts stated in the applicable Prospectus Supplement. Institutions with whom Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions but will in all cases be subject to the approval of the Company. Contracts will not be subject to any conditions except (i) the purchase by an institution of the Offered Securities covered by its Contracts shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such 52 55 institution is subject, and (ii) if the Offered Securities are being sold to underwriters, the Company or the Operating Partnership shall have sold to such underwriters the total principal amount of the Offered Securities less the principal amount thereof covered by Contracts. Certain of the underwriters and their affiliates may be customers of, engage in transactions with and perform services for, the Company in the ordinary course of business. EXPERTS The consolidated financial statements and schedule of the Company as of December 31, 1996 and 1995, and for the years ended December 31, 1996 and 1995, and for the period June 13, 1994 through December 31, 1994 and of Essex Partners Properties for the period January 1, 1994 through June 12, 1994, the audited Combined Historical Summary of Gross Income and Direct Operating Expenses for the year ended December 31, 1996 of Wilshire Promenade, Tara Village, Evergreen Heights, The Bluffs II, The Village Apartments, Camarillo Lots 7, 8 and 9, and Huntington Breakers Apartments, and the audited Combined Statement of Revenues and Certain Expenses of Stonehedge Village, Bridle Trails, Spring Lake, and Maple Leaf for the year ended December 31, 1996 have been incorporated by reference herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements and schedule of the Operating Partnership as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995, and for the period June 13, 1994 through December 31, 1994 and Essex Partners Properties for the period January 1, 1994 through June 12, 1994, are included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified accountants, and upon the authority of said firm as experts in accounting and auditing. LEGAL MATTERS The validity of the Offered Securities will be passed upon for the Company by Morrison & Foerster LLP, Palo Alto, California. In addition, the description of the Company's qualification and taxation as a REIT under the Code contained in this Prospectus under the caption entitled "Federal Income Tax Considerations -- General" is based upon the opinion of Morrison & Foerster LLP. 53 56 ESSEX PORTFOLIO, L.P. INDEX TO FINANCIAL STATEMENTS AND OTHER INFORMATION FINANCIAL STATEMENTS FOR ESSEX PORTFOLIO, L.P. AND ESSEX PARTNERS PROPERTIES (PREDECESSOR) AS OF DECEMBER 31, 1996
PAGE ---- Financial Statements Independent Auditors' Report.............................. F-2 Balance Sheets of Essex Portfolio, L.P. as of December 31, 1996 and 1995.......................... F-3 Statements of Operations of Essex Portfolio, L.P. for the years ended December 31, 1996 and 1995 and the period from June 13, 1994 through December 31, 1994, and the Statement of Operations for Essex Partners Properties for the period from January 1, 1994 through June 12, 1994...................................................... F-4 Statements of Partners' Capital of Essex Portfolio, L.P. for the years ended December 31, 1996, 1995 and 1994...... F-5 Statements of Cash Flows of Essex Portfolio, L.P. for the years ended December 31, 1996 and 1995, and for the period from June 13, 1994 through December 31, 1994, and Statement of Cash Flows of Essex Partners Properties for the period from January 1, 1994 through June 12, 1994...................................................... F-6 Notes to Financial Statements............................... F-7 Schedule III: Real Estate and Accumulated Depreciation...... F-18 Index to Unaudited Financial Statements and Other Information of Essex Portfolio. L.P....................... F-20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. F-30
F-1 57 INDEPENDENT AUDITORS' REPORT The Partners Essex Portfolio, L.P.: We have audited the accompanying balance sheets of Essex Portfolio, L.P. as of December 31, 1996 and 1995, and the related statements of operations, partners' capital and cash flows for the years ended December 31, 1996 and 1995, and the period June 13, 1994 through December 31, 1994 and of Essex Partners Properties (the Predecessor) for the period January 1, 1994 through June 12, 1994. In connection with our audits of the financial statements, we have also audited the financial statement schedule of Real Estate and Accumulated Depreciation as of December 31, 1996. These financial statements and the financial statement schedule are the responsibility of the management of Essex Portfolio, L.P. and the Predecessor. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 Essex Portfolio, L.P. as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995 and for the period June 13, 1994 through December 31, 1994 and of the Predecessor for the period January 1, 1994 through June 12, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP San Francisco, California January 31, 1997 F-2 58 ESSEX PORTFOLIO, L.P. BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) ASSETS
1996 1995 -------- -------- Real estate: Rental properties: Land and land improvements............................. $ 90,557 $ 61,738 Buildings and improvements............................. 303,252 222,620 -------- -------- 393,809 284,358 Less accumulated depreciation............................. (47,631) (40,281) -------- -------- 346,178 244,077 Investments............................................... 8,537 8,656 -------- -------- 354,715 252,733 Cash, cash equivalents, and restricted cash................. 46,899 3,983 Notes and other related party receivables................... 2,362 4,780 Notes and other receivables................................. 5,293 5,130 Prepaid expenses and other assets........................... 3,745 1,944 Deferred charges, net....................................... 4,160 5,090 -------- -------- $417,174 $273,660 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Mortgage notes payable...................................... $153,205 $136,061 Lines of credit............................................. -- 18,463 Accounts payable and accrued liabilities.................... 7,346 2,964 Distributions payable....................................... 6,286 3,455 Other liabilities........................................... 2,249 1,565 -------- -------- Total liabilities................................. 169,086 162,508 Minority interest........................................... 1,042 1,211 Partners' capital: General partner: Common equity.......................................... 205,302 84,729 Preferred equity....................................... 17,505 -- -------- -------- 222,807 84,729 Limited partners' common equity........................... 24,239 25,212 -------- -------- Total partners' capital........................... 247,046 109,941 -------- -------- $417,174 $273,660 ======== ========
See accompanying notes to financial statements. F-3 59 ESSEX PORTFOLIO, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
ESSEX PARTNERS ESSEX PORTFOLIO, L.P. PROPERTIES ---------------------------------------------------- -------------------- YEAR ENDED YEAR ENDED JUNE 13, THROUGH JANUARY 1, THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 12, 1996 1995 1994 1994 -------------- -------------- ------------------ -------------------- Revenues: Rental.......................... $47,780 $41,640 $19,499 $12,742 Property and asset management... -- -- -- 1,794 Interest and other income....... 2,913 2,300 914 275 ------- ------- ------- ------- 50,693 43,940 20,413 14,811 ------- ------- ------- ------- Expenses: Property operating expenses: Maintenance and repairs...... 4,341 3,811 1,725 1,108 Real estate taxes............ 3,790 3,371 1,601 1,120 Utilities.................... 3,175 2,974 1,396 834 Administrative............... 2,911 2,592 1,297 922 Advertising.................. 653 299 149 142 Insurance.................... 635 557 284 141 Depreciation and amortization............... 8,855 8,007 4,030 2,598 ------- ------- ------- ------- 24,360 21,611 10,482 6,865 Interest........................ 11,442 10,928 4,304 5,924 Amortization of deferred financing costs.............. 639 1,355 773 96 General and administrative...... 1,717 1,527 457 306 Loss from hedge termination..... 42 288 -- -- Property and asset management... -- -- -- 974 Other........................... -- -- -- 314 ------- ------- ------- ------- Total expenses............... 38,200 35,709 16,016 14,479 ------- ------- ------- ------- Income before gain on sales of real estate, provision for income taxes, minority interest and extraordinary items...................... 12,493 8,231 4,397 332 Gain on sales of real estate...... 2,477 6,013 -- -- Provision for income taxes........ -- -- -- (267) Minority interest................. (386) (352) (163) 87 ------- ------- ------- ------- Income before extraordinary items...................... 14,584 13,892 4,234 152 Extraordinary loss on early extinguishments of debt......... (3,441) (154) -- -- ------- ------- ------- ------- Net income................... 11,143 13,738 4,234 152 Dividends on preferred units...... (635) -- -- -- ------- ------- ------- ------- Net income available to common units............... $10,508 $13,738 $ 4,234 $ 152 ======= ======= ======= ======= Per Operating Partnership Common Unit data: Net income from operations before extraordinary item.... $ 1.52 $ 1.71 $ 0.52 Extraordinary loss on early extinguishments of debt...... (0.37) (0.02) -- ------- ------- ------- Net income................... $ 1.15 $ 1.69 $ 0.52 ======= ======= ======= Weighted average number of common units........................... 9,203 8,130 8,130 ======= ======= ======= Distributions per Operating Partnership common unit......... $ 1.72 $ 1.69 $ 0.92 ======= ======= =======
See accompanying notes to financial statements. F-4 60 ESSEX PORTFOLIO, L.P. STATEMENTS OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
GENERAL PARTNER/PREDECESSOR ------------------------------ PREFERRED COMMON EQUITY EQUITY LIMITED PARTNER ------------------ --------- ------------------ UNITS AMOUNT AMOUNT UNITS AMOUNT TOTAL ------- -------- --------- ------- -------- -------- Balance at December 31, 1993.......... -- $ 7,772 $ -- -- $ -- $ 7,772 Partner distributions................. -- (1,273) -- -- -- (1,273) Net income through June 12, 1994...... -- 152 -- -- -- 152 ------ -------- ------- ----- ------- -------- Balance at June 12, 1994.............. -- 6,651 -- -- -- 6,651 Recognition of limited partners' interests........................... -- (25,889) -- 1,855 25,889 -- Contribution -- net proceeds from the initial public offering............. 6,275 112,071 -- -- -- 112,071 Effect of the initial public offering............................ -- (5,658) -- -- -- (5,658) Net income............................ -- 3,266 -- -- 968 4,234 Partners' distributions............... -- (5,742) -- -- (1,652) (7,394) ------ -------- ------- ----- ------- -------- Balances at December 31, 1994......... 6,275 84,699 -- 1,855 25,205 109,904 Net income............................ -- 10,604 -- -- 3,134 13,738 Partners' distributions............... -- (10,574) -- -- (3,127) (13,701) ------ -------- ------- ----- ------- -------- Balances at December 31, 1995......... 6,275 84,729 -- 1,855 25,212 109,941 Contribution -- net proceeds from preferred stock offering............ -- -- 17,505 -- -- 17,505 Contribution -- net proceeds from common stock offerings.............. 5,313 126,464 -- -- -- 126,464 Contribution -- net proceeds from options exercised................... 4 68 -- -- -- 68 Net income............................ -- 8,246 635 -- 2,262 11,143 Partners' distributions............... -- (14,205) (635) -- (3,235) (18,075) ------ -------- ------- ----- ------- -------- Balances at December 31, 1996......... 11,592 $205,302 $17,505 1,855 $24,239 $247,046 ====== ======== ======= ===== ======= ========
See accompanying notes to financial statements. F-5 61 ESSEX PORTFOLIO, L.P. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
ESSEX PARTNERS ESSEX PORTFOLIO, L.P. PROPERTIES --------------------------------------------- ---------------- YEAR ENDED YEAR ENDED JUNE 13, TO JANUARY 1, TO DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 12, 1996 1995 1994 1994 ------------- ------------- ------------- ---------------- Cash flows from operating activities: Net income................................................ $ 11,143 $ 13,738 $ 4,234 $ 152 Minority interest......................................... (215) (131) (76) (87) Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of real estate............................ (2,477) (6,013) -- -- Equity income of limited partnerships................... (546) (92) -- -- Loss on early extinguishment of debt.................... 3,441 154 -- -- Loss from hedge termination............................. 42 62 -- -- Depreciation and amortization........................... 8,855 8,007 4,030 2,598 Amortization of deferred financing costs................ 639 1,355 773 96 Changes in operating assets and liabilities: Other receivables..................................... (163) (48) (71) 1,848 Prepaid expenses and other assets..................... (2,110) (561) 3,626 (1,396) Accounts payable and accrued liabilities.............. 842 (73) 685 691 Other liabilities..................................... 684 197 (1,101) 1,087 -------- -------- -------- -------- Net cash provided by operating activities.......... 20,135 16,595 12,100 4,989 -------- -------- -------- -------- Cash flows from investing activities: Additions to rental properties............................ (101,429) (9,516) (84,940) (1,796) Issuance of notes receivable.............................. (3,909) (500) (8,673) -- Repayments of notes receivable............................ 6,327 333 -- -- Investments in corporations and joint ventures............ 665 (7,426) (1,138) -- Dispositions of real estate............................... 13,350 12,147 -- -- -------- -------- -------- -------- Net cash used in investing activities.............. (84,996) (4,962) (94,751) (1,796) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit............................................... 91,253 21,700 128,904 -- Repayment of mortgage and other notes payable and lines of credit.................................................. (110,305) (17,195) (138,434) (2,113) Additions to deferred charges............................. (2,530) (930) (7,085) -- Additions to payable to related parties................... -- -- 190 919 Repayment of payable to related parties................... -- -- (4,668) (2,908) Contributions from stock offerings -- general partner..... 143,969 -- 112,071 -- Increase in offering related accounts payable............. 1,140 -- -- -- Contributions from stock options exercised -- general partner............................................... 68 -- -- -- Net payments made in connection with the reorganization... -- -- (4,721) -- Net payments made in connection with costs related to the early extinguishment of debt............................ (620) -- -- -- Distributions to limited partners......................... (3,189) (3,123) -- (1,273) Distributions to general partners......................... (12,009) (10,513) (4,044) -- -------- -------- -------- -------- Net cash provided by (used in) financing activities....................................... 107,777 (10,061) 82,213 (5,375) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 42,916 1,572 (438) (2,182) Cash and cash equivalents at beginning of period............ 3,983 2,411 2,849 5,031 -------- -------- -------- -------- Cash and cash equivalents at end of period.................. $ 46,899 $ 3,983 $ 2,411 $ 2,849 ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest.................................... $ 11,575 $ 10,927 $ 3,562 $ 6,584 ======== ======== ======== ======== Supplemental disclosure of non-cash investing and financing activities: Mortgage note payable assumed in connection with purchase of real estate.......................................... $ 17,733 $ -- $ -- $ 9,161 ======== ======== ======== ======== Distributions payable................................... $ 6,286 $ 3,455 $ 3,394 $ -- ======== ======== ======== ========
See accompanying notes to financial statements. F-6 62 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) 1. ORGANIZATION AND BASIS OF PRESENTATION Essex Portfolio, L.P. (the Operating Partnership) was formed in March 1994 and commenced operations on June 13, 1994, when Essex Property Trust, Inc. (the Company), the general partner in the Operating Partnership (the General Partner), completed its initial public offering (the Offering) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112,071 were used by the General Partner to acquire a 77.2% interest in the Operating Partnership. The Operating Partnership holds the assets and liabilities and conducts the operating activities of the Company. The Company has elected to be treated as a real estate investment trust (REIT) under the Internal Revenue Code of 1986 (the "Code"), as amended. The limited partners own an aggregate 13.8% interest in the Operating Partnership at December 31, 1996. The limited partners may convert their interests into shares of common stock of the Company or cash based upon the trading price of the common stock at the conversion date. The Company has reserved 1,855,000 shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024. Concurrent with the Offering, two mortgage loans were completed, generating net proceeds of $66,200. The Operating Partnership used the net proceeds from the Offering and the two mortgage loans as follows: (i) $146,600 to repay indebtedness, (ii) $31,200 to acquire two multi-family properties, and (iii) $500 to pay expenses related to the Offering. The net effect of certain transactions resulting from the formation and Offering was charged directly to partners' capital. Such transactions, which include payments for limited partnership interests in predecessor partnerships contributed to the Operating Partnership, repayment of an affiliate line of credit securing two contributed properties, issuance of a note receivable to the minority interest partners in Pathways Apartments (Pathways) and the adjustments for Essex Property Corporation (EPC) assets and liabilities which were not transferred to the Operating Partnership, are reflected in the accompanying statements of partners' capital for the year ended December 31, 1994. The charge of $5,658 to partners' capital is comprised of the following: Net effect of Offering: Distributions to partners Repayment of an affiliate line of credit securing two contributed properties.............................. $ 6,750 Limited partner buyouts and related costs............ 2,321 ------- 9,071 ------- Issuance of note receivable to the minority interest partners in Pathways.................................. (4,800) ------- EPC net assets which were not transferred to the Operating Partnership Assets (primarily accounts receivable unrelated to property operations and non-controlling interest in partnerships)......................................... 5,687 Liabilities of EPC not repaid or assumed by the Operating Partnership................................. (4,300) ------- 1,387 ------- $ 5,658 =======
The financial statements for the period January 1 through June 12, 1994 include the combined financial statements of Essex Partners Properties (the Predecessor), the predecessor to the Operating Partnership. The combined financial statements of the Predecessor include EPC and the combined accounts of 17 limited partnerships in which a majority economic ownership was controlled by EPC or its affiliates. F-7 63 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Real Estate Rental Properties Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over the estimated useful lives of 3 to 40 years using the straight-line method. Maintenance and repair expenses are charged to operations as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives. Rental properties are pledged as collateral for the related mortgage notes payable. The Operating Partnership adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121), effective January 1, 1996. In the normal course of business, when the Operating Partnership determines that a property is considered to be held for sale, it will discontinue the periodic depreciation of that property in accordance with the provisions of SFAS 121. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In addition, whenever events or changes in circumstances indicate that the carrying amount of a property to be held may not be fully recoverable, the carrying amount will be evaluated. If the sum of the property's expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Operating Partnership will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. No impairment has been recorded through December 31, 1996. Adoption of this Statement did not have a material impact on the Operating Partnership's financial position, results of operations, or liquidity. Real Estate Investments The Operating Partnership accounts for its investments in joint ventures and corporations in a manner which approximates the equity method of accounting. Cash Equivalents Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. Cash, cash equivalents, and restricted cash as of December 31, 1996 and 1995 include $4,194 and $-0-, respectively, of restricted cash related to reserve requirements in conjunction with the Operating Partnership's tax exempt variable rate bond financings. Revenues For residential properties, rental revenue is reported on the accrual basis of accounting. For the retail and corporate properties, rental income is accrued on the straight-line basis over the terms of the leases. Accrued rent receivable relating to such leases has been included in other assets in the accompanying balance sheets. Property management fees of the Predecessor were based on a percentage of rental receipts of properties managed and recognized as the related rental receipts were collected. Asset management fees were based on a percentage of assets managed and recognized monthly as earned. F-8 64 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) Deferred Charges Deferred charges are principally comprised of mortgage loan fees and costs which are amortized over the terms of the related mortgage notes in a manner which approximates the effective interest method. Interest Rate Protection and Swap Arrangements The Operating Partnership will from time to time use interest rate protection and swap agreements to reduce its interest rate exposure on specific variable rate loans. The cost of such arrangements is capitalized and amortized over the term of the agreement. If the agreement is terminated the gain or loss on termination is deferred and amortized over the remaining term of the agreement or reflected in income on repayment of the related debt. Income Taxes No provision for income taxes has been made as the Operating Partnership's taxable income or loss is reportable on the tax returns of the individual partners based on their proportionate interest in the Operating Partnership. Prior to June 13, 1994, income taxes were not provided for on the taxable income of the combined partnerships because the taxable income or loss was reportable in the income tax returns of the individual partners. Income taxes were provided for EPC, which was included in the consolidated tax return filed by its parent company, The Marcus & Millichap Company (M&M). Income tax expense of $267 for 1994 was allocated to EPC by M&M based upon the effective rates applicable to M&M. Advertising Property specific advertising costs incurred during the initial lease-up period are capitalized. All other advertising costs are expensed as incurred. Per Common Unit Data Net income per common unit for the Operating Partnership is computed using the weighted average number of common units outstanding during the period. Income Allocation Income is allocated to the Partners based upon the terms set forth in the partnership agreement. Minority Interest Minority interest represents a 30.7 percent interest in the Pathways property. Equity Transactions During 1996, the Company sold additional shares of Common Stock in two separate common stock offerings on August 14, 1996 and December 24, 1996. In connection with these offerings, the Company sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share, respectively. The total proceeds received for these two transactions was $53,996 and $72,468, respectively. In September 1996, the Company completed the sale of $20 million of its 8.75% Convertible Preferred Stock (the "Convertible Preferred Stock"), Series 1996A to Tiger/Westbrook, with the intent that the F-9 65 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) Company would complete the second phase of the transaction in 1997. The net proceeds were contributed to the Operating Partnership and used primarily to fund property acquisitions and for general corporate purposes. The outstanding Convertible Preferred Stock is entitled to receive annual cumulative cash dividends paid quarterly in an amount equal to the greater of (i) 8.75% of the per share price or (ii) the dividends (subject to adjustment) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. Subsequent to June 20, 1997, 25% of the 1.6 million authorized shares of Convertible Preferred Stock is convertible into Common Stock at the option of the holder, and thereafter, at the beginning of each of the next three-month periods, an additional 25% of the Convertible Preferred Stock is convertible. The conversion price per share is $21.875, subject to certain adjustments as defined in the agreement. 3. REAL ESTATE Rental Properties Rental properties consists of the following at December 31, 1996 and 1995:
LAND AND BUILDINGS LAND AND ACCUMULATED IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION ------------ ------------ -------- ------------ December 31, 1996: Apartment properties..................... $86,491 $274,241 $360,732 $41,627 Retail and corporate..................... 4,066 29,011 33,077 6,004 ------- -------- -------- ------- $90,557 $303,252 $393,809 $47,631 ======= ======== ======== ======= December 31, 1995: Apartment properties..................... $57,672 $193,871 $251,543 $34,943 Retail and corporate..................... 4,066 28,749 32,815 5,338 ------- -------- -------- ------- $61,738 $222,620 $284,358 $40,281 ======= ======== ======== =======
The properties are located in California, Washington and Oregon. The operations of the Properties could be adversely affected by a recession, general economic downturn or a natural disaster in the areas where the properties are located. At December 31, 1996, the Operating Partnership's six retail properties in Portland Oregon with a carrying amount of $14,866 are held for sale. These properties consist of approximately 350,000 square feet of retail space which contributed $3,240 to revenues in 1996. During the year ended December 31, 1996, the Operating Partnership sold to third parties two properties for $14,310, resulting in a gain of $2,477. During the year ended December 31, 1995, the Operating Partnership sold to third parties two properties for $12,147, resulting in a gain of $6,013. For the years ended December 31, 1996, 1995, and 1994, depreciation expense on real estate was $8,820, $7,978 and $6,562, respectively, and amortization of capitalized leasing commissions was $35, $29, and $66, respectively. Investments In connection with the formation, the Operating Partnership obtained all of the 19,000 shares of the non-voting preferred stock of Essex Management Corporation (EMC). Management of the Company owns 100 percent of the common stock of EMC. EMC was formed to provide property and asset management services to various partnerships not controlled by the Operating Partnership, along with the neighborhood F-10 66 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) shopping centers owned by the Operating Partnership. The Operating Partnership accounts for its investment in EMC on the equity method of accounting. In August 1994, the Operating Partnership obtained all of the 31,800 and 62,500 shares of non-voting preferred stock of Essex Fidelity I Corporation (Fidelity I) and Essex Sacramento, Inc. (Sacramento), respectively. Management of the Company owns 100 percent of the common stock of Fidelity I and Sacramento. Fidelity I holds a 20 percent equity interest in Blythe, Limited Partnership, which was formed to acquire, manage and dispose of a portfolio of mortgages and real estate purchased from a federal savings bank. Sacramento holds a 20 percent equity interest in Golden Bear Homes I - IV, Limited Partnerships, which were formed to acquire, manage and dispose of residential real properties purchased from a third party asset management Operating Partnership. During 1995, Fidelity I and Sacramento contributed their respective interests in Blythe, Limited Partnership and Golden Bear Homes I - IV, Limited Partnerships to a new general partnership, Essex Fidelity Sacramento Partners (EFSP). Profits and losses of EFSP are allocated 32 percent to Fidelity I and 68 percent to Sacramento, subject to certain limitations defined in the partnership agreement. This revised structure facilitates the sharing of common resources between these investments. The Operating Partnership accounts for its investments in Fidelity and Sacramento on the equity method of accounting. During 1995, the Operating Partnership acquired limited partnership interests in Essex Bristol Partners (Bristol), Essex San Ramon Partners (San Ramon) and Jackson School Village, L.P. (JSV). Bristol and San Ramon were formed to acquire, own and operate residential rental properties located in Sunnyvale, California and San Ramon, California, respectively. The Operating Partnership provides management services to Bristol and San Ramon. JSV was formed to develop and operate a 200-unit garden style apartment community in Hillsboro, Oregon. The general partner in JSV provides development services to the partnership. The Operating Partnership accounts for its investments in Bristol, San Ramon and JSR on the equity method of accounting. The shares of non-voting preferred stock in EMC, Fidelity I and Sacramento are entitled to a preferential dividend of $0.80 per share per annum. Through these preferred stock investments, the Operating Partnership will be eligible to receive a preferential liquidation value of $10.00 per share plus all cumulative and unpaid dividends. F-11 67 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) Investments consists of the following as of December 31, 1996 and 1995:
1996 1995 ------ ------ Investments in joint ventures: Limited partnership economic interest of 45% in Essex Bristol Partners................................ $1,921 $2,101 Limited partnership economic interest of 45% in Essex San Ramon Partners.............................. 3,436 3,703 Limited partnership interest of 49.9% in Jackson School Village, L.P........................... 2,032 1,670 ------ ------ 7,389 7,474 Investments in corporations: Essex Management Corporation -- 19,000 shares of preferred stock.................................... 190 190 Essex Fidelity I Corporation -- 31,800 shares of preferred stock.................................... 331 331 Essex Sacramento Corporation -- 62,500 shares of preferred stock.................................... 627 627 ------ ------ 1,148 1,148 Other investments.......................................... -- 34 ------ ------ $8,537 $8,656 ====== ======
4. RECEIVABLES Receivables consists of the following at December 31, 1996 and 1995:
1996 1995 ------ ------ Notes and other related party receivables: Note receivable from Fidelity I and Sacramento, secured, bearing interest at 9%, due on demand................. $ 718 $3,540 Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5 - 10%, due 2015............... 726 500 Other related party receivables, substantially due on demand................................................ 918 740 ------ ------ $2,362 $4,780 ====== ======
Other related party receivables at December 31, 1996 consist primarily of unreimbursed expenses due from EMC, acquisition cost-related reimbursements due from Essex San Ramon Partners and receivables from two Company executives. Other related party receivables at December 31, 1995 are comprised of unreimbursed expenses due from EMC and accrued interest income due from Fidelity I and Sacramento.
1996 1995 ------ ------ Notes and other receivables: Note receivable from the co-tenants in the Pathways property, secured, interest payable monthly at 9%, principal due June 2001............................................ $4,728 $4,800 Other receivables.......................................... 565 330 ------ ------ $5,293 $5,130 ====== ======
F-12 68 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) 5. RELATED PARTY TRANSACTIONS Effective June 13, 1994, all general and administrative expenses of the Company, the Operating Partnership and EMC, an affiliated entity, are borne by the Operating Partnership, with a portion subsequently allocated to EMC based on a business unit allocation methodology, formalized and approved by management and the board of directors. Management believes the business unit allocation methodology so applied is reasonable. Expenses allocated to EMC for the years ended December 31, 1996, 1995 and the 1994 period totaled $1,752, $2,116 and $1,139, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying statements of operations. Effective June 13, 1994, EMC provides property management services to the Operating Partnership's neighborhood shopping centers. The fees paid by the Operating Partnership for the years ended December 31, 1996, 1995 and 1994, were $113, $108 and $72, respectively, and are included in administrative expense in the accompanying statements of operations. Prior to June 13, 1994, EPC provided property management, asset management and gardening services to related partnerships which are not included in the accompanying financial statements. Fees received for these services totaled $1,794 for the period ended June 12, 1994, and are included in property and asset management fees in the accompanying statements of operations. Other expenses in the accompanying statements of operations of $314 for the period ended June 12, 1994 represents the Predecessor's share of overhead costs incurred by M&M and allocated among its subsidiaries. Included in rental income in the accompanying statements of operations are rents earned from space leased to M&M, including operating expense reimbursements, of $681, $675 and $660 for the years ended December 31, 1996, 1995 and 1994, respectively. During the years ended December 31, 1996 and 1995, the Operating Partnership paid brokerage commissions totaling $312 and $405 to M&M on the sales of real estate. The commissions are reflected as a reduction of the gain on sales of real estate in the accompanying statements of operations. Included in other income for the years ended December 31, 1996 and 1995 are $820 and $183, respectively, representing dividends from EMC and Essex Sacramento and management fees and equity income from Essex Bristol Partners and Essex San Ramon Partners. Interest income includes $214, $358 and $118 earned principally under the notes receivable from Essex Fidelity I and Essex Sacramento for the years ended December 31, 1996, 1995 and 1994, respectively. Included in accounts payable and accrued liabilities as of December 31, 1996 and 1995 are payables to related parties totaling $-0- and $217, respectively, representing temporary borrowings and unreimbursed expenses. These payables are non-interest bearing and are due on demand. 6. MORTGAGE NOTES PAYABLE Mortgage notes payable consist of the following at December 31, 1996 and 1995:
1996 1995 -------- -------- Mortgage notes payable to commercial bank, secured by deeds of trust, bearing interest at the lower of .9% over the LIBOR rate or the bank's prime rate, repaid during 1996..... $ -- $ 18,580 Mortgage notes payable to savings institutions, secured by deeds of trust, bearing interest at 2.25% to 2.75% over the Federal Reserve 11th District cost of funds rate, repaid during 1996................................................. -- 27,611
F-13 69 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
1996 1995 -------- -------- Mortgage notes payable to mutual life insurance company, secured by deeds of trust, bearing interest at 7.45%, interest only payments due through June 1996, monthly principal and interest installments due thereafter, final principal payment of $40,371 due June 2001.................. $ 50,240 $ 56,000 Mortgage note payable to mutual life insurance company, secured by deed of trust, bearing interest at 7.5%, principal and interest payments due monthly, remaining principal due March 2003.................................... 19,991 -- Mortgage note payable to commercial bank, secured by deed of trust, bearing interest at 6.25% until April 1998, 9.31% thereafter, repaid during 1996.............................. -- 12,170 Mortgage notes payable to a life insurance company, secured by deeds of trust, bearing interest at 8.93%, interest only payments due through March 1997, monthly principal and interest installments due thereafter, final principal payment of $6,853 due April 2005............................ 8,100 8,100 Mortgage note payable to commercial bank, secured by deed of trust, bearing interest at 7.09%, principal and interest payments due monthly, remaining principal due March 2006.... 14,321 -- Multifamily housing demand mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 3.6% for December 1996), plus credit enhancement and underwriting fees of approximately 1.9%. The bonds are convertible to a fixed rate. Among the terms imposed on the properties, which are security for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. Principal balances are due in full at various maturity dates from May 2025 through October 2026. Bonds in the aggregate of $29,220 are subject to interest rate protection agreements through August 2003, limiting the interest rate with respect to such bonds to a maximum interest rate of 7.2%........................................................ 42,820 13,600 Multifamily housing demand mortgage revenue bonds secured by deeds of trust on a rental property and guaranteed by a collateral pledge agreement, bearing interest at 6.455%, principal and interest payments due monthly, remaining principal due January 2026. The interest rate will be repriced in February 2008 at the then-current tax-exempt bond rate................................................... 17,733 -- -------- -------- $153,205 $136,061 ======== ========
The aggregate scheduled maturities of mortgage notes payable are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1997...................................................... $ 2,958 1998...................................................... 3,222 1999...................................................... 3,471 2000...................................................... 3,738 2001...................................................... 41,748 Thereafter................................................ 98,068 -------- $153,205 ========
In June 1994, the Operating Partnership paid $1,180 to enter into a five-year interest rate protection agreement covering mortgage notes payable with aggregate balances of $24,133 as of December 31, 1994. The agreement protected the Operating Partnership from increases in the thirty-day LIBOR rate in excess of the 6.3125% cap rate. In May 1995, the Operating Partnership sold this agreement for $542 and incurred a loss on F-14 70 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) termination of the agreement of $419 which was deferred and is being amortized over the remaining term of the terminated agreement. During the time the agreement was in effect, LIBOR did not exceed 6.3125%. The Operating Partnership used the proceeds of $542 from the sale of the five-year interest rate protection agreement to enter into an interest rate swap agreement extending through June 1999. The interest rate swap agreement fixes the thirty-day LIBOR rate at 5.79% for mortgage notes payable with aggregate balances of $18,580 as of December 31, 1995. As of December 31, 1995, the Operating Partnership incurred net interest expense of $1,621 relating to the mortgage notes payable covered by the interest rate swap agreement. The interest expense is net of $19 received by the Operating Partnership as a result of the agreement. In August 1996, the Operating Partnership sold this agreement for $280. In December 1995, the Operating Partnership paid $531 to enter into a seven-year interest rate protection agreement in anticipation of the acquisition of related debt. Because the related debt was not acquired as had been anticipated, the interest rate protection agreement was terminated, and the Operating Partnership recognized a loss of $226 as of December 31, 1995. During 1996 and 1995, the Operating Partnership charged $42 and $288 to income representing $42 and $62 of amortization of deferred costs relating to the termination of the five-year interest rate protection agreement and $-0- and $226 of termination costs relating to the unmatched position taken on the seven-year interest rate protection agreement. During the year ended December 31, 1996 and 1995, the Operating Partnership refinanced various mortgages and incurred a loss on the early extinguishment of debt of $3,441 and $154 related to the write off of the unamortized loan fees and prepayment penalties. 7. LINES OF CREDIT As of December 31, 1996 and 1995, the Operating Partnership has the following lines of credit with commercial banks:
1996 1995 ------- ------- Secured $38,800 line of credit, interest payable monthly at the lower of 1% over the banks' prime rate or 1.85% over the LIBOR rate, expiring May 15, 1997............. $ -- $ 7,883 Secured $12,000 line of credit, interest payable monthly at the lower of 1.85% over the LIBOR rate or .50% over the bank's prime rate, expiring December 13, 1996...... -- 10,580 ------- ------- $ -- $18,463 ======= =======
As of December 31, 1996, the thirty-day LIBOR rate was 5.5%, and the prime rate was 8.25%. 8. LEASING ACTIVITY The rental operations of the Operating Partnership include apartment properties, which are rented under short term leases (generally, lease terms of three to twelve months), and retail properties and the headquarters building, which are rented under cancelable and noncancelable operating leases, certain of which contain renewal options. Future minimum rental activity for the apartment properties is not included in the following schedule due to the short-term nature of the leases. F-15 71 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) Future minimum rentals due under noncancelable operating leases with tenants of the retail properties and the headquarters building are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1997....................................................... $ 3,407 1998....................................................... 2,955 1999....................................................... 2,411 2000....................................................... 1,917 2001....................................................... 1,500 Thereafter................................................. 4,508 ------- $16,698 =======
Included in this schedule is $533 due annually from M&M through May 1999. In addition to minimum rental payments, retail and headquarters building tenants pay reimbursements for their pro rata share of specified operating expenses. Such amounts totaled $964, $1,018 and $1,074 for the years ended December 31, 1996, 1995 and 1994, respectively, and are included as rental income and operating expenses in the accompanying statements of operations. Certain of these leases also provide for the payment of additional rent based on a percentage of the tenants' revenues. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Management believes that the carrying amounts of its financial instruments, which include cash and cash equivalents, notes receivable and mortgage and other notes payable, approximates fair value as of December 31, 1996 and 1995, because interest rates and yields from these instruments are consistent with yields currently available to the Operating Partnership for similar instruments. 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for 1996 and 1995:
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- --------- -------------- ------------- 1996 Total revenues before gain on sale of real estate.................................... $11,554 $11,754 $12,823 $14,562 Gain (loss) on sale of real estate........ -- 2,409 71 (3) ------- ------- ------- ------- Total revenues.............................. $11,554 $14,163 $12,894 $14,559 ======= ======= ======= ======= Extraordinary item.......................... $(2,180) $ (665) $ (472) $ (124) ======= ======= ======= ======= Net income (loss)........................... $ (74) $ 4,092 $ 2,804 $ 4,321 ======= ======= ======= ======= 1995 Total revenues before gain on sale of real estate.................................... $10,923 $10,913 $10,983 $11,121 Gain on sale of real estate................. -- 789 -- 5,224 ------- ------- ------- ------- Total revenues.............................. $10,923 $11,702 $10,983 $16,345 ======= ======= ======= ======= Extraordinary item.......................... $ -- $ (154) $ -- $ -- ======= ======= ======= ======= Net income.................................. $ 1,927 $ 2,599 $ 2,058 $ 7,154 ======= ======= ======= =======
F-16 72 ESSEX PORTFOLIO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS) 11. COMMITMENTS AND CONTINGENCIES A commercial bank has issued on behalf of the Operating Partnership a letter of credit relating to financing transactions of $564 which expires in June 2002. The Operating Partnership has provided a guarantee of the mortgage note payable of Essex Bristol Partners to a commercial bank. This note has a balance of $12,298 as of December 31, 1996 and is due in May 2002. The Operating Partnership identifies and evaluates prospective investments on a continuous basis. In connection therewith, the Operating Partnership initiates letters of intent and extends offers on a regular basis. At December 31, 1996, the Operating Partnership was committed to fund the acquisition of two apartment properties for $20,585. Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Operating Partnership carries no express insurance coverage for this type of environmental risk. The Operating Partnership has conducted environmental studies which revealed the presence of groundwater contamination at three properties; such contamination at two of the properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that five properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at two properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. Based on the information contained in the environmental studies, the Operating Partnership believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these eight properties would not have a material adverse effect on the Operating Partnership's financial condition or results of operations. At December 31, 1996, the Operating Partnership was committed to purchase the ownership interests of its joint venture partner in Bristol and San Ramon for $7.9 million. This transaction was completed in January, 1997. The Operating Partnership is involved in various lawsuits arising out of the ordinary course of business and certain other legal matters. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Operating Partnership's financial position, results of operations or liquidity. F-17 73 SCHEDULE III ESSEX PORTFOLIO, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
INITIAL COST COSTS ------------------------ CAPITALIZED BUILDINGS AND SUBSEQUENT PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS TO ACQUISITION -------- ----- -------- ----------- ------- -------------- -------------- Apartments: The Apple(5)................ 200 Fremont, CA $ $ 996 $ 5,582 $ 1,080 Countrywood(5).............. 137 Fremont, CA 1,374 5,638 572 Plumtree(5)................. 140 Santa Clara, CA 3,090 7,421 108 ------- ------- -------- ------- -- 5,460 18,641 1,760 ------- ------- -------- ------- Summerhill Park............. 100 Sunnyvale, CA 2,654 4,918 257 Oak Pointe.................. 390 Sunnyvale, CA 4,842 19,776 3,442 Summerhill Commons.......... 184 Newark, CA 1,608 7,582 285 Pathways.................... 296 Long Beach, CA 4,083 16,757 307 Villa Rio Vista............. 286 Anaheim, CA 3,013 12,661 1,082 Foothill Commons............ 360 Bellevue, WA 2,435 9,821 1,218 Woodland Commons............ 236 Bellevue, WA 2,040 8,727 557 Palisades................... 192 Bellevue, WA 1,560 6,242 821 ------- ------- -------- ------- 50,240 22,235 86,484 7,969 ------- ------- -------- ------- Marina Cove(3).............. 292 Santa Clara, CA -- 5,320 16,431 360 ------- ------- -------- ------- Santa Fe Ridge.............. 240 Silverdale, WA 8,100 4,137 7,925 94 ------- ------- -------- ------- Inglenook Court............. 224 Bothell, WA 8,300 3,467 7,881 842 ------- ------- -------- ------- Wharfside Pointe............ 142 Seattle, WA 2,245 7,020 263 Emerald Ridge............... 180 Bellevue, WA 3,449 7,801 141 Sammamish View.............. 153 Bellevue, WA 3,324 7,501 95 ------- ------- -------- ------- 19,991 9,018 22,322 499 ------- ------- -------- ------- The Laurels................. 164 Mill Creek, WA -- 1,559 6,430 6 ------- ------- -------- ------- Brighton Ridge.............. 264 Renton WA -- 2,623 10,800 5 ------- ------- -------- ------- Windsor Ridge............... 216 Sunnyvale, CA 14,321 4,017 10,315 221 ------- ------- -------- ------- Wandering Creek............. 156 Kent, WA 5,300 1,285 4,980 376 ------- ------- -------- ------- Camarillo Oaks.............. 371 Camarillo, CA 19,420 6,310 14,525 467 ------- ------- -------- ------- Treetops.................... 172 Freemont, CA 9,800 3,520 8,182 142 ------- ------- -------- ------- Eastridge Apartments........ 188 San Ramon, CA -- 6,068 13,628 35 ------- ------- -------- ------- Landmark Apartments......... 285 Hillsboro, OR -- 3,655 14,200 59 ------- ------- -------- ------- Meadowood................... 320 Simi Valley, CA 17,733 7,852 18,592 35 ----- ------- ------- -------- ------- 5,888 ===== GROSS AMOUNT CARRIED AT CLOSE OF PERIOD ------------------------------- DEPRECIABLE LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- -------------- -------------- -------- ------------ ------------- -------- ----------- Apartments: The Apple(5)................ $ 996 $ 6,662 $ 7,658 $ 3,799 1971 4/82 5-30 Countrywood(5).............. 1,374 6,210 7,584 2,029 1970 2/88 5-30 Plumtree(5)................. 3,090 7,529 10,619 705 1975 2/94 5-30 ------- -------- -------- ------- 5,460 20,401 25,861 6,533 ------- -------- -------- ------- Summerhill Park............. 2,654 5,175 7,829 1,229 1988 9/88 5-40 Oak Pointe.................. 4,842 23,218 28,060 7,014 1973 12/88 5-30 Summerhill Commons.......... 1,517 7,958 9,475 1,975 1987 7/87 5-40 Pathways.................... 4,083 17,064 21,147 3,531 1975 2/91 5-30 Villa Rio Vista............. 2,984 13,772 16,756 5,787 1968 7/85 5-30 Foothill Commons............ 2,435 11,039 13,474 3,128 1978 3/90 5-30 Woodland Commons............ 2,040 9,284 11,324 2,565 1978 3/90 5-30 Palisades................... 1,560 7,063 8,623 2,050 1969/1977 (2) 5/90 5-30 ------- -------- -------- ------- 22,115 94,573 116,688 27,279 ------- -------- -------- ------- Marina Cove(3).............. 5,320 16,791 22,111 1,493 1974 6/94 5-30 ------- -------- -------- ------- Santa Fe Ridge.............. 4,142 8,014 12,156 602 1993 10/94 5-30 ------- -------- -------- ------- Inglenook Court............. 3,472 8,718 12,190 780 1985 10/94 5-30 ------- -------- -------- ------- Wharfside Pointe............ 2,251 7,277 9,528 627 1990 6/94 5-30 Emerald Ridge............... 3,445 7,946 11,391 585 1987 11/94 5-30 Sammamish View.............. 3,327 7,593 10,920 544 1986 11/94 5-30 ------- -------- -------- ------- 9,023 22,816 31,839 1,756 ------- -------- -------- ------- The Laurels................. 1,565 6,430 7,995 -- 1981 12/96 5-30 ------- -------- -------- ------- Brighton Ridge.............. 2,628 10,800 13,428 -- 1986 12/96 5-30 ------- -------- -------- ------- Windsor Ridge............... 4,018 10,535 14,553 2,086 1989 3/89 5-40 ------- -------- -------- ------- Wandering Creek............. 1,294 5,347 6,641 193 1986 11/95 5-30 ------- -------- -------- ------- Camarillo Oaks.............. 6,223 15,079 21,302 262 1985 7/96 5-30 ------- -------- -------- ------- Treetops.................... 3,574 8,270 11,844 283 1978 1/96 5-30 ------- -------- -------- ------- Eastridge Apartments........ 6,087 13,644 19,731 152 1988 8/96 5-30 ------- -------- -------- ------- Landmark Apartments......... 3,689 14,225 17,914 158 1990 8/96 5-30 ------- -------- -------- ------- Meadowood................... 7,881 18,598 26,479 50 1986 11/96 5-30 ------- -------- -------- -------
F-18 74 SCHEDULE III ESSEX PORTFOLIO, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
INITIAL COST COSTS ------------------------ CAPITALIZED BUILDINGS AND SUBSEQUENT PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS TO ACQUISITION -------- ----- -------- ----------- ------- -------------- -------------- Headquarters Building: 777 California(4)(5)...... 44,827 Palo Alto, CA -- -- 6,700 8,657 -------- ------- -------- ------- Retail: Canby Square(5)........... 102,565 Canby, OR $ $ 801 $ 2,507 $ 1,783 -------- Cedar Mill Place(5)....... 28,392 Portland, OR 535 1,149 156 Powell Villa Center(5).... 63,645 Portland, OR 740 1,393 1,185 Riviera Plaza(5).......... 48,420 Eugene, OR 766 1,069 208 Wichita Towne Center(5)... 38,324 Milwaukee, OR 218 1,632 149 Garrison Square(5)........ 69,780 Vancouver, WA 1,004 1,676 749 ------- -------- ------- -------- ------- 351,126 -- 4,064 9,426 4,230 ------- -------- ------- -------- ------- 395,953 $153,205 $90,590 $277,462 $25,757 ======= ======== ======= ======== ======= GROSS AMOUNT CARRIED AT CLOSE OF PERIOD ------------------------------- DEPRECIABLE LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- -------------- -------------- -------- ------------ ------------- -------- ----------- Headquarters Building: 777 California(4)(5)...... -- 15,357 15,357 3,150 1987 7/86 5-30 ------- -------- -------- ------- Retail: Canby Square(5)........... $ 802 $ 4,289 $ 5,091 $ 478 1976 1/90 7-30 Cedar Mill Place(5)....... 536 1,304 1,840 472 1975 1/90 7-30 Powell Villa Center(5).... 739 2,579 3,318 472 1959 1/90 7-30 Riviera Plaza(5).......... 767 1,276 2,043 475 1961 1/90 7-30 Wichita Towne Center(5)... 218 1,781 1,999 471 1978 1/90 7-30 Garrison Square(5)........ 1,004 2,425 3,429 486 1962 1/90 7-30 ------- -------- -------- ------- 4,066 13,654 17,720 2,854 ------- -------- -------- ------- $90,557 $303,252 $393,809 $47,631 ======= ======== ======== =======
- --------------- (1) The aggregate cost for federal income tax purposes is $303,034. (2) Phase I was built in 1969 and Phase II was built in 1977. (3) A portion of land is leased pursuant to a ground lease expiring in 2028. (4) Land is leased pursuant to a ground lease expiring in 2054. (5) These properties secure the Operating Partnership's $38,800 line of credit. A summary of activity for real estate and accumulated depreciation is as follows:
1996 1995 1994 -------- -------- -------- Real estate: Balance at beginning of year.................... $284,358 $282,344 $186,447 Improvements.................................... 3,406 3,193 2,614 Acquisition of real estate...................... 118,107 6,265 93,283 Disposition of real estate...................... (12,062) (7,444) -- -------- -------- -------- Balance at end of year.......................... $393,809 $284,358 $282,344 ======== ======== ======== 1996 1995 ------- ------- Real estate: Accumulated depreciation: Balance at beginning of year.................... Balance at beginning of year...................... $40,281 $34,112 Improvements.................................... Dispositions...................................... (1,470) (1,809) Acquisition of real estate...................... Depreciation expense -- Acquisitions.............. 905 -- Disposition of real estate...................... Depreciation expense.............................. 7,915 7,978 ------- ------- Balance at end of year.......................... Balance at end of year............................ $47,631 $40,281 ======= ======= 1994 ------- Real estate: Balance at beginning of year.................... $27,574 Improvements.................................... -- Acquisition of real estate...................... -- Disposition of real estate...................... 6,538 ------- Balance at end of year.......................... $34,112 =======
F-19 75 INDEX TO UNAUDITED FINANCIAL STATEMENTS OF ESSEX PORTFOLIO, L.P.
PAGE ---- Balance Sheets of Essex Portfolio, L.P. as of September 30, 1997 and December 31, 1996................................ F-21 Statements of Operations of Essex Portfolio, L.P. for the three months ended September 30, 1997 and 1996............ F-22 Statements of Operations of Essex Portfolio, L.P. for the nine months ended September 30, 1997 and 1996............. F-23 Statements of Partners' Capital of Essex Portfolio, L.P. for the nine months ended September 30, 1997.................. F-24 Condensed Statements of Cash Flows for the Nine Months ended September 30, 1997 and 1996............................... F-25 Notes to Financial Statements............................... F-26 Management's Discussion and Analysis of Financial Condition and Results of Operation.................................. F-30
F-20 76 ESSEX PORTFOLIO, L.P. BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (UNAUDITED, DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS - ------------------------------------------------------------ Real estate: Rental properties: Land and land improvements............................. $141,232 $ 90,557 Buildings and improvements............................. 425,179 303,252 -------- -------- 566,411 393,809 Less accumulated depreciation.......................... (53,916) (47,631) -------- -------- 512,495 346,178 Investments............................................... 2,627 8,537 Real estate under development............................. 22,663 0 -------- -------- 537,785 354,715 Cash and cash equivalents-unrestricted...................... 18,781 42,705 Restricted cash............................................. 5,662 4,194 Notes and other related party receivables................... 14,063 2,362 Notes and other receivables................................. 8,086 5,293 Prepaid expenses and other assets........................... 9,333 3,745 Deferred charges, net....................................... 4,080 4,160 -------- -------- $597,790 $417,174 ======== ======== LIABILITIES AND PARTNERS' CAPITAL - ------------------------------------------------------------ Mortgage notes payable...................................... $187,926 $153,205 Lines of credit............................................. 0 0 Accounts payable and accrued liabilities.................... 19,657 7,346 Distributions payable....................................... 8,509 6,286 Other liabilities........................................... 3,542 2,249 -------- -------- Total liabilities................................. 219,634 169,086 Minority interest........................................... 2,894 1,042 Partners' capital: General partner: Common equity.......................................... 312,274 205,302 Preferred equity....................................... 37,505 17,505 -------- -------- 349,779 222,807 Limited partners' common equity........................... 25,483 24,239 -------- -------- Total partners' capital........................... 375,262 247,046 -------- -------- $597,790 $417,174 ======== ========
See accompanying notes to the unaudited financial statements. F-21 77 ESSEX PORTFOLIO, L.P. STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Revenues: Rental.................................................... $20,887 $12,119 Interest and other income................................. 1,088 704 ------- ------- 21,975 12,823 ------- ------- Expenses: Property operating expenses: Maintenance and repairs................................ 1,678 1,113 Real estate taxes...................................... 1,571 924 Utilities.............................................. 1,369 791 Administrative......................................... 1,493 713 Advertising............................................ 309 161 Insurance.............................................. 224 190 Depreciation and amortization.......................... 3,555 2,276 ------- ------- 10,199 6,168 Interest.................................................. 3,118 2,828 Amortization of deferred financing costs.................. 128 103 General and administrative................................ 631 416 Loss from hedge termination............................... 0 3 ------- ------- Total expenses......................................... 14,076 9,518 ------- ------- Net income before gain on sales of real estate, minority interests and extraordinary item............. 7,899 3,305 Gain on sales of real estate.............................. 4,713 71 ------- ------- Net income before minority interests and extraordinary item.................................................. 12,612 3,376 Minority interests........................................ (127) (100) ------- ------- Income before extraordinary item....................... 12,485 3,276 Extraordinary item: Loss on early extinguishment of debt................... 0 (472) ------- ------- Net income........................................... 12,485 2,804 Dividends on preferred units.............................. (875) (197) ------- ------- Net income available to common units...................... $11,610 $ 2,607 ======= ======= Net income per Operating Partnership common unit: Primary: Net income from operations before extraordinary item... $ 0.73 $ 0.33 Extraordinary item -- debt extinguishment.............. 0.00 (0.05) ------- ------- Net income........................................... $ 0.73 $ 0.28 ======= ======= Weighted average number of common units used in net income calculation.................................... 16,007 9,466 ======= ======= Fully diluted: Net income from operations before extraordinary item... $ 0.70 Extraordinary item -- debt extinguishment.............. 0.00 ------- Net income........................................... $ 0.70 ======= Weighted average number of common units used in net income calculation.................................... 17,861 9,878 ======= ======= Distributions per Operating Partnership common unit......... $ 0.450 $ 0.435 ======= =======
See accompanying notes to financial statements. F-22 78 ESSEX PORTFOLIO, L.P. STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Revenues: Rental.................................................... $56,596 $34,123 Interest and other income................................. 3,510 2,008 ------- ------- 60,106 36,131 ------- ------- Expenses: Property operating expenses: Maintenance and repairs................................ 4,765 3,218 Real estate taxes...................................... 4,473 2,693 Utilities.............................................. 3,649 2,276 Administrative......................................... 3,845 1,967 Advertising............................................ 861 451 Insurance.............................................. 688 482 Depreciation and amortization.......................... 9,863 6,513 ------- ------- 28,144 17,600 Interest.................................................. 9,348 8,738 Amortization of deferred financing costs.................. 383 529 General and administrative................................ 1,682 1,279 Loss from hedge termination............................... 0 42 ------- ------- Total expenses......................................... 39,557 28,188 ------- ------- Net income before gain on sales of real estate, minority interests and extraordinary item............. 20,549 7,943 Gain on sales of real estate.............................. 5,127 2,480 ------- ------- Net income before minority interests and extraordinary item.................................................. 25,676 10,423 Minority interests........................................ (325) (283) ------- ------- Income before extraordinary item....................... 25,351 10,140 Extraordinary item: Loss on early extinguishment of debt................... (104) (3,317) ------- ------- Net income........................................... 25,247 6,823 Dividends on preferred units........................... (1,805) (197) ------- ------- Net income available to common units................... $23,442 $ 6,626 ======= ======= Net income per Operating Partnership common unit: Primary: Net income from operations before extraordinary item... $ 1.56 $ 1.16 Extraordinary item -- debt extinguishment.............. (0.01) (0.39) ------- ------- Net income........................................ $ 1.55 $ 0.77 ======= ======= Weighted average number of common units used in net income calculation.................................... 15,092 8,575 ======= ======= Fully diluted: Net income from operations before extraordinary item... $ 1.55 Extraordinary item -- debt extinguishment.............. (0.01) ------- Net income........................................... $ 1.54 ======= Weighted average number of common units used in net income calculation.................................... 16,386 8,713 ======= ======= Distributions per Operating Partnership common unit......... $ 1.320 $ 1.285 ======= =======
See accompanying notes to financial statements. F-23 79 ESSEX PORTFOLIO, L.P. STATEMENTS OF PARTNERS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED, IN THOUSANDS)
LIMITED PARTNER GENERAL PARTNER --------------- ----------------------------- PREFERRED COMMON EQUITY EQUITY ----------------- --------- UNITS AMOUNT UNITS AMOUNT AMOUNT TOTAL ----- ------- ------ -------- --------- -------- Balances at December 31, 1996........ 1,855 $24,239 11,592 $205,302 $17,505 $247,046 Contribution -- net proceeds from preferred stock.................... -- -- -- -- 20,000 20,000 Contribution -- net proceeds from common stock....................... -- -- 3,495 104,119 -- 104,119 Contribution -- net proceeds from options exercised.................. -- -- 18 338 -- 338 Contributions -- net proceeds from partners........................... 18 543 -- -- -- 543 Net income........................... -- 3,158 -- 20,284 1,805 25,247 Partners' distribution............... -- (2,457) -- (17,769) (1,805) (22,031) ----- ------- ------ -------- ------- -------- Balances at September 30, 1997....... 1,873 $25,483 15,105 $312,274 $37,505 $375,262 ===== ======= ====== ======== ======= ========
See accompanying notes to the unaudited financial statements F-24 80 ESSEX PORTFOLIO, L.P. CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Net cash provided by operating activities................... $ 30,839 $16,844 -------- ------- Cash flows from investing activities: Additions to rental properties............................ (122,667) (72,640) Dispositions of rental properties......................... 15,470 13,327 Additions to notes receivable............................. (785) 0 Additions to real estate under development................ (22,663) 0 Investments in corporations and joint ventures............ 371 425 -------- ------- Net cash used in investing activities.................. (130,274) (58,888) -------- ------- Cash flows from financing activities: Mortgage and other notes payable and lines of credit...... 75,055 64,383 Repayment of mortgage and other notes payable and lines of credit................................................. (89,471) (82,231) Additions to restricted cash.............................. (1,468) 0 Additions to deferred charges............................. (413) (979) Additions to notes and other related party receivables/payables................................... (23,277) (4,636) Repayment of notes and other related party receivables/payables................................... 11,576 6,097 Decrease in offering related accounts payable............. (789) 0 Contributions from convertible preferred stock sale....... 20,000 18,025 Contributions from common stock offerings - general partner................................................ 104,119 54,005 Contributions from stock options exercised - general partner................................................ 338 0 Distributions to limited partners......................... (2,785) (2,364) Distributions to general partners......................... (17,374) (8,001) -------- ------- Net cash provided by financing activities.............. 75,511 44,299 -------- ------- Net (decrease) increase in cash and cash equivalents........ (23,924) 2,255 Cash and cash equivalents at beginning of period............ 42,705 3,983 -------- ------- Cash and cash equivalents at end of period.................. $ 18,781 $ 6,238 ======== ======= Supplemental disclosure of cash flow information: Cash paid for interest net of amount capitalized.......... $ 8,741 $ 8,830 ======== ======= Supplemental disclosure of non-cash investing and Financing activities: Mortgage notes payable assumed in connection with purchase of real estate......................................... $ 49,137 $ 0 ======== ======= Distributions payable....................................... $ 8,509 $ 4,834 ======== =======
See accompanying notes to unaudited financial statements. F-25 81 NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1. ORGANIZATION AND BASIS OF PRESENTATION Essex Portfolio, L.P. (the "Operating Partnership") was formed in March 1994 and commenced operations on June 13, 1994, when Essex Property Trust, Inc. (the "Company"), the general partner in the Operating Partnership (the "General Partner"), completed its initial public offering (the "Offering") in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112,071 were used by the General Partner to acquire a 77.2% interest in the Operating Partnership. The Company has elected to be treated as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code), as amended. The unaudited financial statements of the Operating Partnership are prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. The financial statements for the three and nine months ended September 30, 1997 and 1996 include the accounts of Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, owning an 89.0% and 82.6% general partnership interest in it as of September 30, 1997 and 1996, respectively. 2. SIGNIFICANT TRANSACTIONS (A) Equity Transactions (i) On September 10, 1997, the Company completed a public offering of 1,300,000 shares of Common Stock for a net price of $31.00 per share. In addition, on September 19, 1997, the underwriter, Lehman Brothers, exercised its "over-allotment" option and the Company sold an additional 195,000 shares at $31.00 per share (such public offering of 1,495,000 shares is referred to herein as the "September 1997 Offering"). The 1,495,000 shares are newly issued and registered under a shelf registration previously filed by the Company. The net proceeds were used to pay off lines of credit and to fund the acquisition and development of additional multifamily properties. (B) Acquisitions (i) On July 16, 1997, the Operating Partnership acquired The Village Apartments, a 122 unit apartment community located in Oxnard, California, for a contract price of $7,720. The community features a swimming pool, spa, tennis courts and a clubhouse. (ii) On August 6, 1997, the Operating Partnership acquired a 65% interest in a partnership owning an additional 193 units located in Camarillo, California and adjacent to the 371 unit Camarillo Oaks property which the Operating Partnership has owned since 1996. The Operating Partnership anticipates purchasing the remaining 35% interest by the end of the year. The total price, at 100%, will be $12,000. The Operating Partnership has assumed $8,915 in fixed rate tax exempt bonds at an average 7.69% interest rate. The bonds mature in October 2026. The Operating Partnership paid $46 to assume these bonds. The community features a swimming pool and jacuzzi. (iii) On August 6, 1997, the Operating Partnership acquired Park Place Apartments and Windsor Court Apartments adding 118 units to the Operating Partnership's portfolio. These properties are located in Los Angeles, California and were purchased together at an aggregate contract price of $10,994. These communities each feature a swimming pool and jacuzzi. F-26 82 NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (iv) On September 17, 1997, the Operating Partnership purchased Windsor Terrace Apartments, a 104 unit apartment community located in Pasadena, California, for a contract price of $7,104. This community features a swimming pool and spa. These acquisitions were funded with proceeds from the Company's September 1997 Offering. (C) Development (i) On September 19, 1997, the Operating Partnership broke ground on the Fountain Court development, located in Seattle, Washington, consisting of the construction of a 320 unit multifamily community. The Operating Partnership has funded $4,000 in equity, representing a 49% ownership interest in this venture. A $22,500 construction loan commitment has been obtained. The Operating Partnership's partner in this joint venture is a local Seattle developer. In accordance with the terms of the agreement, in the year 2000 the Operating Partnership is to purchase its partners' 51% interest, resulting in a total estimated cost for Fountain Court of $31,350. The community will feature a health club, spa, indoor lap pool, exercise room and entertainment center. The Operating Partnership broke ground on this project in August 1997. (ii) On September 26, 1997, the Operating Partnership purchased a 2.5 acre site located in Marina Del Rey, California, on which it intends to build a multifamily property of up to 188 units. The total estimated cost for the community is $28,800. This community will feature a swimming pool, spa, fitness center, entertainment center and business center and commanding views of the marina and waterfront. The Operating Partnership expects to break ground on the project in May 1998. (iii) On September 26, 1997, the Operating Partnership purchased a 14.8 acre site located in La Habra, California. The Operating Partnership plans to develop Hillsborough Park Apartments, a 235 unit multifamily community, on this site. The total estimated cost is $19,400. This community will feature a swimming pool, spa, tennis courts, exercise room and a security perimeter. The Operating Partnership expects to break ground on the project in March 1998. (iv) On August 1, 1997, the Operating Partnership entered into a partnership which has acquired a 15 acre site located in Issaquah, Washington. The partnership is developing a 245 unit multifamily community on this site. The Operating Partnership has funded $3,500 in equity, representing a 45% ownership interest in this venture. The Operating Partnership will receive a 12% return on this invested equity and will manage the property upon completion. The total estimated cost is $25,300. The Operating Partnership has the option to purchase the property within five years of completion. The Operating Partnership broke ground on this project in August 1997. (D) Dispositions (i) On September 11, 1997, the Operating Partnership sold Countrywood Apartments located in Fremont, California, for a gross sales price of $9,500 resulting in a gain of $3,344. (ii) On September 22, 1997, the Operating Partnership sold Riviera Square, a retail shopping center located in Eugene, Oregon, for a gross sales price of $3,086 resulting in a gain of $1,369. The Operating Partnership expects to use the proceeds of these sales to provide funding for acquisitions of multifamily properties in the fourth quarter. (E) Debt Related Transactions The Operating Partnership has executed agreements on two unsecured lines of credit for an aggregate amount of $50,000, of which, each line has an expiration period of 90 days. F-27 83 NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 3. RELATED PARTY TRANSACTIONS All general and administrative expenses of the Company, the Operating Partnership and Essex Management Corporation ("EMC") are initially borne by the Operating Partnership, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three and nine months ended September 30, 1997 totaled $140 and $699, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying statements of operations. Rental income in the accompanying statements of operations includes related party rents earned from space leased to The Marcus & Millichap Company ("M&M"), including operating expense reimbursement, of $175 and $518 for the three and nine months ended September 30, 1997, respectively, and $169 and $509 for the three and nine months ended September 30, 1996, respectively. Other income for the three and nine months ended September 30, 1997 includes interest income of $442 and $1,954, respectively, which was earned principally under notes receivable from Essex Fidelity I Corporation, the Partnerships which collectively own Anchor Village, the Partnerships which collectively own Highridge and the Partnerships which collectively own an approximate 30.7% minority interest in Pathways Apartments, a 296 unit multifamily property located in Long Beach, California ("Pathways"). For the three and nine months ended September 30, 1997 the Operating Partnership earned $0 and $29, respectively, of dividend income from EMC. In addition, the Operating Partnership earned management fee income of $137 and $320 for the three and nine months ended September 30, 1997, respectively, from Anchor Village, Highridge, Pathways and Camarillo Oaks. EMC provides property management services to the Operating Partnership's neighborhood shopping centers. The fees paid by the Operating Partnership for such services for the three and nine months ended September 30, 1997 were $19 and $76, respectively, and are included in the general and administrative expense item in the accompanying statements of operations. Notes and other related party receivables as of September 30, 1997 and December 31, 1996 consist of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ Notes receivable from Fidelity I and Sacramento, secured, bearing interest at 9%, due on demand... $ -- $ 718 Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5% -- 10%, due 2015........ 726 726 Note receivable from Anchor Village, secured, bearing interest at 8%, due January 14, 1998..... 9,650 -- Notes receivable from Highridge, secured, bearing interest at 9%, due September 2006............... 2,750 -- Other related party receivables, substantially due on demand........................................ 937 918 ------- ------ $14,063 $2,362 ======= ======
Other related party receivables consist primarily of accrued interest income on related party notes receivables and loans to officers. During the three and nine months ended September 30, 1997, the Operating Partnership paid brokerage commissions totaling $376 and $590, respectively, to M&M in connection with the disposition of real estate. F-28 84 NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) These commissions were considered in the calculation of the gain on sale in the accompanying statement of operations. 4. NEW ACCOUNTING PRONOUNCEMENTS The Operating Partnership will adopt the provisions of The Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share, for financial statements with periods ending after December 15, 1997. Earlier application is not permitted. After the effective date, all prior period earnings per share data presented will be restated to conform with the provisions of SFAS 128. Had the Operating Partnership applied the provisions of SFAS 128 to the unaudited financial statements for the period ending September 30, 1997, the effect on earnings per share data would have been immaterial. The FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting Comprehensive Income," and "SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." These statements, which are effective for periods beginning after December 15, 1997, expand or modify disclosures and, accordingly, will have no impact on the Operating Partnership's reported financial position, results of operations or cash flows. 5. SUBSEQUENT EVENTS Property Acquisitions Subsequent to September 30, 1997, the Operating Partnership has acquired 11 multifamily properties comprising 1,814 apartment units for an aggregate contract price of approximately $150,000. Of these property acquisitions, five were located in the Seattle metropolitan area, four were located in Southern California, and two were located in the Portland, Oregon metropolitan area. These acquisitions were funded with proceeds from the Company's September 1997 and December 1997 Common Stock offerings, assumed loans or bonds secured by the properties, borrowings under the Operating Partnership's lines of credit, proceeds from dispositions of one multifamily property and one retail center and general corporate funds. Equity Transaction On December 8, 1997, the Company completed a follow-on public offering of 1,500,000 shares of Common Stock for $35.50 per share. Gross proceeds from the offering were approximately $50,400. The net proceeds were to repay indebtedness, fund acquisition and development activities and for general corporate purposes. F-29 85 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion is based primarily on the financial statements of the Operating Partnership for the nine months ended September 30, 1997 and 1996, and for the years ended December 31, 1994, 1995 and 1996. This information should be read in conjunction with the accompanying financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature. The Operating Partnership holds directly or indirectly all of the Company's interests in the Properties and all of the Company's operations relating to the Properties are conducted through the Operating Partnership. The Company is the sole general partner of the Operating Partnership and, as of September 30, 1997, owned an 89.0% general partnership interest in the Operating Partnership. GENERAL BACKGROUND The Operating Partnership's revenues are generated primarily from multifamily residential, retail and commercial property operations, which accounted for approximately 96% of its revenues for the nine months ended September 30, 1997 and 1996. The Operating Partnership's properties (the "Properties") are located in California, Washington and Oregon. Occupancy levels of the multifamily residential Properties in these markets have generally remained high (averaging over 95% for the last five years). Since the Operating Partnership began Operations in June 1994, the Operating Partnership has acquired ownership interest in 32 multifamily residential properties, of which 22 are located in California, nine are located in Washington and two are located in Oregon, as of September 30, 1997. In aggregate, these acquisitions consist of a total of 5,872 units and had a total capitalized cost of approximately $390.5 million. As part of its active portfolio management strategy, the Operating Partnership has sold, since it began operations, five multifamily residential properties in Northern California consisting of a total of 579 units and three of its retail centers in Oregon at an aggregate gross sales price of approximately $43.0 million resulting in a net aggregate gain of approximately $14.1 million. Average financial occupancy rates (which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rents) of the multifamily Properties on a same-property basis decreased to 97.1% for the three months ended September 30, 1997, from 97.3%, for the three months ended September 30, 1996. The regional breakdown of such financial occupancy for the three months ended September 30, 1997 and 1996 is as follows:
SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Northern California....................... 97.8% 98.5% Seattle Metropolitan...................... 96.0% 95.7% Southern California....................... 96.5% 95.9%
The retail and commercial Properties were 97% occupied (based on square footage) as of September 30, 1997. RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996. Total Revenues increased by $23,975,000 or 66.4% to $60,106,000 in the first nine months of 1997 from $36,131,000 in the first nine months of 1996. The following table sets forth a breakdown of these revenue F-30 86 amounts, including the revenues attributable to properties that the Operating Partnership owned for both of the nine months ended September 30, 1997 and 1996 ("Same Store Properties").
NINE MONTHS ENDED SEPTEMBER 30, NUMBER OF -------------------- DOLLAR PERCENTAGE RENTAL INCOME PROPERTIES 1997 1996 CHANGE CHANGE ------------- ---------- -------- -------- ------- ---------- (DOLLARS IN THOUSANDS) Same Store Properties Northern California.................. 7 $14,150 $12,380 $ 1,770 14.3% Seattle Metropolitan................. 9 11,526 10,768 758 7.0 Southern California.................. 2 3,623 3,557 66 1.9 Retail and commercial................ 4 2,960 2,962 (2) (0.1) -- ------- ------- ------- ----- Total Same Store Properties............ 22 32,259 29,667 2,592 8.7 Properties acquired/disposed of subsequent to January 1, 1996..... 24,337 4,456 19,881 446.2 ------- ------- ------- ----- Total rental income.................. 56,596 34,123 22,473 65.9 Other income......................... 3,510 2,008 1,502 74.8 ------- ------- ------- ----- Total revenues.................... $60,106 $36,131 $23,975 66.4% ======= ======= ======= =====
As set forth in the above table, $19,881,000 of the $23,975,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1996. During this period, the Operating Partnership acquired interests in twenty-five properties (the "Acquisition Properties"), and disposed of three multifamily properties and three retail shopping centers (the "Disposition Properties"). Of the increase in total revenues, $2,592,000 is attributable to increases in rental income from the Same Store Properties. Rental income from the Same Store Properties increased by approximately 8.7% to $32,259,000 in the first nine months of 1997 from $29,667,000 in the first nine months of 1996. The majority of this increase was attributable to the seven multifamily Same Store Properties located in Northern California, the rental income of which increased by $1,770,000 or 14.3% to $14,150,000 in the first nine months of 1997 from $12,380,000 in the first nine months of 1996. This $1,770,000 increase is primarily attributable to rental rate increases as offset by a decrease in financial occupancy to 97.4% for the first nine months of 1997, from 98.4% for the first nine months of 1996. The nine multifamily residential properties located in Seattle metropolitan area was the next largest region contributing to this Same Store Properties rental income increase. The rental income of these properties increased by $758,000 or 7.0% to $11,526,000 in the first nine months of 1997 from $10,768,000 in the first nine months of 1996. This $758,000 increase is attributable to rental rate increases and an increase in financial occupancy to 96.7% for the first nine months of 1997, from 95.5% for the first nine months of 1996. The increase in total revenue also reflected an increase of $1,502,000 attributable to other income. The most significant component was an increase in interest income of $1,223,000 which was largely due to an increase in notes receivable. Total Expenses increased by $11,369,000 or approximately 40.3% to $39,557,000 in the first nine months of 1997 from $28,188,000 in the first nine months of 1996. Interest expense increased by $610,000 or 7.0% to $9,348,000 in the first nine months of 1997 from $8,738,000 in the first nine months of 1996. Such interest expense increase was primarily due to the net addition of outstanding mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $7,194,000 or 64.9% to $18,281,000 in the first nine months of 1997 from $11,087,000 in the first nine months of 1996. Of such increase, $6,884,000 was attributable to the Acquisition Properties and the Disposition Properties. General and administrative expenses represents the costs of the Operating Partnership's various acquisition and administrative departments as well as partnership administration and non-operating expenses. Such expenses increased by $403,000 in the first nine months of 1997 from the amount for the first nine months of 1996. This increase is largely due to additional staffing requirements resulting from the growth of the Operating Partnership. F-31 87 Net Income increased by $18,424,000 to $25,247,000 in the first nine months of 1997 from $6,823,000 in the first nine months of 1996. The increase in net income was primarily a result of the net contribution of the Acquisition Properties and an increase in net operating income from the Same Store Properties and an increase in the gain on sales of real estate of $2,647,000 to $5,127,000 in the third quarter of 1997 from $2,480,000 in the third quarter of 1996. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Total Revenues increased by $6,753,000 or 15.4% to $50,693,000 in 1996 from $43,940,000 in 1995. Rental revenue increased by $6,140,000 or 14.7% to $47,780,000 in 1996 from $41,640,000 in 1995. Approximately $3,564,000 of the increase in rental revenue was attributable to the properties which were acquired by the Operating Partnership in 1995 and 1996. Rental revenue from the Northern California and Seattle multifamily residential Properties increased by $3,010,000 or 9.3% to $35,504,000 in 1996 from $32,494,000 in 1995. Rental revenue increased by $2,156,000 or 46.9% during 1996 for the Properties located in Southern California. Approximately $1,973,000 of this increase was attributable to two properties acquired in this region during 1996. Portland, Oregon 1996 acquisitions contributed $703,000 to rental operations. Commercial property rental revenue increased by $271,000 or 5.9% during 1996. On April 30, 1996 and June 21, 1996 the Operating Partnership sold the Viareggio and Westbridge properties, respectively. The net all cash sales price of the two properties was $13,350,000. The net book value of these assets were $10,873,000 resulting in a gain on sales of real estate of $2,477,000. Total Expenses increased by $2,491,000 or approximately 7.0% to $38,200,000 in 1996 from $35,709,000 in 1995. Interest expense increased by $514,000 or 4.7% to $11,442,000 in 1996 from $10,928,000 in 1995. Such interest expense increase was primarily due to the acquisition of additional multifamily Properties. Property operating expenses, exclusive of depreciation and amortization increased by $1,901,000 or 14.0% to $15,505,000 in 1996 from $13,604,000 in 1995. Of such increase, $1,293,000 is attributable to properties acquired in 1996 and 1995. General and administrative expenses represents the cost of Essex's various acquisition and administrative departments, as well as, partnership, administration and non-operating expenses, Such expenses increased by $190,000 primarily due to an increase in staffing during the year. Net Income decreased by $2,595,000 to $11,143,000 in 1996 from $13,738,000 in 1995. The decrease in net income was primarily due to an extraordinary charge of $3,441,000 related to the early extinguishment of debt, net reduction in gains on sale of real estate of $3,536,000 from $6,013,000 in 1995 to $2,477,000 in 1996, partially offset by income before gain on sales of real estate, provision for income taxes, minority interest and extraordinary items increase of $4,262,000 to $12,493,000 in 1996 from $8,231,000 in 1995. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Total Revenues increased by $8,716,000 or 24.7% to $43,940,000 in 1995 from $35,224,000 in 1994. Rental revenue increased by $9,399,000 or 29.2% to $41,640,000 in 1995 from $32,241,000 in 1994. Approximately $8,269,000 of the increase in rental revenue was attributable to the properties which were acquired by the Operating Partnership concurrent with and after the Company's initial public offering in 1994 and 1995. Rental revenue from the Northern California and Seattle multifamily residential Properties increased by $8,918,000 or 37.8% to $32,494,000 in 1995 from $23,576,000 in 1994. Rental revenue increased by $206,000 or 4.7% during 1995 for the two Properties located in Southern California. Commercial property rental revenue increased by $149,000 or 3.3% during 1995. On May 31, 1995 and November 8, 1995 the Operating Partnership sold the Loma Verde and Pacifica Park properties, respectively. The net all cash sales price of the two properties was $12,147,000. The net book value of these assets were $6,134,000 resulting in a gain on sales of real estate of $6,013,000. Total Expenses increased by $5,214,000 or approximately 17.1% to $35,709,000 in 1995 from $30,495,000 in 1994. Interest expense increased by $700,000 or 6.8% to $10,928,000 in 1995 from $10,228,000 in 1994. Such interest expense increase was primarily due to the acquisition of additional multifamily Properties. Property operating expenses, exclusive of depreciation and amortization, increased by $2,885,000 or 26.9% to $13,604,000 in 1995 from $10,719,000 in 1994. Of such increase, $2,793,000 is attributable to properties acquired concurrent with and after the Company's initial public offering in 1994 and 1995. Property and asset F-32 88 management expenses relate to (i) the cost of managing properties in which certain directors and officers of the Company and their affiliates hold a minimal economic interest and (ii) the cost of managing portfolios of real estate and non-performing mortgages. Property and asset management expenses of $974,000 were incurred prior to the completion of the Company's initial public offering. Such expenses are no longer incurred due to the establishment of Essex Management Corporation ("EMC") in connection with the Company's initial public offering (the financial results of which are not consolidated with Essex's financial statements), which has borne all property and asset management costs since June 13, 1994. General and administrative expenses increased by $764,000 due primarily to reduced allocations of the Operating Partnership's expenses to EMC of approximately $500,000 and the accrual of incentive compensation related to achieving certain performance benchmarks. Other expenses represent an allocation to the Operating Partnership of costs incurred prior to the completion of the Company's initial public offering by The Marcus & Millichap Company for executive management, incentive compensation, audit and tax services and other matters; such expenses have not been borne by Essex since the completion of the Company's initial public offering. Net Income increased by $9,352,000 to $13,738,000 in 1995 from $4,386,000 in 1994. The increase in net income after minority interest was primarily due to $6,013,000 gains from the sale of two properties and operations from properties acquired concurrent with and after the IPO in 1994 and 1995. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Operating Partnership had $18,781,000 of unrestricted cash and cash equivalents. The Operating Partnership expects to meet its short-term liquidity requirements (during the next 12 months) by using working capital, amounts available on lines of credit, and any portion of net cash flow from operations not currently distributed. The Operating Partnership believes that its future net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT requirements. The Operating Partnership has credit facilities in the committed amount of approximately $75,110,000. At September 30, 1997 the Operating Partnership had no outstanding balance on its lines of credit. The Operating Partnership expects to meet its long-term liquidity requirements (beyond the next 12 months) by using working capital, amounts available on lines of credit, any portion of undistributed net cash flow, net proceeds from public and private debt and equity offerings of the Operating Partnership, contributions from the Company of net proceeds from public and private equity offerings of the Company, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Operating Partnership or the Company will have access to the debt and equity markets in a timely fashion to meet long-term liquidity requirements or that future working capital, net cash flow and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the Operating Partnership's needs. The Operating Partnership's total cash balances decreased $22,456,000 from $46,899,000 as of December 31, 1996 to $24,443,000 as of September 30, 1997. This decrease was primarily a result of $130,274,000 of cash used in investing activities, which was offset by $30,839,000 of cash provided by operating activities, and $76,979,000 of cash provided by financing activities. Of the $130,274,000 net cash used in investing activities, $122,667,000 was used to purchase and upgrade rental properties, and $22,663,000 was used to fund-real estate under development as offset by $15,470,000 of proceeds received from the disposition of one multifamily residential and three retail properties. The $75,511,000 net cash provided by financing activities was primarily a result of $75,055,000 of proceeds from lines of credit and other notes payable, $104,119,000 net proceeds from the common stock offerings, $20,000,000 net proceeds from convertible preferred stock sale and $11,576,000 repayment of notes receivable as offset by $89,471,000 of repayments of mortgages other notes payable and lines of credit, $23,277,000 issued in notes and other related party receivables and $20,159,000 of dividends/distributions paid. As of September 30, 1997, the Operating Partnership's outstanding indebtedness under mortgages and line of credit consisted of $145,106,000 in fixed rate debt, $42,820,000 of debt represented by tax exempt variable rate demand bonds, of which $29,220,000 is capped at a maximum interest rate of 7.2%. As of September 30, 1997, 32 of the Company's 43 Properties were encumbered by debt. The total amount of the outstanding debt was $187,925,500. The agreements underlying these encumbrances contain customary restrictive covenants which the Operating Partnership believes do not have a material adverse effect F-33 89 on the Operating Partnership's operations. As of September 30, 1997, the Operating Partnership was in compliance with such covenants. Also, of the Company's 32 Properties encumbered by debt, 15 were secured by deeds of trust relating solely to those Properties. With respect to the remaining 17 Properties, two cross collateralized mortgages were secured by 8 Properties and 3 Properties, respectively, and a separate line of credit was secured by 6 Properties. The Operating Partnership's expects to incur approximately $300 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 1997. These expenditures do not include the improvements required in connection with Northwestern Mutual and John Hancock mortgage loans and renovation expenditures required pursuant to tax-exempt bond financings. The Operating Partnership expects that cash from operations and/or the lines of credit will fund such expenditures. The Operating Partnership is also developing six multifamily residential projects, which are anticipated to have an aggregate of approximately 1,330 multifamily units. The Operating Partnership expects that such projects will be completed during the next two years (1998 and 1999). Such projects involve certain risks inherent in real estate development. See "Risk Factors -- Development Activities; Risks That Developments Will Be Delayed or Not Completed." In connection with these development projects, the Operating Partnership has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for approximately $77 million. The Operating Partnership expects to fund such commitments with some combination of its line of credit, net proceeds from public and private equity and debt issuances, and any portion of undistributed net cash flow. The Operating Partnership pays quarterly distributions from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Operating Partnership primarily in short-term investment grade securities or is used by the Operating Partnership to reduce balances outstanding under its lines of credit. On August 20, 1996, the Company completed the sale of 2,530,000 shares of its Common Stock through an underwritten public offering at a price of $22.75 per share. The net proceeds were contributed to the Operating Partnership and used primarily to fund property acquisitions. In September 1996, the Company completed the sale of $20 million of its 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to Tiger/Westbrook. The net proceeds were contributed to the Operating Partnership and used primarily to fund property acquisitions. On December 24, 1996, the Company completed the sale of 2,783,000 shares of its Common Stock through an underwritten public offering at a price of $27.75 per share. The net proceeds were used primarily to fund property acquisitions. On March 31, 1997, the Company completed the sale of 2,000,000 shares of its Common Stock to Cohen & Steers at a price of $29.125 per share. The net proceeds were contributed to the Operating Partnership and used primarily to reduce debt and acquire additional multifamily properties. On June 20, 1997, the Company completed the second phase of the Tiger/Westbrook transaction with the sale of an additional $20 million of its Convertible Preferred Stock to Tiger/Westbrook. The net proceeds were contributed to the Operating Partnership and used primarily to fund property acquisitions and for general corporate purposes. On September 19, 1997, the Company completed a public offering of 1,495,000 shares of its Common Stock at a net price of $31.00 per share. The net proceeds were contributed to the Operating Partnership and used to pay off lines of credit balances and to fund acquisition and development of additional multifamily properties. On December 8, 1997, the Company completed the sale of 1,500,000 shares of its Common Stock through an underwritten public offering at a price of $35.50 per share. The net proceeds were contributed to the Operating Partnership and used primarily to fund property acquisitions. The Company is currently evaluating appropriate courses of action regarding Year 2000 compliance. The Company has contacted its current software vendor and has determined that an upgraded package will be available for implementation. Any costs related to Year 2000 compliance will be expensed as incurred. Total costs are not expected to have a material impact on operations. F-34 90 FUNDS FROM OPERATIONS Industry analysts generally consider funds from operations, ("Funds from Operations"), an appropriate measure of performance of an equity REIT. Generally, Funds from Operations adjusts the net income of equity REITs for non-cash charges such as depreciation and amortization and non-recurring gains or losses. The Operating Partnership generally considers Funds from Operations to be a useful financial performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations. The following table sets forth the Operating Partnership's calculation of Funds from Operations for the quarters ended September 30, 1997 and 1996.
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 1997 1996 ----------- ---------- Net Income before minority interest and extraordinary item............................... $12,612,000 $3,376,000 Adjustments: Depreciation and amortization.................... 3,555,000 2,276,000 Adjustment for unconsolidated joint ventures..... 242,000 130,000 Non-recurring items, including gain on sales of real estate and loss from hedge termination... (4,713,000) (68,000) Minority interests............................... (161,000) (144,000) ----------- ---------- Funds from Operations.............................. $11,535,000 $5,570,000 =========== ========== Weighted average number common units -- fully diluted(1)....................................... 17,860,753 9,878,075 =========== ==========
- --------------- (1) Assumes conversion of all outstanding shares of Convertible Preferred Stock and Operating Partnership interests into shares of the Company's Common Stock. The National Association of Real Estate Investment Trust ("NAREIT"), a leading industry trade group, has approved a revised interpretation of Funds from Operations, which provides that the amortization of deferred financing costs is no longer added back to net income to calculate Funds from Operations. The Operating Partnership adopted the revised NAREIT definition of Funds from Operations as of January 1, 1996. F-35 91 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses, other than underwriting discounts and commissions, in connection with the offering of the securities being registered are set forth below. All of such expenses are estimates, except the Securities Act registration fee. Securities Act Registration Fee............................. $103,250 Fee of Rating Agencies...................................... 50,000 Printing fees............................................... 50,000 Legal fees and expenses..................................... 75,000 Accounting fees and expenses................................ 20,000 New York Stock Exchange Filing Fees......................... 25,000 Trustee expenses and fees................................... 15,000 Blue sky fees and expenses.................................. 15,000 Miscellaneous expenses...................................... 46,750 -------- Total............................................. $400,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Maryland General Corporation Law (the "MGCL") permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which limits such liability to the maximum extent permitted by the MGCL. The Charter authorizes the Company to obligate itself to indemnify its present and former officers and directors and to pay or reimburse reasonable expenses for such individuals in advance of the final disposition of a proceeding to the maximum extent permitted from time to time by the laws of Maryland. The Bylaws of the Company obligate it to indemnify, and advance expenses to present, former and proposed directors and officers to the maximum extent permitted by Maryland law. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their services in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services, or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. In addition, the MGCL requires the Company, as conditions to advancing expenses, to obtain (i) a written affirmation by the director or officer of his good-faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the applicable Bylaws and (ii) a written statement by him or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. The Bylaws of the Company also permit the Company to provide indemnification and advance or expenses to a present or former director or officer who served a predecessor of the Company in such capacity, and to any employee or agent of the Company or a predecessor of the Company. Finally, the MGCL requires a corporation (unless its charter provides otherwise, which the Company's charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceedings to which he is made a party by reason of his service in that capacity. II-1 92 The Company has entered into indemnification agreements with each of the directors and executive officers of the Company to provide them with indemnification to the full extent permitted by the Charter and Bylaws of the Company. The Company maintains an insurance policy which provides liability coverage for directors and officers of the Company. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1* Underwriting Agreement 3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995 (incorporated by reference to Exhibit 3.1 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 3.2 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A, (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 8-K, filed August 13, 1996). 3.3 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 10-Q as of September 30, 1996). 3.4 Certificate of Correction dated December 20, 1996 (incorporated by reference to Exhibit 3.4 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 3.5 Articles Supplementary for the 7.875% Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 8-K filed March 3, 1998). 3.6 Amended and Restated Bylaws of Essex Property Trust, Inc., (incorporated by reference to Exhibit 3.2 to Essex's Current Report on Form 8-K, filed August 13, 1996). 3.7 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996 (incorporated by reference to Exhibit 3.6 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.1* Form of Certificate of Articles Supplementary for additional series of Preferred Stock or for other classes or series of Essex Property Trust, Inc.'s capital stock 4.2* Form of Warrant Agreement 4.3* Form of Deposit Agreement 4.4 Form of Indenture 5.1** Opinion of Morrison & Foerster LLP 8.1 Opinion of Morrison & Foerster LLP relating to certain tax matters 12.1 Statement on Computation of ratio of earnings to combined fixed charges and preferred stock (incorporated by reference to Exhibit 12.1 to Essex Property Trust, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 23.1 Consent of KPMG Peat Marwick LLP 23.2** Consent of Morrison & Foerster LLP (included in Exhibits 5.1 and 8.1) 24.1** Power of Attorney (included on page II-4) 25.1* Statement of Eligibility of Trustee on Form T-1
- --------------- * To be filed by amendment or incorporated by reference in connection with the offering of the applicable Offered Securities. ** Previously filed. II-2 93 ITEM 17. UNDERTAKINGS Each of the undersigned Registrants hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering price may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; provided, however, that subparagraphs (i) and (ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in the periodic reports filed by the Registrants pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby further undertakes that, for the purposes of determining any liability under the Securities Act of 1933, each filing of the Registrants' annual reports pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrants hereby further undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance under Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Essex Portfolio, L.P., an undersigned Registrant, hereby further undertakes to file an application for the purpose of determining the eligibility of the Trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Act. II-3 94 The undersigned Registrants undertake that insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the provisions described under Item 15 of this registration statement, or otherwise (other than insurance), each such Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the Securities being registered, each Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. II-4 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, each Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California, on the day of March, 1998. ESSEX PROPERTY TRUST, INC. By: /s/ KEITH R. GUERICKE* ------------------------------------ Keith R. Guericke Chief Executive Officer and President ESSEX PORTFOLIO, L.P. by Essex Property Trust, Inc. as General Partner By: /s/ KEITH R. GUERICKE* ------------------------------------ Keith R. Guericke Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board of March 5, 1998 - -------------------------------------------------------- Directors George M. Marcus * Director March 5, 1998 - -------------------------------------------------------- William A. Millichap /s/ KEITH R. GUERICKE Director, Chief Executive March 5, 1998 - -------------------------------------------------------- Officer and President Keith R. Guericke (Principal Executive Officer) /s/ MICHAEL J. SCHALL Director, Executive Vice March 5, 1998 - -------------------------------------------------------- President and Chief Michael J. Schall Financial Officer (Principal Financial Officer) * Controller (Principal March 5, 1998 - -------------------------------------------------------- Accounting Officer) Mark J. Mikl * Director March 5, 1998 - -------------------------------------------------------- David W. Brady * Director March 5, 1998 - -------------------------------------------------------- Robert E. Larson * Director March 5, 1998 - -------------------------------------------------------- Gary P. Martin
II-5 96
SIGNATURE TITLE DATE --------- ----- ---- * Director March 5, 1998 - -------------------------------------------------------- Issie N. Rabinovitch Director - -------------------------------------------------------- Thomas E. Randlett Director - -------------------------------------------------------- Willard H. Smith, Jr. * Director March 5, 1998 - -------------------------------------------------------- Gregory J. Hartman * Director March 5, 1998 - -------------------------------------------------------- Anthony Downs *By: /s/ MICHAEL J. SCHALL ---------------------------------------------------- Michael J. Schall Attorney-in-Fact
II-6 97 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE ------- ------------------------------------------------------------ ------------ 1.1* Underwriting Agreement 3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995 (incorporated by reference to Exhibit 3.1 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 3.2 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A, (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 8-K, filed August 13, 1996). 3.3 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 10-Q as of September 30, 1996). 3.4 Certificate of Correction dated December 20, 1996 (incorporated by reference to Exhibit 3.4 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 3.5 Articles Supplementary for the 7.875% Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to Essex's Current Report on Form 8-K filed March 3, 1998). 3.6 Amended and Restated Bylaws of Essex Property Trust, Inc., (incorporated by reference to Exhibit 3.2 to Essex's Current Report on Form 8-K, filed August 13, 1996). 3.7 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996 (incorporated by reference to Exhibit 3.6 to Essex Property Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.1* Form of Certificate of Articles Supplementary for additional series of Preferred Stock or for other classes or series of Essex Property Trust, Inc.'s capital stock 4.2* Form of Warrant Agreement 4.3* Form of Deposit Agreement 4.4 Form of Indenture 5.1** Opinion of Morrison & Foerster LLP 8.1 Opinion of Morrison & Foerster LLP relating to certain tax matters 12.1 Statement on Computation of ratio of earnings to combined fixed charges and preferred stock (incorporated by reference to Exhibit 12.1 to Essex Property Trust, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 23.1 Consent of KPMG Peat Marwick LLP 23.2** Consent of Morrison & Foerster LLP (included in Exhibits 5.1 and 8.1) 24.1** Power of Attorney (included on page II-4) 25.1* Statement of Eligibility of Trustee on Form T-1
- --------------- * To be filed by amendment or incorporated by reference in connection with the offering of the applicable Offered Securities. ** Previously filed. EX-4.4 2 FORM OF INDENTURE 1 EXHIBIT 4.4 ESSEX PORTFOLIO, L.P., ISSUER ESSEX PROPERTY TRUST, INC. GUARANTOR AND [ ] TRUSTEE INDENTURE DATED AS OF _________________ DEBT SECURITIES GUARANTEES 2 REFERENCE SHEET* Reference is made to the following provisions of the Trust Indenture Act of 1939, as amended, which establish certain duties and responsibilities of the Issuer, the Guarantor and the Trustee which may not be set forth in this Indenture:
SECTION SUBJECT SECTION SUBJECT - ------- ------- ------- ------- 310(b) Disqualification of the Trustee 315(b) Notice of default from the for conflicting interest Trustee to Securityholders 311 Preferential collection of 315(c) Duties of the Trustee in case of claims of the Trustee as default creditor of the Issuer 312(a) Periodic filing of information 315(d) Provisions relating to by the Issuer with Trustee responsibility of the Trustee 312(b) Access of Securityholders to 315(e) Assessment of costs against information litigating Securityholders in certain circumstances 313(a) Annual report of the Trustee to 316(a) Directions and waivers by Securityholders Securityholders in certain circumstances 313(b) Additional reports of the 316(b) Prohibition of impairment of Trustee to Securityholders right of Securityholders to payment 314(a) Reports by the Issuer, including 316(c) Right of the Issuer to set annual compliance certificate record date for certain purposes 314(c) Evidence of compliance with 317(a) Special powers of the Trustee conditions precedent 315(a) Duties of the Trustee prior to 318(a) Provisions of Trust Indenture default Act of 1939 to control in case of conflict
- ---------- *This reference sheet is not a part of the Indenture. 3 INDENTURE, dated as of ___________________, among Essex Portfolio, L.P., a limited partnership organized under the laws of California (hereinafter called the "Issuer"), having its principal office at 400 South El Camino Real, Suite 1100, San Mateo, California 94402-1708, Essex Property Trust, Inc., a Maryland corporation, as Guarantor (the "Guarantor" or "General Partner"), and [ ], as Trustee (the "Trustee"), having a principal place of business at [ ]. RECITALS OF THE ISSUER AND THE GUARANTOR The Issuer deems it necessary to issue from time to time for lawful purposes debt securities (hereinafter called the "Securities") evidencing its unsecured indebtedness, and has duly authorized the execution and delivery of this Indenture, to provide for the issuance from time to time of the Securities, unlimited as to principal amount, to bear interest at the rates or formulas, to mature at such times and to have such other provisions as shall be fixed as hereinafter provided. The Guarantor has duly authorized the execution and delivery of this Indenture to provide for guarantees (the "Guarantee") with respect to Securities as set forth in the Indenture. This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are deemed to be incorporated into this Indenture by such Act, and shall, to the extent applicable, be governed by such provisions. All things necessary to make this Indenture a valid agreement of the Issuer and the Guarantor, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (2) all other terms used herein which are defined in the TIA, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash 1 4 transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the TIA; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Three, Article Five, Article Six and Article Ten, are defined in those Articles. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Additional Amounts" means any additional amounts which are required by a Security or by or pursuant to a Board Resolution, under circumstances specified therein, to be paid by the Issuer in respect of certain taxes imposed on certain Holders and which are owing to such holders. "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. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any authenticating agent appointed by the Trustee pursuant to Section 611. "Authorized Newspaper" means a newspaper, printed in the English language or in an official language of the country of publication, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Whenever successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different Authorized Newspapers in the same city meeting the foregoing requirements and in each case on any Business Day. "Bearer Security" means any Security established pursuant to Section 201 which is payable to bearer. "Board" means the board of directors of the General Partner, the executive committee or any committee of that board duly authorized to act hereunder. 2 5 "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the General Partner to have been duly adopted by the Board and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means, unless otherwise specified with respect to any Securities pursuant to Section 301, any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in that Place of Payment or particular location are authorized or required by law, regulation or executive order to close. "Capitalized Leases" means any lease of property by the Issuer or any Subsidiary as lessee which is reflected on the Issuer's consolidated balance sheet as a capitalized lease, or which should be so reflected, in accordance with GAAP. "CEDEL" means Centrale de Livraison de Valeurs Mobilieres, S.A., or its successor. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Common Depository" shall have the meaning specified in Section 304. "Conversion Event" means the cessation of use of (i) a Foreign Currency either by the government of the country which issued such currency or for the settlement of transactions by a central bank or other public institution of or within the international banking community, (ii) the ECU either within the European Monetary System or for the settlement of transactions by public institutions of or within the European Community or (iii) any currency unit (or composite currency) other than the ECU for the purposes for which it was established. "Corporate Trust Office" means the office of the Trustee at which, at any particular time, its corporate trust business shall be principally administered, which office at the date hereof is located at 101 California Street, Suite 2725, San Francisco, CA 94111, Attention: Corporate Trust Department. "Coupon" means any interest coupon appertaining to a Bearer Security. "Debt" of the Issuer or any Subsidiary means, without duplication, any indebtedness of the Issuer or any Subsidiary, in respect of (i) borrowed money, (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any security interest existing on property owned by the Issuer or any Subsidiary, (iv) letters of credit or amounts representing the balance deferred and unpaid of the purchase price of any property except any such balance that constitutes an accrued expense or trade payable or (v) Capitalized Leases, and also includes, to the extent not otherwise included, any obligation by the Issuer or any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), indebtedness 3 6 of another person (other than the Issuer or any Subsidiary) in respect of clauses (i) through (v) above. "Defaulted Interest" has the meaning specified in Section 307. "Dollar" or "$" means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts. "DTC" means The Depository Trust Company, or any successor thereto. "ECU" means the European Currency Unit as defined and revised from time to time by the Council of the European Community. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels Office, or its successor as operator of the Euroclear System. "European Community" means the European Economic Community. "European Monetary System" means the European Monetary System established by the Resolution of December 5, 1978 of the Council of the European Community. "Event of Default" has the meaning specified in Article Five. "Foreign Currency" means any currency, currency unit or composite currency, including, without limitation, the ECU, issued by the government of one or more countries other than the United States of America or by any recognized confederation or association of such governments. "GAAP" means generally accepted accounting principles as used in the United States applied on a consistent basis. "General Partner" and "Guarantor" means Essex Property Trust, Inc., a Maryland corporation, as general partner of the Issuer. "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the Foreign Currency in which the Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government which issued the Foreign Currency in which the Securities of such series are payable, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any 4 7 deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt. "Guarantee" has the meaning stated in the second recital of the Indenture and, more particularly, means any guarantee of the Issuer's obligations under the Securities by the Guarantor as may be provided pursuant to Article 16 of this Indenture. "Holder" means, in the case of a Registered Security, the Person in whose name a Security is registered in the Security Register and, in the case of a Bearer Security, the bearer thereof and, when used with respect to any coupon, shall mean the bearer thereof. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, and shall include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument, "Indenture" shall mean, with respect to any one or more series of Securities for which any such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended and shall include the terms of the or those particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms which relate solely to other series of Securities for which such Person is not Trustee. "Indexed Security" means a Security the terms of which provide that the principal amount thereof payable at Stated Maturity may be more or less than the principal face amount thereof at original issuance, as determined by reference to a particular index or other measure specified in a supplemental indenture relating to such Security. "Interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, shall mean interest payable after Maturity, and, when used with respect to a Security which provides for the payment of Additional Amounts pursuant to Section 1009, includes such Additional Amounts. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Issuer" means the Person named as the "Issuer" in the first paragraph of this Indenture until a successor shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Issuer" shall mean such successor. "Issuer Request" and "Issuer Order" mean, respectively, a written request or order signed in the name of the Issuer by the General Partner by its President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the General Partner, and delivered to the Trustee. 5 8 "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption, notice of option to elect repayment or otherwise. "Officers' Certificate" means a certificate signed by the President or a Vice President of the General Partner and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the General Partner, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may, if permitted by the TIA, be counsel for the Issuer or who may be an employee of or other counsel for the Issuer. "Original Issue Discount Security" means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption or repayment at the option of the Holder money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Issuer) in trust for the Holders of such Securities and any coupons appertaining thereto, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities, except to the extent provided in Sections 1402 and 1403, with respect to which the Issuer has effected defeasance as provided in Article Fourteen; and (iv) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Issuer; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders for quorum purposes, and for the purpose of making the calculations required by TIA Section 313, (i) the principal amount of an Original Issue Discount Security that may be counted in making such determination or calculation and that shall be deemed to be Outstanding for such purpose shall be equal to the amount of principal thereof that would be (or shall have been declared to be) due and payable, at the time of such determination, upon a declaration of acceleration of the maturity thereof 6 9 pursuant to Section 502, (ii) the principal amount of any Security denominated in a Foreign Currency that may be counted in making such determination or calculation and that shall be deemed Outstanding for such purpose shall be equal to the Dollar equivalent, determined pursuant to Section 301 as of the date such Security is originally issued by the Issuer, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent as of such date of original issuance of the amount determined as provided in clause (i) above) of such Security, (iii) the principal amount of any Indexed Security that may be counted in making such determination or calculation and that shall be deemed outstanding for such purpose shall be equal to the principal face amount of such indexed Security at original issuance, unless otherwise provided with respect to such Security pursuant to Section 301, and (iv) Securities owned by the Issuer or any other obligor upon the Securities or any Affiliate of the Issuer or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. "Paying Agent" means any Person authorized by the Issuer to pay the principal of (and premium, if any) or interest on any securities or coupons on behalf of the Issuer. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and interest on such Securities are payable as specified as contemplated by Sections 301 and 1002. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains. "Redemption Date", when used with respect to any Security to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registered Security" shall mean any Security established pursuant to Section 201 which is registered in the Security Register. 7 10 "Regular Record Date" for the interest payable on any Interest Payment Date on the Registered Securities of any series means the date specified for that purpose as contemplated by Section 301, whether or not a Business Day. "Repayment Date" means, when used with respect to any Security to be repaid at the option of the Holder, the date fixed for such repayment by or pursuant to this Indenture. "Responsible Officer", when used with respect to the Trustee, means any trust officer in its Corporate Trust Office or a successor group or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers with responsibility for matters related to this Indenture. "Security" has the meaning stated in the first recital of this Indenture and, more particularly, means any Security or Securities authenticated and delivered under this Indenture; provided, however, that, if at any time there is more than one Person acting as Trustee under this Indenture, "Securities" with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the first recital of this Indenture and shall more particularly mean Securities authenticated and delivered by such Trustee (or its predecessor as such) under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Significant Subsidiary" means any Subsidiary which is a "significant subsidiary" (as defined in Article I, Rule 1-02 of Regulation S-X, promulgated under the Securities Act of 1933, as amended) of the Issuer. "Special Record Date" for the payment of any Defaulted Interest on the Registered Securities of any series means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means a corporation, partnership or limited liability company, a majority of the outstanding voting stock, partnership interests or membership interests, as the case may be, of which is owned or controlled, directly or indirectly, by the Issuer or by one or more other Subsidiaries of the Issuer. For the purposes of this definition, "voting stock" means stock having voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended and as in force at the date as of which this Indenture was executed, except as provided in Section 905. 8 11 "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder; provided, however, that if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean only the Trustee with respect to Securities of that series. "United States" means, unless otherwise specified with respect to any Securities pursuant to Section 301, the United States of America (including the states and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "United States person" means, unless otherwise specified with respect to any Securities pursuant to Section 301, an individual who is a citizen or resident of the United States, a corporation, partnership or other entity created organized in or under the laws of the United States or an estate or trust the income of which is subject to United States federal income taxation regardless of its source. "Yield to Maturity" means the yield to maturity, computed at the time of issuance of a Security (or, if applicable, at the most recent redetermination of interest on such Security) and as set forth in such Security in accordance with generally accepted United States bond yield computation principles. SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Issuer or Guarantor to the Trustee to take any action under any provision of this Indenture, the Issuer or Guarantor shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (including certificates delivered pursuant to Section 1005) shall include: (1) a statement that each individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such condition or covenant has been complied with; and 9 12 (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by or covered by an opinion of any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion as to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Issuer or the Guarantor may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, or a certificate or representations by counsel, unless such officer knows, or in the exercise of reasonable care should know, that the opinion, certificate or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such Opinion of Counsel or certificate or representations may be based, insofar as it relates to factual matters upon a certificate or opinion of, or representations by, an officer or officers of the Issuer stating that the information as to such factual matters is in the possession of the Issuer, unless such counsel knows that the certificate or opinion or representations as to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of the Outstanding Securities of all series or one or more series, as the case may be, may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing. If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of Securities of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provisions of Article Fifteen, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and conclusive in favor of the 10 13 Trustee and the Issuer and any agent of the Trustee or the Issuer, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 1506; (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may so be proved in any other reasonable manner which the Trustee deems sufficient; (c) The ownership of Registered Securities shall be proved by the Security Register; (d) The ownership of Bearer Securities may be proved by the production of such Bearer Securities or by a certificate executed, as depository, by any trust company, bank or other depository, wherever situated, if such certificate shall be deemed by the Trustee to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depository, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustee to be satisfactory. The Trustee and the Issuer may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, or (2) such Bearer Security is produced to the Trustee by some other Person, or (3) such Bearer Security is surrendered in exchange for a Registered Security, or (4) such Bearer Security is no longer Outstanding. The ownership of Bearer Securities may also be proved in any other manner which the Trustee deems sufficient; (e) If the Issuer shall solicit from the Holders of Registered Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Issuer may, at its option, in or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Issuer shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders 11 14 on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date; (f) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee, any Security Registrar, any Paying Agent, any Authenticating Agent or the Issuer in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, etc., to Trustee and Issuer. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (1) the Trustee by any Holder or by the Issuer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office and specifically referencing this Indenture, or (2) the Issuer by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, to the Issuer addressed to it at the address of its principal office specified in the first paragraph of this Indenture or at any other address previously furnished in writing to the Trustee by the Issuer. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders of Registered Securities by the Issuer or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, to each such Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided herein. Any notice mailed to a Registered Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Except as otherwise expressly provided herein or otherwise specified with respect to any Securities pursuant to Section 301, where this Indenture provides for notice to Holders of Bearer Securities of any event, such notice shall be sufficiently given if published in an Authorized Newspaper in The City of New York and in such other city or cities as may be specified in such Securities on a Business Day, such publication to be not later than the latest date, and not earlier than the earliest date, prescribed herein or in such Securities for the giving of such notice. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once, on the date of the first such publication. 12 15 Any request, demand, authorization, direction, notice, consent or waiver required or permitted under the Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee. SECTION 107. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and agreements in this Indenture by the Issuer and Guarantor shall bind their successors and assigns, whether so expressed or not. SECTION 109. Separability Clause. In case any provision in this Indenture or in any Security, Guarantee or Coupon shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. Nothing in this Indenture or in the Securities, Guarantees or Coupons, express or implied, shall give to any Person, other than the parties hereto, any Security Registrar, any Paying Agent, any Authenticating Agent and their successors hereunder and the Holders any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. This Indenture and the Securities, Guarantees and Coupons shall be governed by and construed in accordance with the law of the State of New York. This Indenture is subject to the provisions of the TIA that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions, which are incorporated herein by reference. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or any Security or coupon other than a provision in the Securities of any series which specifically states that such provision shall apply in lieu hereof), payment of interest or any Additional Amounts or principal (and premium, if any) or sinking fund payment need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, Redemption Date, Repayment Date or sinking fund payment date, or at the Stated Maturity or Maturity, provided that interest shall not accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity, as the case may be, to the date of payment. 13 16 ARTICLE TWO SECURITIES FORMS SECTION 201. Forms of Securities. The Registered Securities, if any, of each series and the Bearer Securities and related Coupons, if any, of each series and the Guarantee, if any, relating to such series shall be in substantially the form as shall be established in an indenture supplemental hereto or approved from time to time by or pursuant to a Board Resolution in accordance with Section 301, shall have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture or any indenture supplemental hereto, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements placed thereon as the Issuer may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Securities may be listed, or to conform to usage. Unless otherwise specified as contemplated by Section 301, Bearer Securities shall have interest Coupons attached. The definitive Securities (and Guarantees and Coupons, if any) shall be printed, lithographed or engraved or produced by any combination of these methods on a steel engraved border or steel engraved borders or may be produced in any other manner, all as determined by the officers of the Issuer executing such Securities (or Guarantees or Coupons), as evidenced by their execution of such Securities or coupons. SECTION 202. Form of Trustee's Certificate of Authentication. Subject to Section 611, the Trustee's certificate of authentication shall be in substantially the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. -------------------------------------- [ ] as Trustee By ------------------------------------ Authorized Officer SECTION 203. Securities Issuable in Global Form. If Securities of a series are issuable in global form, as specified in and as contemplated by Section 301, then, notwithstanding clause (8) of Section 301 and the provisions of Section 302, any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities of such series from time to time endorsed thereon and that the aggregate amount of Outstanding Securities of such series represented thereby may from time to time be increased or decreased to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the 14 17 amount, of Outstanding Securities represented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Issuer Order to be delivered to the Trustee pursuant to Section 303 or 304. Subject to the provisions of Section 303 and, if applicable, Section 304, the Trustee shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Issuer Order. If an Issuer Order pursuant to Section 303 or 304 has been, or simultaneously is, delivered, any instructions by the Issuer with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 102 and need not be accompanied by an Opinion of Counsel. The provisions of the last sentence of Section 303 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Issuer and the Issuer delivers to the Trustee the Security in global form together with written instructions (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of Section 303. Notwithstanding the provisions of Section 307, unless otherwise specified as contemplated by Section 301, payment of principal of and any premium and interest on any Security in permanent global form shall be made to the Person or Persons specified therein. Notwithstanding the provisions of Section 308 and except as provided in the preceding paragraph, the Issuer, the Trustee and any agent of the Issuer and the Trustee shall treat as the Holder of such principal amount of Outstanding Securities represented by a permanent global Security (i) in the case of a permanent global Security in registered form, the Holder of such permanent global Security in registered form or (ii) in the case of a permanent global Security in bearer form, Euroclear or CEDEL. ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in one or more Board Resolutions or pursuant to authority granted by one or more Board Resolutions and, subject to Section 303, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, any or all of the following, as applicable: (1) the title of the Securities of the series (which shall distinguish the Securities of such series from all other series of Securities); 15 18 (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906, 1107 or 1305); (3) the date or dates, or the method by which such date or dates will be determined, on which the principal of the Securities of the series shall be payable; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate or rates shall be determined, the date or dates from which such interest shall accrue or the method by which such date or dates shall be determined, the Interest Payment Dates on which such interest will be payable and the Regular Record Date, if any, for the interest payable on any Registered Security on any Interest Payment Date, or the method by which such date shall be determined, and the basis upon which interest shall be calculated if other than that of a 360-day year of twelve 30-day months; (5) the place or places, if any, other than or in addition to Boston, Massachusetts, where (i) the principal of (and premium, if any), interest, if any, on, and Additional Amounts, if any, payable in respect of, Securities of the series shall be payable, (ii) any Registered Securities of the series may be surrendered for registration of transfer, exchange or conversion and (iii) notices or demands to or upon the Issuer in respect of the Securities of the series and this Indenture may be served; (6) the period or periods within which, or the date or dates on which, the price or prices at which, the currency or currencies, currency unit or units or composite currency or currencies in which, and other terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuer, if the Issuer is to have the option; (7) the obligation, if any, of the Issuer to redeem, repay or purchase Securities of the series, pursuant to any sinking fund or analogous provision or at the option of a Holder thereof upon the occurrence of specified circumstances or otherwise, and the period or periods within which or the date or dates on which, the price or prices at which, the currency or currencies, currency unit or units or composite currency or currencies in which, and other terms and conditions upon which Securities of the series shall be redeemed, repaid or purchased, in whole or in part, pursuant to such obligation and any provisions in modification of, in addition to or in lieu of any of the provisions of Articles Eleven, Twelve or Thirteen; (8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Registered Securities of the series shall be issuable and, if other than the denomination of $1,000, the denomination or denominations in which any Bearer Securities of the series shall be issuable; 16 19 (9) if other than the Trustee, the identity of each Security Registrar and/or Paying Agent for the series; (10) the percentage of the principal amount at which Securities of such series will be issued and, if other than the principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502 or, if applicable, the portion of the principal amount of Securities of the series that is convertible in accordance with the provisions of this Indenture, or the method by which such portion shall be determined; (11) if other than Dollars, the Foreign Currency or Currencies in which payment of the principal of (and premium, if any), interest, if any, on, and Additional Amounts, if any, on the Securities of the series shall be payable or in which the Securities of the series shall be denominated; (12) whether the amount of payments of principal of (and premium, if any) or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method (which index, formula or method may be based, without limitation, on one or more currencies, currency units, composite currencies, commodities, equity indices or other indices), and the manner in which such amounts shall be determined; (13) provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified; (14) any deletions from, modifications of or additions to the Events of Default or covenants of the Issuer set forth in this Indenture with respect to Securities of the series, (whether or not such Events of Default or covenants are consistent with the Events of Default or covenants set forth herein); (15) whether Securities of such series will be issued in certificated or book-entry form and, if certificated, whether Securities of the series are to be issuable as Registered Securities, Bearer Securities (with or without coupons) or both, any restrictions applicable to the offer, sale or delivery of Bearer Securities and the terms upon which Bearer Securities of the series may be exchanged for Registered Securities of the series and vice versa (if permitted by applicable laws and regulations), whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form with or without coupons and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 305, and, if Registered Securities of the series are to be issuable as a global Security, the identity of the depository for such series; 17 20 (16) the date as of which any Bearer Securities of the series and any temporary global Security representing outstanding Securities of the series shall be dated if other than the date of original issuance of the first Security of the series to be issued; (17) the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the manner in which, or the Person to whom, any interest on any Bearer Security of the series shall be payable, if otherwise than upon presentation and surrender of the Coupons appertaining thereto as they severally mature, and the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 304; (18) the applicability, if any, of Sections 1402 and/or 1403 to the Securities of the series and any provisions in modification of, in addition to or in lieu of any of the provisions of Article Fourteen; (19) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, then the form and/or terms of such certificates, documents or conditions; (20) the applicability, if any, of Articles Sixteen and Seventeen to the Securities of the series and any provisions in modification of, in addition to or in lieu of any of the provisions of Article Sixteen and Seventeen; (21) whether and under what circumstances the Issuer will pay Additional Amounts as contemplated by Section 1009 on the Securities of the series to any Holder who is not a United States person (including any modification to the definition of such term) in respect of any tax, assessment or governmental charge and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such Additional Amounts (and the terms of any such option); (22) the terms and conditions, if any, upon which payment of the Securities of such series shall be subordinated to other Debt of the Issuer (including, without limitation, the Debt which ranks senior to such Securities; restrictions on payments to Holders of such Securities while a default with respect to such senior Debt is continuing; restrictions, if any, on payments to the Holders of such Securities following an Event of Default; and any requirements for Holders of such Securities to remit certain payments to the holders of such senior Debt); and (23) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series and the Guarantees and Coupons appertaining to any Securities of such series shall be substantially identical except, in the case of Registered 18 21 Securities, as to denominations and except as may otherwise be provided in or pursuant to the Board Resolution establishing the series (subject to Section 303) and set forth in an Officers' Certificate or in any indenture supplemental hereto. All Securities of any one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders, for issuances of additional Securities of such series. If any of the terms of the Securities of any series are established by action taken pursuant to one or more Board Resolutions, a copy of an appropriate record of such action(s) shall be certified by the Secretary or an Assistant Secretary of the Issuer and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the Securities of such series. SECTION 302. Denominations. The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 301. With respect to Securities of any series denominated in Dollars, in the absence of any such provisions, the Registered Securities of such series, other than Registered Securities issued in global form (which may be of any denomination), shall be issuable in denominations of $1,000 and any integral multiple thereof and the Bearer Securities of such series, other than Bearer Securities issued in global form (which may be of any denomination), shall be issuable in denominations of $1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities and any Guarantees or Coupons appertaining thereto shall be executed on behalf of the Issuer by its General Partner, by such General Partner's President or one of its Vice Presidents, under such General Partner's seal reproduced thereon, and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities and Guarantees or Coupons may be manual or facsimile signatures of such authorized officer and may be imprinted or otherwise reproduced on the Securities. Securities, Guarantees or Coupons and agreements relating thereto bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the General Partner of the Issuer or the Guarantor as applicable shall bind the Issuer or the Guarantor, as applicable, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities, Guarantees or Coupons or related agreements. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of a series, together with any Guarantee or Coupon appertaining thereto, executed on behalf of the Issuer to the Trustee for authentication, together with an Issuer Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Issuer Order shall authenticate and deliver such Securities; provided, however, that, in connection with its original issuance, no Bearer Security shall be mailed or otherwise delivered to any location in the United States; and provided further that, unless otherwise specified with respect to any series of Securities pursuant to Section 301, a Bearer Security may be delivered in connection with its original issuance only if the Person entitled to receive such Bearer Security 19 22 shall have furnished a certificate in the form set forth in Exhibit A-1 to this Indenture or such other certificate as may be specified with respect to any series of Securities pursuant to Section 301, dated no earlier than 15 days prior to the earlier of the date on which such Bearer Security is delivered and the date on which a temporary Security first becomes exchangeable for such Bearer Security in accordance with the terms of such temporary Security and this Indenture. If any Security shall be represented by a permanent global Bearer Security, then, for purposes of this Section and Section 304, the notation of a beneficial owner's interest therein upon original issuance of such Security or upon exchange of a portion of a temporary global Security shall be deemed to be delivery in connection with its original issuance of such beneficial owner's interest in such permanent global Security. Except as permitted by Section 306, the Trustee shall not authenticate and deliver any Bearer Security unless all appurtenant Coupons then matured have been detached and canceled. If all the Securities of any series are not to be issued at one time and if the Board Resolution or supplemental indenture establishing such series shall so permit, such Issuer Order may set forth procedures acceptable to the Trustee for the issuance of such Securities and determining the terms of particular Securities of such series, such as interest rate or formula, maturity date, date of issuance and date from which interest shall accrue. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to TIA Sections 315(a) through 315(d)) shall be fully protected in relying upon, (i) an Opinion of Counsel stating that (a) the form or forms of such Securities and any Guarantees or Coupons have been established in conformity with the provisions of this Indenture; (b) the terms of such Securities and any Guarantees or Coupons have been established in conformity with the provisions of this Indenture; and (c) such Securities, together with any Guarantees or Coupons appertaining thereto, when completed by appropriate insertions and executed and delivered by the Issuer to the Trustee for authentication in accordance with this Indenture, authenticated and delivered by the Trustee in accordance with this Indenture and issued by the Issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legal, valid and binding obligations of the Issuer or the Guarantor, as appropriate, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting the enforcement of creditors' rights generally and to general equitable principles; and (ii) an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the issuance of the Securities and the Guarantees have been complied with and that, to the best of the knowledge of the signers of such certificate, no Event of Default with respect to any of the Securities shall have occurred and be continuing. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect 20 23 the Trustee's own rights, duties, obligations or immunities under the Securities and this Indenture or otherwise in a manner which is not acceptable to the Trustee. Each Registered Security shall be dated the date of its authentication and each Bearer Security shall be dated as of the date specified as contemplated by Section 301. No Security, Guarantee or Coupon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security or Security to which such Guarantee or Coupon appertains a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Issuer, and the Issuer shall deliver such Security to the Trustee for cancellation as provided in Section 309 together with a written statement (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Issuer, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. (a) Pending the preparation of definitive Securities of any series, the Issuer may execute, and upon Issuer Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, of the tenor of the definitive Securities in lieu of which they are issued, in registered form, or, if authorized, in bearer form with one or more coupons or without coupons, and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. In the case of Securities of any series, such temporary Securities may be in global form. Except in the case of temporary Securities in global form (which shall be exchanged in accordance with Section 304(b) or as otherwise provided in or pursuant to a Board Resolution), if temporary Securities of any series are issued, the Issuer will cause Definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Issuer in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any non-matured coupons appertaining thereto), the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations; provided, however, that no definitive Bearer Security shall be delivered in exchange for a temporary Registered Security; and provided further that a definitive Bearer Security shall be delivered in exchange for a temporary Bearer Security only in 21 24 compliance with the conditions set forth in Section 303. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series; (b) Unless otherwise provided in or pursuant to a Board Resolution, this Section 304(b) shall govern the exchange of temporary Securities issued in global form other than through the facilities of DTC. If any such temporary Security is issued in global form, then such temporary global Security shall, unless otherwise provided therein, be delivered to the London office of a depository or common depository (the "Common Depository"), for the benefit of Euroclear and CEDEL, for credit to the respective accounts of the beneficial owners of such Securities (or to such other accounts as they may direct). Without unnecessary delay but in any event not later than the date specified in, or determined pursuant to the terms of, any such temporary global Security (the "Exchange Date"), the Issuer shall deliver to the Trustee definitive Securities, in aggregate principal amount equal to the principal amount of such temporary global Security, executed by the Issuer. On or after the Exchange Date, such temporary global Security shall be surrendered by the Common Depository to the Trustee, as the Issuer's agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge, and the Trustee shall authenticate and deliver, in exchange for each portion of such temporary global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such temporary global Security to be exchanged. The definitive Securities to be delivered in exchange for any such temporary global Security shall be in bearer form, registered form, permanent global bearer form or permanent global registered form, or any combination thereof, as specified as contemplated by Section 301, and, if any combination thereof is so specified, as requested by the beneficial owner thereof; provided, however, that, unless otherwise specified in such temporary global Security, upon such presentation by the Common Depository, such temporary global Security is accompanied by a certificate dated the Exchange Date or a subsequent date and signed by Euroclear as to the portion of such temporary global Security held for its account then to be exchanged and a certificate dated the Exchange Date or a subsequent date and signed by CEDEL as to the portion of such temporary global Security held for its account then to be exchanged, each in the form set forth in Exhibit A-2 to this Indenture or in such other form as may be established pursuant to Section 301; and provided further that definitive Bearer Securities shall be delivered in exchange for a portion of a temporary global Security only in compliance with the requirements of Section 303. Unless otherwise specified in such temporary global Security, the interest of a beneficial owner of Securities of a series in a temporary global Security shall be exchanged for definitive Securities of the same series and of like tenor following the Exchange Date when the account holder instructs Euroclear or CEDEL, as the case may be, to request such exchange on his behalf and delivers to Euroclear or CEDEL, as the case may be, a certificate in the form set forth in Exhibit A-1 to this Indenture (or in such other forms as may be established pursuant to Section 301), dated no earlier than 15 days prior to the Exchange Date, copies of which certificate shall be available from the offices of Euroclear and CEDEL, the Trustee, any Authenticating Agent appointed for such series of Securities and each Paying Agent. Unless 22 25 otherwise specified in such temporary global Security, any such exchange shall be made free of charge to the beneficial owners of such temporary global Security, except that a Person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like unless such Person takes delivery of such definitive Securities in person at the offices of Euroclear or CEDEL. Definitive Securities in bearer form to be delivered in exchange for any portion of a temporary global Securities shall be delivered only outside the United States. Until exchanged in full as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor authenticated and delivered hereunder, except that, unless otherwise specified as contemplated by Section 301, interest payable on a temporary global Security on an Interest Payment Date for Securities of such series occurring prior to the applicable Exchange Date shall be payable to Euroclear and CEDEL on such Interest Payment Date upon delivery by Euroclear and CEDEL to the Trustee of a certificate or certificates in the form set forth in Exhibit A-2 to this Indenture (or in such other forms as may be established pursuant to Section 301), for credit without further interest on or after such Interest Payment Date to the respective accounts of persons who are the beneficial owners of such temporary global Security on such Interest Payment Date and who have each delivered to Euroclear or CEDEL, as the case may be, a certificate dated no earlier than 15 days prior to the Interest Payment Date occurring prior to such Exchange Date in the form set forth as Exhibit A-1 to this Indenture (or in such other forms as may be established pursuant to Section 301). Notwithstanding anything to the contrary herein contained, the certifications made pursuant to this paragraph shall satisfy the certification requirements of the preceding two paragraphs of this Section 304(b) and of the third paragraph of Section 303 of this Indenture and the interests of the Persons who are the beneficial owners of a temporary global Security with respect to which such certification was made will be exchanged for definitive Securities of the same series and of like tenor on the Exchange Date or the date of certification if such date occurs after the Exchange Date, without further act or deed by such beneficial owners. Except as otherwise provided in this paragraph no payments of principal or interest owing with respect to a beneficial interest in a temporary global Security will be made unless and until such interest in such temporary global Security shall have been exchanged for an interest in a definitive Security. Any interest so received by Euroclear and CEDEL and not paid as herein provided shall be returned to the Trustee prior to the expiration of two years after such Interest Payment Date in order to be repaid to the Issuer. SECTION 305. Registration, Registration of Transfer and Exchange. The Issuer shall cause to be kept at the Corporate Trust Office of the Trustee or in any office or agency of the Issuer in a Place of Payment a register for each series of Registered Securities (the registers maintained in such office or in any such office or agency of the Issuer in a Place of Payment being herein sometimes referred to collectively as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Registered Securities and of transfers of Registered Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Trustee, at its Corporate Trust Office, is hereby initially appointed "Security Registrar" for the purpose of registering Registered Securities and transfers of Registered 23 26 Securities on such Security Register as herein provided. In the event that the Trustee shall cease to be Security Registrar, it shall have the right to examine the Security Register at all reasonable times. Subject to the provisions of this Section 305, upon surrender for registration of transfer of any Registered Security of any series at any office or agency of the Issuer in a Place of Payment for that series, the Issuer shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of the same series, of any authorized denominations and of a like aggregate principal amount, bearing a number not contemporaneously outstanding, and containing identical terms and provisions, including a Guarantee, if applicable. Subject to the provisions of this Section 305, at the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series, of any authorized denomination or denominations and of a like aggregate principal amount, containing identical terms and provisions, upon surrender of the Registered Securities to be exchanged at any such office or agency. Whenever any such Registered Securities are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Registered Securities which the Holder making the exchange is entitled to receive and, if applicable, the Guarantor shall execute the accompanying Guarantees. Unless otherwise specified with respect to any series of Securities as contemplated by Section 301, and as set forth below, Bearer Securities may not be issued in exchange for Registered Securities. If (but only if) permitted by the applicable Board Resolution and (subject to Section 303) set forth in the applicable Officers' Certificate, or in any indenture supplemental hereto, delivered as contemplated by Section 301, at the option of the Holder, Bearer Securities of any Series may be exchanged for Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Bearer Securities to be exchanged at any such office or agency, with all unmatured coupons and all matured coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default any such permitted exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Issuer in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Issuer and the Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however, that, except as otherwise provided in Section 1002, interest represented by coupons shall be payable only upon presentation and surrender of those coupons at an office or agency located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in a permitted exchange for a Registered Security of the same series and like tenor after the close of business at such office or agency on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of 24 27 business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or proposed date for payment, as the case may be, and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive and, if applicable, the Guarantor shall execute the accompanying Guarantees. Notwithstanding the foregoing, except as otherwise specified as contemplated in Section 301, any permanent global Security shall be exchangeable only as provided in this paragraph. If the depository for any permanent global Security is DTC, then, unless the terms of such global Security expressly permit such global Security to be exchanged in whole or in part for definitive Securities, a global Security may be transferred, in whole but not in part, only to a nominee of DTC, or by a nominee of DTC to DTC, or to a successor to DTC for such, global Security selected or approved by the Issuer or to a nominee of such successor to DTC. If at any time DTC notifies the Issuer that it is unwilling or unable to continue as depository for the applicable global Security or Securities or if at any time DTC ceases to be a clearing agency registered under the Securities Exchange Act of 1934 if so required by applicable law or regulation, the Issuer shall appoint a successor depository with respect to such global Security or Securities and provide notice to the Trustee of such appointment. If (x) a successor depository for such global Security or Securities is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such unwillingness, inability or ineligibility, (y) an Event of Default has occurred and is continuing and the beneficial owners representing a majority in principal amount of the applicable series of Securities represented by such global Security or Securities advise DTC, with a copy to the Trustee and the Issuer, to cease acting as depository for such global Security or Securities or (z) the Issuer, in its sole discretion, determines at any time that all (but not less than all) Outstanding Securities of any series issued or issuable in the form of one or more global Securities shall no longer be represented by such global Security or Securities and advises the Trustee and DTC of such determination, then the Issuer shall execute, and the Trustee shall authenticate and deliver, definitive Securities of like series, rank, tenor and terms in a definitive form in an aggregate principal amount equal to the principal amount of such global Security or Securities. If any beneficial owner of an interest in a permanent global Security otherwise entitled to exchange such interest for definitive Securities of such series and of like tenor and principal amount of another authorized form and denomination, as specified as contemplated by Section 301 and provided that any applicable notice provided in the permanent global Security shall have been given, then without unnecessary delay but in any event no later than the earliest date on which such interest may be so exchanged, the Issuer shall execute, and the Trustee shall authenticate and deliver, definitive Securities in aggregate principal amount equal to the principal amount of such beneficial owner's interest in such permanent global Security. On or after the earliest date on which such interests may be so exchanged, such permanent global Security shall be surrendered for exchange by DTC or such other depository as shall be specified in the Issuer Order with respect thereto to the Trustee; 25 28 provided, however, that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities to be redeemed and ending on the relevant Redemption Date if the Security for which exchange is requested may be among those selected for redemption; and provided further that no Bearer Security delivered in exchange for a portion of a permanent global Security shall be mailed or otherwise delivered to any location in the United States. If a Registered Security is issued in exchange for any portion of a permanent global Security after the close of business at the office or agency where such exchange occurs on (i) a Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) a Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of interest or Defaulted Interest, as the case may be, interest or defaulted interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such permanent global Security is payable in accordance with the provisions of this Indenture. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Registered Security presented or surrendered for registration of transfer or for exchange, conversion or redemption shall (if so required by the Issuer or the Security Registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1107 or 1305 not involving any transfer. The Issuer or the Trustee, as applicable, shall not be required (i) to issue, register the transfer of or exchange any Security if such Security may be among those selected for redemption during a period beginning at the opening of business 15 days before selection of the Securities to be redeemed under Section 1103 and ending at the close of business on (A) if such Securities are issuable only as Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if such Securities are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption or, if such Securities are also issuable as Registered Securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security so selected for redemption in whole or in part, except, in the case of a Registered Security to be redeemed in part, the portion thereof not selected for redemption may be exchanged for a Registered Security of that series and of like tenor, provided that such Registered Security shall be simultaneously surrendered for redemption, or (iii) to issue, register the transfer of or exchange any Security 26 29 which has been surrendered for repayment at the option of the Holder, except that portion, if any, of such Security which is not to be so repaid. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security or a Security with a mutilated Guarantee or Coupon appertaining to it is surrendered to the Trustee or the Issuer, together with, in proper cases, such security or indemnity as may be required by the Issuer or the Trustee to save each of them or any agent of either of them harmless, the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding, with Guarantees or Coupons corresponding to the Guarantees or Coupons, if any, appertaining to the surrendered Security. If there shall be delivered to the Issuer and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security, Guarantee or Coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of written notice to the Issuer or the Trustee that such Security, Guarantee or Coupon has been acquired by a bona fide purchaser, the Issuer shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for the Security to which a destroyed, lost or stolen Guarantee or Coupon appertains (with all appurtenant Guarantees or Coupons not destroyed, lost or stolen), a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding with Guarantees or Coupons corresponding to the Guarantees or Coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen Guarantee or Coupon appertains. Notwithstanding the provisions of the previous two paragraphs, in case any such mutilated, destroyed, lost or stolen Security or Coupon has become or is about to become due and payable, the Issuer in its discretion may, instead of issuing a new Security, with Coupons corresponding to the Coupons, if any, appertaining to such destroyed, lost or stolen Security or to the security to which such destroyed, lost or stolen Coupon appertains, pay such Security or Coupon; provided, however, that payment of principal of (and premium, if any), any interest on and any Additional Amounts with respect to, Bearer Securities shall, except as otherwise provided in Section 1002, be payable only at an office or agency located outside the United States and, unless otherwise specified as contemplated by Section 301, any interest on Bearer Securities shall be payable only upon presentation and surrender of the Coupons appertaining thereto. Every new Security of any series with its coupons, if any, issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security, or in exchange for a Security to which a mutilated, destroyed, lost or stolen coupon may pertain, shall constitute an original additional contractual obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Security and its coupons, if any, or the mutilated, destroyed, lost or stolen coupon shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and 27 30 proportionately with any and all other Securities of that series and their coupons, if any, duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities, Guarantees or Coupons. SECTION 307. Payment of Interest -- Interest Rights Preserved. Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, interest on any Registered Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Issuer maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest on any Registered Security may at the Holder's option upon written notice to the Trustee be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 308, to the address of such Person as it appears on the Security Register or (ii) transfer to an account maintained by the payee with a bank or other depository institution located inside the United States. Unless otherwise provided as contemplated by Section 301 with respect to the Securities of any series, payment of interest may be made, in the case of a Bearer Security, by transfer to an account maintained by the payee with a bank located outside the United States. Unless otherwise provided as contemplated by Section 301, every permanent global Security will provide that interest, if any, payable on any Interest Payment Date will be paid to DTC, Euroclear and/or CEDEL, as the case may be, with respect to that portion of such permanent global Security held for its account by Cede & Co. or the Common Depository, as the case may be, for the purpose of permitting such party to credit the interest received by it in respect of such permanent global Security to the accounts of the beneficial owners thereof. In case a Bearer Security of any series is surrendered in exchange for a Registered Security of such series after the close of business (at an office or agency in a Place of Payment for such series) on any Regular Record Date and before the opening of business (at such office or agency) on the next succeeding Interest Payment Date, such Bearer Security shall be surrendered without the Coupon relating to such Interest Payment Date and interest will not be payable on such Interest Payment Date in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such Coupon when due in accordance with the provisions of this Indenture. Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, any interest on any Registered Security of any series that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest shall be paid by the Issuer, as provided in clause (1) or (2) below: 28 31 (1) The Issuer may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Issuer shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of such series and the date of the proposed payment (which shall not be less than 20 days after such notice is received by the Trustee), and at the same time the Issuer shall deposit with the Trustee an amount of money in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall not be more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Issuer of such Special Record Date and, in the name and at the expense of the Issuer, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Registered Securities of such series at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Issuer, cause a similar notice to be published at least once in an Authorized Newspaper in each Place of Payment, but such publications shall not be a condition precedent to the establishment of such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Registered Securities of such series (or their respective predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). In case a Bearer Security of any series is surrendered for transfer or exchange at the office or agency in a Place of Payment for such series after the close of business at such office or agency on any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the Coupon relating to such Proposed date of payment and Defaulted Interest will not be payable on such proposed date of payment in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such Coupon when due in accordance with the provisions of this Indenture. (2) The Issuer may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Issuer to the Trustee of 29 32 the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Registered Security for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name such Registered Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any), and (subject to Sections 305 and 307) interest on, such Registered Security and for all other purposes whatsoever, whether or not such Registered Security is overdue, and neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall be affected by notice to the contrary. Title to any Bearer Security and any Coupons appertaining thereto shall pass by delivery. The Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Holder of any Bearer Security and the Holder of any Coupon as the absolute owner of such Security or Coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or Coupon is overdue, and neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall be affected by notice to the contrary. None of the Issuer, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Security in global form or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. All notices and communications to be given to Holders and all payments to be made to Holders under a Security in global form shall be given or made only to or upon the order of the registered Holder (which shall be the depository or its nominee) thereof. The rights of beneficial owners of a Security in global form shall be exercised only through the depository, subject to the applicable rules and procedures of the depository. Notwithstanding the foregoing, with respect to any global Security, nothing herein shall prevent the Issuer, the Trustee, or any agent of the Issuer or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by any depository, as a Holder, with respect to such global Security or impair, as between such depository and owners of beneficial interests in such global Security, the operation of customary practices governing the exercise of the rights of such depository (or its nominee) as Holder of such global Security. The Trustee, Issuer, any Paying Agent or the Security Registrar may rely and shall be fully protected in relying upon information furnished by any such depository with respect to its members, participants and any beneficial owners. SECTION 309. Cancellation. All Securities and coupons surrendered for payment, redemption, repayment at the option of the Holder, registration of transfer or exchange for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be 30 33 delivered to the Trustee, and any such Securities and Coupons and Securities and Coupons surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Issuer may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Issuer has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. If the Issuer shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. Canceled Securities and Coupons held by the Trustee shall be destroyed by the Trustee (subject to the record-retention requirements of the Exchange Act) and the Trustee shall deliver a certificate of such destruction to the Issuer unless by a Issuer Order the Issuer directs their return to it. SECTION 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 with respect to Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year consisting of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Issuer Request cease to be of further effect with respect to any series of Securities specified in such Issuer Request (except as to any surviving rights of registration of transfer or exchange of Securities of such series herein expressly provided for and any right to receive Additional Amounts, as provided in Section 1009), and the Trustee, upon receipt of a Issuer Order, and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of its Indenture as to such series when (1) either: (A) all Securities of such series theretofore authenticated and delivered and all Coupons, if any, appertaining thereto (other than (i) Coupons appertaining to Bearer Securities surrendered for exchange for Registered Securities and maturing after such exchange, whose surrender is not required or has been waived as provided in Section 305, (ii) Securities and Coupons of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306, (iii) Coupons appertaining to Securities called for redemption and maturing after the relevant Redemption Date, whose surrender has been waived as provided in Section 1106, and (iv) Securities and Coupons of such series for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid 31 34 to the Issuer or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all Securities of such series and, in the case of (i) or (ii) below, any Coupons pertaining thereto, not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) if redeemable at the option of the Issuer, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as funds in trust for such purpose an amount in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable, sufficient to pay and discharge the entire indebtedness on such Securities and such Coupons not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, and any Additional Amounts with respect thereto, to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; and (2) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and (3) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with. The obligations of the Issuer to the Trustee and any predecessor Trustee under Section 606, the obligations of the Issuer to any Authenticating Agent under Section 611 and, if money shall have been deposited with and held by the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive the satisfaction and discharge of this Indenture. SECTION 402. Application of Trust Funds. Subject to the provisions of the last paragraph of Section 1003, all monies deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the Coupons and this Indenture, to the payment, either directly or through any Paying Agent (but not in any event including the Issuer acting as its own Paying Agent) as the Trustee may determine, 32 35 to the Persons entitled thereto, of the principal (and premium, if any), and any interest and Additional Amounts for whose payment such money has been deposited with or received by the Trustee. Such money shall be segregated from other funds of the Trustee. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default," wherever used herein with respect to any particular series of Securities, means any one of the following events (whatever the reason for such Event of Default and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon or any Additional Amounts payable in respect of any Security of that series or of any Coupon appertaining thereto, when such interest, Additional Amounts or Coupon becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series when it becomes due and payable at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of any Security of that series; or (4) default in the performance of, or breach of, any covenant or warranty of the Issuer in this Indenture with respect to any Security of that series (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section 501 specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least a majority in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) a default under any bond, debenture, note or other evidence of indebtedness of the Issuer, or under any mortgage, indenture or other instrument of the Issuer (including a default with respect to Securities of any series other than that series) under which there may be issued or by which there may be secured any indebtedness of the Issuer (or by any Subsidiary, the repayment of which the Issuer has Guaranteed or for which the Issuer is directly responsible or liable as obligor or guarantor), whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay an aggregate principal amount exceeding $10,000,000 of such indebtedness when due and payable which shall continue after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness in an aggregate 33 36 principal amount exceeding $10,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 10 days after there shall have been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least a majority in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (6) the Issuer or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; or (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Issuer or any Significant Subsidiary in an involuntary case, (B) appoints a Custodian of the Issuer or any Significant Subsidiary or for all or substantially all of either of its property, or (C) orders the liquidation of the Issuer or any Significant Subsidiary and the order or decree remains unstayed and in effect for 90 days; or (8) any other Event of Default provided with respect to Securities of that series. As used in this Section 501, the term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors and the term "Custodian" means any receiver, trustee, assignee, liquidator or other similar official under any Bankruptcy Law. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of not less than a majority in principal amount of the Outstanding Securities of that series may declare the principal (or, if any Securities are Original Issue Discount Securities or Indexed Securities, such portion of the principal as may 34 37 be specified in the terms thereof) of all the Securities of that series to be due and payable immediately, by a notice in writing to the Issuer (and to the Trustee if given by the Holders), and upon any such declaration such principal or specified portion thereof shall become immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of not less than a majority in principal amount of the Outstanding Securities of that series, by written notice to the Issuer and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Issuer has paid or deposited with the Trustee a sum sufficient to pay in the currency, currency unit or composite currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series): (A) all overdue installments of interest and any Additional Amounts payable in respect of all Outstanding Securities of that series and any related coupons, (B) the principal of (and premium, if any, on) any Outstanding Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates borne by or provided for in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue installments of interest and any Additional Amounts at the rate or rates borne by or provided for in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the nonpayment of the principal of (or premium, if any) or interest on Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Issuer covenants that if: (1) default is made in the payment of any installment of interest or Additional Amounts, if any, on any Securities of any series and any related Coupon when such 35 38 interest or Additional Amount becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security of any series at its Maturity, then the Issuer will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities of such series and Coupons, the whole amount then due and payable on such Securities and Coupons for principal (and premium, if any) and interest and Additional Amounts thereon, with interest upon any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installments of interest or Additional Amounts thereon, if any, at the rate or rates borne by or provided for in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel. If the Issuer fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Issuer or Guarantor or any other obligor upon such Securities or Guarantees of such series and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Issuer or Guarantor or any other obligor upon such Securities or Guarantees of such series, wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series and any related Guarantees and Coupons by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Issuer, the Guarantor or any other obligor upon the Securities or the property of the Issuer, the Guarantor or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Issuer or the Guarantor for the payment of overdue principal of, premium, if any, or interest on the Securities) shall be entitled and empowered, by intervention in such proceeding or otherwise: (i) to file and prove a claim for the whole amount, or such lesser amount as may be provided for in the Securities of such series, of principal (and premium, if any) and interest and Additional Amounts, if any, owing and unpaid in respect of the Securities or Guarantees and to file such other papers or documents and to take such other actions including participating as a member of any committee of creditors appointed in 36 39 the matter as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder of Securities of such series, Guarantees and Coupons to make such payments to the Trustee, and in the event that such payments are made directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee, their agents and counsel, and any other amounts due the Trustee or any predecessor Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security, Guarantee or Coupon any plan of reorganization, arrangement, adjustment or composition affecting the Securities, Guarantees or Coupons or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of a Security, Guarantee or Coupon in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities of Coupons. All rights of action and claims under this Indenture or any of the Securities, Guarantees or Coupons may be prosecuted and enforced by the Trustee without the possession of any of the Securities, Guarantees or Coupons or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of Securities, Guarantees and Coupons in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date and dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) and interest and any Additional Amounts, upon presentation of the Securities, Guarantees or Coupons, or any thereof, as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due to the Trustee and any predecessor Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid upon the Securities, Guarantees and Coupons for principal (and premium, if any) and interest and any Additional Amounts payable, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according 37 40 to the aggregate amounts due and payable on such Securities, Guarantees and Coupons for principal (and premium, if any), interest and Additional Amounts, respectively; and THIRD: To the payment of the remainder, if any, to the Issuer. SECTION 507. Limitation on Suits. No Holder of any Security of any series or any related Coupon shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than a majority in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium, if any, Interest and Additional Amounts. Notwithstanding any other provision in this Indenture, the Holder of any Security, Guarantee or Coupon shall have the right which is absolute and unconditional to receive payment of the principal of (and premium, if any) and (subject to Sections 305 and 307) interest on, and any Additional Amounts in respect of, such Security or Guarantee or payment of such Coupon on the respective due dates expressed in such Security, Guarantee or Coupon (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder of a Security, Guarantee or Coupon has instituted any proceeding to enforce any right or remedy 38 41 under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Issuer, the Guarantor, the Trustee and the Holders of Securities and coupons shall, subject to any determination in such proceeding, be restored severally and respectively to their former position hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities, Guarantees or Coupons in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities, Guarantees or Coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion nor employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security, Guarantee or Coupon to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities, Guarantees or Coupons, as the case may be. SECTION 512. Control by Holders of Securities. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Securities of such series, provided that: (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee need not take any action which might expose it to personal liability, without the receipt of reasonable indemnity from Holders requesting such action, or be unduly prejudicial to the Holders of Securities of such series not joining therein. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series and any related coupons waive any past default hereunder with respect to such series and its consequences, except a default 39 42 (1) in the payment of the principal of (or premium, if any) or interest on or Additional Amounts payable in respect of any Security of such series or any related Coupons, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been waived, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Usury, Stay or Extension Laws. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Undertaking for Costs. All parties to this Indenture acknowledge, and each Holder of any Security by his acceptance thereof shall be deemed to have acknowledged, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than a majority in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the respective Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date). ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults. Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on or any 40 43 Additional Amounts or sinking fund installment with respect to the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of the Securities and Coupons of such series; and provided further that in the case of any default or breach of the character specified in Section 501(4) with respect to the Securities and coupons of such series, no such notice to Holders shall be given until at least 60 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to the Securities of such series. SECTION 602. Certain Rights of Trustee. (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Issuer mentioned herein shall be sufficiently evidenced by an Issuer Request or Issuer Order (other than delivery of any Security, together with any coupons appertaining thereto, to the Trustee for authentication and delivery pursuant to Section 303 which shall be sufficiently evidenced as provided therein) and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting to take any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities of any series or any related Guarantees or Coupons pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document, but the Trustee, in its discretion, may make such further inquiry or 41 44 investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuer, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; the Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own negligence or intentional misconduct, and (9) the Trustee shall not be deemed to have notice of any Event of Default or default or other fact or circumstance upon the occurrence of which it may be required to take action hereunder unless a Responsible Officer of the Trustee has actual knowledge of such event, fact or circumstance or unless written notice of any such event is received by the Trustee at its Corporate Trust Office. In the absence of such actual knowledge or notice, the Trustee may conclusively assume that no default has occurred and is continuing under this Indenture. Except as otherwise expressly provided herein, the Trustee shall not be bound to ascertain or inquire as to the performance of observance of any of the terms, conditions, covenants or agreements herein or of any of the documents executed in connection with the Securities or as to the existence of an Event of Default thereunder. (10) The Trustee shall, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants, duties or obligations shall be read into this Indenture against the Trustee. The Trustee shall, during the existence of any event of Default (which has not been cured), exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (11) The Trustee shall not be liable for any error of judgment made by a responsible employee or officer, unless the Trustee shall have been negligent in ascertaining the pertinent facts, or such responsible employee or officer was negligent in making such error or such error was made intentionally. (12) The permissive Rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty unless so specified herein. (13) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the direction of the Holders of not less than a 42 45 majority in aggregate principal amount of any series of Securities issued hereunder at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee under this Indenture with respect to such series of Securities. (14) All indemnifications and releases from liability granted herein to the Trustee shall extend to the directors, officers, employees and agents of the Trustee and to the Paying Agent and Registrar. Whether or not expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of the Trustee shall be subject to the provisions of this Article Six. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. SECTION 603. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificate of authorization, the Guarantees and in any Coupons shall be taken as the statements of the Issuer or the Guarantor, as applicable, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity, sufficiency or priority of this Indenture or of the Securities, Guarantees or Coupons, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder. Neither the Trustee nor the Authenticating Agent shall be accountable for the use or application by the Issuer of Securities or the proceeds thereof. SECTION 604. May Hold Securities and Guarantees. The Trustee, any Paying Agent, Security Registrar, Authenticating Agent or any other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Securities, Guarantees and Coupons and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Issuer or the Guarantor with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar, Authenticating Agent or such other agent. SECTION 605. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Issuer. SECTION 606. Compensation and Reimbursement. The Issuer agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse each of the Trustee and any predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any 43 46 provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to Trustee's negligence or bad faith; and (3) to indemnify each of the Trustee and any predecessor Trustee for, and to hold it harmless against, any loss, liability or expense (including the reasonable compensation and the expenses and disbursements of its agents and counsel) incurred without negligence or bad faith on its own part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(6) or (7), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law. As security for the performance of the obligations of the Issuer under this Section, the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (or premium, if any) or interest on particular Securities or Coupons under Section 401 or Article Fourteen. The provisions of this Section shall survive the termination of this Indenture. SECTION 607. Corporate Trustee Required; Eligibility; Conflicting Interests. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of at least $50,000,000. If such corporation or holding company publishes reports of condition at least annually, pursuant to law or the requirements Federal, state, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation or holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 609. (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Issuer. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of 44 47 such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Issuer. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Issuer or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Issuer or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Issuer by or pursuant to a Board Resolution may remove the Trustee and appoint a successor Trustee with respect to all Securities, or (ii) subject to TIA Section 315(e), any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason with respect to the Securities of one or more series, the Issuer, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series). If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Issuer and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Issuer. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Issuer or the holders of Securities and accepted appointed by the Issuer or Holders of Securities and accepted appointment in the manner hereinafter provided any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, 45 48 petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to Securities of such series. (f) The Issuer shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series in the manner provided for notices to the Holders of Securities in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 609. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee shall execute, acknowledge and deliver to the Issuer and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, upon request of the Issuer or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its claim, if any, provided for in Section 606. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Issuer, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto, pursuant to Article Nine hereof, wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the right, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; 46 49 but, on request of the Issuer or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. (c) Upon request of any such successor Trustee, the Issuer shall execute any and all instruments for more fully and certainly vesting in, and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 610. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities or coupons shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities or coupons so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities or coupons. In case any Securities or coupons shall not have been authenticated by such predecessor Trustee, any such successor Trustee may authenticate and deliver such Securities or coupons, in either its own name or that of its predecessor Trustee, with the full force and effect which this Indenture provides for the certificate of authentication of the Trustee. SECTION 611. Appointment of Authentication Agent. At any time when any of the Securities remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption or repayment thereof, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the trustee hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustee, a copy of which instruction shall be promptly furnished to the Issuer. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Issuer and, except as may otherwise be provided pursuant to Section 301, shall at all times be a bank or trust or corporation organized and doing business and in good standing under the laws of the United States of America or of any State or the District of Columbia, authorized under such laws to act 47 50 as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by federal or state authorities. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent for any series of Securities may at any time resign by giving written notice of resignation to the Trustee for such series and to the Issuer. The Trustee for any series of Securities may at any time terminate the agency of an Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee for such series may appoint a successor Authenticating Agent which shall be acceptable to the Issuer and shall give notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will service in the manner set forth in Section 106. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Issuer agrees to pay to each Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication substantially in the following form: 48 51 This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. [ ] as Trustee By:______________________________ as Authenticating Agent By:______________________________ Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER SECTION 701. Disclosure of Names and Addresses of Holders. Every Holder of Securities, Guarantees or Coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any Security Registrar shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders of Securities in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 702. Reports by Trustee. Within 60 days after June 15 of each year commencing with the first June 15 after the issuance of Securities pursuant to this Indenture, the Trustee shall transmit by mail to all Holders of Securities as provided in TIA Section 313(c) a brief report dated as of such June 15, if required by TIA Section 313(a). SECTION 703. Reports by Issuer and the Guarantor. The Issuer and the Guarantor will: (1) file with the Trustee, within 15 days after the Issuer or the Guarantor is required to file the same with the Commission, copies of the annual reports and of the information documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribed) which the Issuer or the Guarantor may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Issuer or the Guarantor is not required to file information, documents or reports pursuant to either of such Sections, then it will file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security 49 52 listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Issuer and the Guarantor with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to the Holders of Securities, within 30 days after the filing hereof with the Trustee, in the manner and to the extent provided in TIA Section 313(c), such summaries of any information, documents and reports required to be filed by the Issuer and the Guarantor pursuant to paragraphs (1) and (2) of this section as may be required by rules and regulations prescribed from time to time by the Commission. SECTION 704. Issuer to Furnish to Trustee Names and Addresses of Holders The Issuer will furnish or cause to be furnished to the Trustee: (a) semi-annually, not later than 25 days after the Regular Record Date for interest for each series of Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Registered Securities of such series as of such Regular Record Date, or if there is no Regular Record Date for interest for such series of Securities, semi-annually, upon such dates as are set forth in the Board Resolution or indenture supplemental hereto authorizing such series, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, provided, however, that, so long as the Trustee is the Security Registrar, no such list shall be required to be furnished. ARTICLE EIGHT CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE SECTION 801. Consolidation and Merger of Issuer and Sale, Lease and Conveyance Permitted Subject to Certain Conditions. The Issuer may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into any other Person, provided that in any such case, (i) either the Issuer shall be the continuing Person, or the successor (if other than the Issuer) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall expressly assume the due and punctual payment of the principal of (and premium, if any) and any interest (including all Additional Amounts, if any, payable pursuant to Section 1009) on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Issuer by supplemental indenture, complying with Article Nine thereof, 50 53 executed and delivered to the Trustee by such Person and (ii) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Issuer or any Subsidiary as a result thereof as having been incurred by the Issuer or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or the lapse of time, or both, would become an Event of Default, shall have occurred and be continuing. SECTION 802. Rights and Duties of Successor Person. In case of any such consolidation, merger, sale, lease or conveyance and upon any such assumption by the successor Person, such successor Person shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein as the party of the first part, and the predecessor Person, except in the event of a lease, shall be relieved of any further obligation under this Indenture and the Securities. Such successor Person thereupon may cause to be signed, and may issue either in its own name or in the name of the Issuer, any and all of the Securities issuable hereunder which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor Person, instead of the Issuer, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any securities which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance, such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate. SECTION 803. Officers' Certificate and Opinion of Counsel. Any consolidation, merger, sale, lease or conveyance permitted under Section 801 is also subject to the condition that the Trustee receive an Officers' Certificate and an Opinion of Counsel to the effect that any such consolidation, merger, sale, lease or conveyance, and the assumption of the Issuer's obligation under this Indenture by any successor Person (through a supplemental indenture hereto in accordance with Section 901), complies with the provisions of this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders of Securities or coupons, the Issuer, when authorized by or pursuant to the partnership agreement of the Issuer and Board Resolution of the General Partner, the Guarantor and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, for any of the following purposes: 51 54 (1) to evidence the succession of another Person to the Issuer or the Guarantor and the assumption by any such successor of the covenants of the Issuer or the Guarantor herein and in the Securities or Guarantees contained; or (2) to add to the covenants of the Issuer or the Guarantor for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Issuer or the Guarantor; or (3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are expressly being included solely for the benefit of such series); provided, however, that in respect of any such additional Events of Default such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the Holders of that or those series of Securities to which such additional Events of Default apply to waive such default; or (4) to add to or change any of the provisions of this Indenture to provide that Bearer Securities may be registerable as to principal, to change or eliminate any restrictions on the payment of principal of or any premium or interest on Bearer Securities, to permit Bearer Securities to be issued in exchange for Registered Securities, to permit Bearer Securities to be issued in exchange for Bearer Securities of other authorized denominations or to permit or facilitate the issuance of Securities in uncertificated form, provided, that any such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect; or (5) to change or eliminate any of the provisions of this Indenture, provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (6) to secure the Securities or Guarantees; or (7) to establish the form or terms of Securities of any series and any related Guarantees or Coupons as permitted by Sections 202 and 301, including the provisions and procedures relating to Securities convertible into Common Stock or Preferred Stock of the General Partner; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or 52 55 change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (9) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided such provisions shall not adversely affect the interests of the Holders of Securities of any series or any related Guarantees or Coupons in any material respect; or (10) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Sections 401, 1402 and 1403; provided that any such action shall not adversely affect the interests of the Holders of Securities of such series and any related Guarantees or Coupons or any other series of Securities in any material respect. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of all Outstanding Securities of any series, by Act of said Holders delivered to the Issuer and the Trustee, the Issuer and the Guarantor, when authorized by or pursuant to a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture, as it relates to such series or of modifying in any manner the rights of the Holders of Securities of such series and any related Guarantees or Coupons under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: (1) change the Stated Maturity of the principal of (or premium, if any, on) or any installment of principal of or interest on, any Security; or reduce the principal amount thereof or the rate or amount of interest thereon or any Additional Amounts payable in respect thereof, or any premium payable upon the redemption thereof, or change any obligation of the Issuer to pay Additional Amounts pursuant to Section 1009 (except as contemplated by Section 801(i) and permitted by Section 901(1)), or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502 or the amount thereof pursuant to Section 502 or the amount thereof provable in bankruptcy pursuant to Section 504, or adversely affect any right of repayment at the option of the Holder of any Security, or change any Place of Payment where, or the currency or currencies, currency unit or units or composite currency or currencies in which, any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Maturity thereof (or, in the case of redemption or repayment at the option of the Holder, on or after the Redemption Date or the Repayment Date, as the case may be), or 53 56 (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver with respect to such series (or compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or reduce the requirement of Section 1504 for quorum or voting, or (3) modify any of the provisions of this Section, Section 513 or Section 1010, except to increase the required percentage to effect such action or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modification thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and that all conditions precedent for any supplemental indenture have been satisfied. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of a supplemental indenture under this Article, this Indenture shall be modified in accordance therewith and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder and of any coupon appertaining thereto shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of a supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the 54 57 Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, Interest and Additional Amounts. The Issuer covenants and agrees for the benefit of the Holders of each series of Securities that it will duly and punctually pay the principal of (and premium, if any) and interest on and any Additional Amounts payable in respect of the Securities of that series in accordance with the terms of such series of Securities, and Coupons appertaining thereto and this Indenture. Unless otherwise specified as contemplated by Section 301 with respect to any series of Securities, any interest due on and any Additional Amounts payable in respect of Bearer Securities on or before Maturity, other than Additional Amounts, if any, payable as provided in Section 1009 in respect of principal of (or premium, if any, on) such a Security, shall be payable only upon presentation and surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. Unless otherwise specified with respect to Securities of any series pursuant to Section 301, at the option of the Issuer, all payments of principal may be paid by check to the registered Holder of the Registered Security or other person entitled thereto against surrender of such Security. SECTION 1002. Maintenance of Office or Agency. If Securities of a series are issuable only as Registered Securities, the Issuer shall maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment or conversion, where Securities of that series may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Securities of that series and this Indenture may be served. If Securities of a series are issuable as Bearer Securities, the Issuer will maintain: (A) in the City of San Francisco or in the City of New York, an office or agency where any Registered Securities of that series may be presented or surrendered for payment or conversion, where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange, where notices and demands to or upon the Issuer in respect of the Securities of that series and this Indenture may be served and where Bearer Securities of that series and related Coupons may be presented or surrendered for payment or conversion in the circumstances described in the following paragraph (and not otherwise); (B) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States, an office or agency where Securities of that series and related Coupons may be presented and surrendered for payment (including payment of any Additional Amounts payable on Securities of that series pursuant to Section 1009) or conversion; provided, however, that if the Securities of that series are listed on the Luxembourg Stock Exchange or an other stock exchange located outside the United States and such stock exchange shall so require, the Issuer will maintain a Paying Agent for the Securities of that series in Luxembourg or any other required city located outside the United States, as the case may be, so long as the Securities of that series are listed on such exchange; and (C) subject to any laws or regulations applicable thereto, in a 55 58 Place of Payment for that series located outside the United States an office or agency where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange and where notices and demands to or upon the Issuer in respect of the Securities of that series and this Indenture may be served. The Issuer will give prompt written notice to the Trustee of the location, and any change in the location, of each such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereto, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, except that Bearer Securities of that series and the related Guarantees or Coupons may be presented and surrendered for payment (including payment of any Additional Amounts payable on Bearer Securities of that series pursuant to Section 1009) or conversion at the offices specified in the Security and the Issuer hereby appoints the same as its agent to receive such respective presentations, surrenders, notices and demands, and the Issuer hereby appoints [ ], with an address at [ ], its agent to receive all such presentations, surrenders, notices and demands. Unless otherwise specified with respect to any Securities pursuant to Section 301, no payment of principal, premium or interest on or Additional Amounts in respect of Bearer Securities shall be made at any office or agency of the Issuer in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however, that, if the Securities of a series are payable in Dollars, payment of principal and any premium and interest on any Bearer Security (including any Additional Amounts Payable on Securities of such series pursuant to Section 1009) shall be made at the office of the Issuer's Paying Agent in the City of San Francisco or in the City of New York, if (but only if) payment in Dollars of the full amount of such principal, premium, interest or Additional Amounts, as the case may be, at all offices or agencies outside the United States maintained for such purpose by the Issuer in accordance with this Indenture, is illegal or effectively precluded by exchange controls or other similar restrictions. The Issuer may from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all of such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in accordance with the requirements set forth above for Securities of any series for such purposes. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Unless otherwise specified with respect to any Securities pursuant to Section 301 with respect to a series of Securities, the Issuer hereby designates as a Place of Payment for each series of Securities the office or agency of the Issuer in the City of San Francisco, and initially appoints [ ], with an address at [ ], as Paying Agent in such city and as its agent to receive all such presentations, surrenders, notices and demands. 56 59 Unless otherwise specified with respect to any Securities pursuant to Section 302, if and so long as the Securities of any series (i) are denominated in a Foreign Currency or (ii) may be payable in a Foreign Currency or so long as it is required under any other provision of this Indenture, then the Issuer will maintain with respect to each such series of Securities, or as so required, at least one exchange rate agent. SECTION 1003. Money for Securities Payments to Be Held in Trust. If the Issuer shall at any time act as its own Paying Agent with respect to any series of any Securities and any related coupons, it will, by no later than 12 noon Eastern Standard Time on the day prior to each due date of the principal of (and premium, if any), or interest on or Additional Amounts in respect of, any of the Securities of that series, segregate and holder in trust for the benefit of the Persons entitled thereto a sum in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay the principal (and premium, if any) or interest or Additional Amounts so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the Issuer shall have one or more Paying Agents for any series of Securities and any related coupons, it will, on or before each due date of the principal of (and premium, if any), or interest on or Additional Amounts in respect of any Securities of that series, deposit with a Paying Agent a sum (in the currency or currencies, currency unit or units or composite currency or currencies described in the preceding paragraph) sufficient to pay the principal (and premium, if any) or interest or Additional Amount, so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest or Additional Amounts and (unless such Paying Agent is the Trustee) the Issuer will promptly notify the Trustee of its action or failure so to act. The Issuer will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of principal of (and premium, if any) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Issuer (or any other obligor upon the Securities) in the making of any such payment of principal (and premium, if any) or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Issuer Order direct any Paying Agent to pay, 57 60 to the Trustee all sums held in trust by the Issuer or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Issuer or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Except as otherwise provided in the Securities of any series, any money deposited with the Trustee or any Paying Agent, or then held by the Issuer in trust for the payment of the principal of (and premium, if any) or interest on, or any Additional Amounts in respect of, any Security of any series and remaining unclaimed for two years after such principal (and premium, if any), interest or Additional Amounts has become due and payable shall be paid to the Issuer upon Issuer Request or (if then held by the Issuer) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Issuer for payment of such principal of (and premium, if any) or interest on, or any Additional Amounts in respect of, such Security, without interest thereon, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Issuer as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Issuer cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 1004. Existence. Subject to Article Eight, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (partnership and statutory) and franchises; provided, however, that the Issuer shall not be required to preserve any right or franchise if the Board shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. Statement as to Compliance. The Issuer will deliver to the Trustee, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer of the General Partner as to his or her knowledge of the Issuer's compliance with all conditions and covenants under this Indenture and in the event of any noncompliance, specifying such noncompliance and the nature and status thereof. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. SECTION 1006. Maintenance of Properties. The Issuer shall cause all of its material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order, all as in the judgment of the Issuer may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, notwithstanding anything herein to the contrary, the Issuer and its Subsidiaries may sell or otherwise dispose of any of their properties for value in the ordinary course of business. 58 61 SECTION 1007. Insurance. The Issuer shall cause each of its properties and each of the properties of its Subsidiaries which are of an insurable nature to be insured against loss of damage with insurers of recognized responsibility, in commercially reasonable amounts and types. SECTION 1008. Payment of Taxes and Other Claims. The Issuer shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent (i) all taxes, assessments and governmental charges levied or imposed upon the Issuer or any Subsidiary or upon the income, profits or property of the Issuer or any Subsidiary, and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon property of the Issuer or any Subsidiary; provided, however, notwithstanding anything herein to the contrary, the Issuer shall not be required to pay or discharge or cause to be paid or discharged any tax, assessment, charge or claim whose amount or applicability is being contested in good faith. SECTION 1009. Additional Amounts. If any Securities of a series provide for the payment of Additional Amounts, the Issuer will pay to the Holder of any Security of such series Additional Amounts as may be specified as contemplated by Section 301. Whenever in this Indenture there is mentioned, in any context except in the case of Section 502(l), the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or payment of any related Coupon or the net proceeds received on the statement or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided by the terms of such series established pursuant to Section 301 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to such terms and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. Except as otherwise specified as contemplated by Section 301, if the Securities of a series provide for the payment of Additional Amounts, at least 20 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least 10 days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers' Certificate, the Issuer will furnish the Trustee and the Issuer's principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers' Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and premium or interest on the Securities of that series shall be made to Holders of Securities of that series or any related coupons who are not United States persons without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of the series. If any such withholding shall be required, then such Officers' Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities of that series or related coupons and the Issuer will pay to the Trustee or such Paying Agent the Additional Amounts required by the terms of such Securities. In the event that the Trustee or any Paying Agent, as the case may be, shall not so receive the above-mentioned certificate, then the Trustee or such Paying Agent shall be entitled (i) to assume that no such withholding or 59 62 deduction is required with respect to any payment of principal and premium or interest with respect to any Securities of a series or related coupons until it shall have received a certificate advising otherwise and (ii) to make all payments of principal and premium and interest with respect to the Securities of a series or related coupons without withholding or deductions until otherwise advised. The Issuer covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them or in reliance on any Officers' Certificate furnished pursuant to this Section or in reliance on the Issuer's not furnishing such an Officers' Certificate. SECTION 1010. Waiver of Certain Covenants. The Issuer may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1006 through 1008, if before or after the time for such compliance the Holders of at least a majority in principal amount of all Outstanding Securities of each series, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Issuer and the duties of the Trustee in respect of such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article. SECTION 1102. Election to Redeem; Notice to Trustee. The election of the Issuer to redeem any Securities shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Issuer of all or less than all of the Securities of any series, the Issuer shall, at least 45 days prior to the giving of the notice of redemption contemplated in Section 1104 (unless a shorter notice shall be satisfactory to the Trustee in its sole discretion), notify the Trustee of such Redemption Date and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Issuer shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption 60 63 of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series or a denomination larger than the minimum authorized denomination for Securities of that series. The Trustee shall promptly notify the Issuer and the Security Registrar (if other than itself) in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 1104. Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 106 and may be further specified in an indenture supplemental hereto, not less than 30 days nor more than 60 days prior to the Redemption Date, unless a shorter period is specified by the terms of such series established pursuant to Section 301, to each Holder of Securities to be redeemed, but failure to give such notice in the manner herein provided to the Holder of any Security designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other such Security or portion thereof. Any notice that is mailed to the Holders of Registered Securities in the manner herein provided shall be conclusively presumed to have been duly given, whether or not a Holder receives the notice. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, accrued interest to the Redemption Date payable as provided in Section 1106, if any, and Additional Amounts, if any, (3) if less than all Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amount) of the particular Security or Securities to be redeemed, (4) in case any Security is to be redeemed in part only, the notice which relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the holder will receive, without charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed, (5) that on the Redemption Date, the Redemption Price and accrued interest to the Redemption Date payable as provided in Section 1106, if any, will become due and payable upon each such Security, or the portion thereof, to be redeemed and, if applicable, that interest thereon shall cease to accrue on and after said date, 61 64 (6) the Place or Places of Payment where such Securities, together in the case of Bearer Securities with all coupons appertaining thereto, if any, maturing after the Redemption Date, are to be surrendered for payment of the Redemption Price and accrued interest, if any, or for conversion, (7) that the redemption is for a sinking fund, if such is the case, (8) that unless otherwise specified in such notice, Bearer Securities of any series, if any, surrendered for redemption must be accompanied by all Coupons maturing subsequent to the Redemption Date or the amount of any such missing Coupon or Coupons will be deducted from the Redemption Price, unless security or indemnity satisfactory to the Issuer, the Trustee for such series and any Paying Agent is furnished, (9) if Bearer Securities of any series are to be redeemed and any Registered Securities of any such series are not to be redeemed, and if such Bearer Securities may be exchanged for Registered Securities not subject to redemption on this Redemption Date pursuant to Section 305 or otherwise, the last date, as determined by the Issuer, on which such exchanges may be made, and (10) the CUSIP number of such Security, if any. (11) if applicable, that a Holder of Securities who desires to convert Securities for redemption must satisfy the requirements for conversion contained in such Securities, the then existing conversion price or rate, and the date and time when the option to convert shall expire. Notice of redemption of Securities to be redeemed shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. Neither the Issuer nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Security, check, advice of payment or redemption notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience or reference and that neither the Issuer nor the Trustee shall be liable for any inaccuracy in such numbers. SECTION 1105. Deposit of Redemption Price. On or prior to 12:00 noon Eastern Standard Time on the date prior to any Redemption Date, the Issuer shall deposit with the Trustee or with a Paying Agent (or, if the Issuer is acting as its own Paying Agent , which it may not do in the case of a sinking fund payment under Article Twelve, segregate and hold in trust as provided in Section 1003) an amount of money in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay on the Redemption Date the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. 62 65 SECTION 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Issuer shall default in the payment of the Redemption Price and accrued interest) such Securities shall, if the same were interest-bearing, cease to bear interest and the Coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void. Upon surrender of any such Security for redemption in accordance with said notice, together with all Coupons if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Issuer at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of Coupons for such interest; and proved further that, except as otherwise provided with respect to Securities convertible into Common Stock or Preferred Stock of the General Partner, installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more predecessor Securities registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307 if any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant Coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless if thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing Coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by Coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of those Coupons. If a Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 1107. Securities Redeemed in Part. Any Registered Security which is to be redeemed only in part (pursuant to the provisions of this Article or of Article Twelve) shall be surrendered at a Place of Payment therefor (with, if the Issuer or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Trustee duly executed by the Holder thereof or his attorney duly authorized in writing) and the Issuer shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, 63 66 without charge and at the expense of the Issuer, a new Security or Securities of the same series, of any authorized denomination specified by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of such Securities of any series is herein referred to as an "optional sinking fund payment". If provided for by the terms of any Securities of any series, the cash amount of any mandatory sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series. SECTION 1202. Satisfaction of Sinking Fund Payments with Securities. The Issuer may, in satisfaction of all or any part of any mandatory sinking fund payment with respect to the Securities of a series, (1) deliver Outstanding Securities of such series (other than any previously called for redemption) together in the case of any Bearer Securities of such series with any unmatured Coupons appertaining thereto and (2) apply as a credit Securities of such series which have been redeemed either at the election of the Issuer pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, as provided for by the terms of such Securities, or which have otherwise been acquired by the Issuer; provided that such Securities so delivered or applied as a credit have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the applicable Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly. SECTION 1203. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for Securities of any series, the Issuer will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing mandatory sinking fund payment for that series pursuant to the terms of that series, or portion thereof, if any, which is to be satisfied by payment of cash in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202, and the optional amount, if any, to be added in cash to the next ensuing mandatory sinking fund payment, and will also deliver to the Trustee any Securities to be so 64 67 delivered and credited. If such Officers' Certificate shall specify an optional amount to be added in cash to the next ensuing mandatory sinking fund payment, the Issuer shall thereupon be obligated to pay the amount therein specified. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereto to be given in the name of and at the expense of the Issuer in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. ARTICLE THIRTEEN REPAYMENT AT THE OPTION OF HOLDERS SECTION 1301. Applicability of Article. Repayment of Securities of any series before their Stated Maturity at the option of Holders thereof shall be made in accordance with the terms of such Securities, if any, and (except as otherwise specified by the terms of such series established pursuant to Section 301) in accordance with this Article. SECTION 1302. Repayment of Securities. Securities of any series subject to repayment in whole or in part at the option of the Holders thereof will, unless otherwise provided in the terms of such Securities, be repaid at a price equal to the principal amount thereof, together with interest, if any, thereon accrued to the Repayment Date specified in or pursuant to the terms of such Securities. The Issuer covenants that on but by no later than 12:00 noon Eastern Standard Time or the day prior to the Repayment Date it will deposit with the Trustee or with a Paying Agent (or, if the Issuer is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in the currency or currencies, currency unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay the principal (or, if so provided by the terms of the Securities of any series, a percentage of the principal) of, and (except if the Repayment Date shall be an Interest Payment Date) accrued interest on, all the Securities or portions thereof, as the case may be, to be repaid on such date. SECTION 1303. Exercise of Option. Securities of any series subject to repayment at the option of the Holders thereof will contain an "Option to Elect Repayment" form on the reverse of such Securities. In order for any Security to be repaid at the option of the Holder, the Trustee must receive at the Place of Payment therefor specified in the terms of such Security (or at such other place or places of which the Issuer shall from time to time notify the Holders of such Securities) not earlier than 60 days nor later than 30 days prior to the Repayment Date (1) the Security so providing for any such repayment together with the "Option to Elect Repayment" form on the reverse thereof duly completed by the Holder or by the Holder's attorney duly authorized in writing or (2) a telegram, facsimile transmission or a letter from a member of a national securities exchange, or the National Association of Securities Dealers, Inc. ("NASD"), or a commercial bank or trust company in the United States setting forth the name of the Holder of the Security, the principal amount of the Security, the principal amount of the security to be repaid, the CUSIP number, if any, or a description of the tenor and terms of the Security, a 65 68 statement that the option to elect repayment is being exercised thereby and a guarantee that the Security to be repaid, together with the duly completed form entitled "Option to Elect Repayment" on the reverse of the Security, will be received by the Trustee not later than the fifth Business Day after the date of such telegram, telex, facsimile transmission or letter; provided, however, that such telegram, telex, facsimile transmission or letter shall only be effective if such Security and form duly completed are received by the Trustee by such fifth Business Day. If less than the entire principal amount of such Security is to be repaid in accordance with the terms of such Security, the principal amount of such Security to be repaid, in increments of the minimum denomination for Securities of such series, shall be stated in a writing accompanying such Security. Except as otherwise may be provided by the terms of any Security providing for repayment at the option of the Holder thereof, exercise of the repayment option by the Holder shall be irrevocable unless waived by the Issuer. SECTION 1304. When Securities Presented for Recipient Become Due and Payable. If Securities of any series providing for repayment at the option of the Holders thereof shall have been surrendered as provided in this Article and as provided by or pursuant to the terms of such Securities, such Securities or the portions thereof, as the case may be, to be repaid shall become due and payable and shall be paid by the Issuer on the Repayment Date therein specified, and on and after such Repayment Date (unless the Issuer shall default in the payment of such Securities on such Repayment Date) such Securities shall, if the same were interest-bearing, cease to bear interest and the Coupons for such interest appertaining to any Bearer Securities so to be repaid, except to the extent provided below, shall be void. Upon surrender of any such Security for repayment in accordance with such provisions, together with all Coupons, if any, appertaining thereto maturing after the Repayment Date, the principal amount of such Security so to be repaid shall be paid by the Issuer, together with accrued interest, if any, to the Repayment Date; provided, however, that Coupons whose Stated Maturity is on or prior to the Repayment Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified pursuant to Section 301, only upon presentation and surrender of such Coupons; and provided further that, in the case of Registered Securities, installments of interest, if any, whose Stated Maturity is on or prior to the Repayment Date, shall be payable (but without interest thereon, unless the Issuer shall default in the payment thereof) to the Holders of such Securities, or one or more predecessor Securities, registered as such as the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Bearer Security surrendered for repayment shall not be accompanied by all appurtenant Coupons maturing after the Repayment Date, such Security may be paid after deducting from the amount payable therefor as provided in Section 1302 an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing coupon in respect of which a deduction shall have been made as provided in the preceding sentence, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by Coupons shall be payable only at an office or agency located outside 66 69 the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of those Coupons. If the principal amount of any Security surrendered for repayment shall not be so repaid upon surrender thereof, such principal amount (together with interest, if any, thereon accrued to such Repayment Date) shall, until paid, bear interest from the Repayment Date at the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) set forth in such Security. SECTION 1305. Securities Repaid in Part. Upon surrender of any Registered Security which is to be repaid in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without charge and at the expense of the Issuer, a new Registered Security or Securities of the same series, of any authorized denomination specified by the Holder, in an aggregate principal amount equal to and in exchange for the portion of the principal of such Security so surrendered which is not to be repaid. ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1401. Applicability of Article; Issuer's Option to Effect Defeasance or Covenant Defeasance. If, pursuant to Section 301, provision is made for either or both of (a) defeasance of the Securities of a series under Section 1402 or (b) covenant defeasance of the Securities of a series under Section 1403, then the provisions of such Section or Sections, as the case may be, together with the other provisions of this Article (with such modifications thereto as may be specified pursuant to Section 301 with respect to any Securities), shall be applicable to such Securities and any coupons appertaining thereto, and the Issuer may at its option by Board Resolution delivered to the Trustee, at any time, with respect to such Securities and any Coupons appertaining thereto, elect to have Section 1402 (if applicable) or Section 1403 (if applicable) be applied to such Outstanding Securities and any Coupons appertaining thereto upon compliance with the conditions set forth below in this Article. SECTION 1402. Defeasance and Discharge. Upon the Issuer's exercise of the above option applicable to this Section with respect to any Securities of a series, the Issuer and the Guarantor shall be deemed to have been discharged from its obligations with respect to such Outstanding Securities and any Coupons appertaining thereto on the date the conditions set forth in Section 1404 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by such Outstanding Securities and any Coupons appertaining thereto, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1405 and the other Sections of this Indenture referred to in clauses (A) and (B) below, and to have satisfied all of its other obligations under such Securities and coupons appertaining thereto and this Indenture insofar as such Securities and any coupons appertaining thereto are concerned (and the Trustee, at the expense of the Issuer, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the 67 70 rights of Holders of such Outstanding Securities and any coupons appertaining thereto to receive, solely from the trust fund described in Section 1404 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any) and interest, if any, on such Securities and any coupons appertaining thereto when such payments are due, (B) the Issuer's obligations with respect to such Securities under Sections 305, 306, 606, 1002 and 1003 and with respect to the payment of Additional Amounts, if any, on such Securities as contemplated by Section 1009, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Fourteen. Subject to compliance with this Article Fourteen, the Issuer may exercise its option under this Section notwithstanding the prior exercise of its option under Section 1403 with respect to such Securities and any coupons appertaining thereto. SECTION 1403. Covenant Defeasance. Upon the Issuer's exercise of the above option applicable to this Section with respect to any Securities of a series, the Issuer shall be released from its obligations under Sections 1006 through 1008 and, if specified pursuant to Section 301, its obligations under any other covenant, with respect to such Outstanding Securities and any coupons appertaining thereto on and after the date the conditions set forth in Section 1404 are satisfied (hereinafter, "covenant defeasance"), and such Securities and any coupons appertaining thereto shall thereafter be deemed to be not "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with Sections 1006 through 1008 or such other covenant, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Outstanding Securities and any coupons appertaining thereto, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or any such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a default or an Event of Default under Section 501(4) or 501(8) or otherwise, as the case may be, but except as specified above, the remainder of this Indenture and such Securities and any coupons appertaining thereto shall be unaffected thereby. SECTION 1404. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of Section 1402 or Section 1403 to any Outstanding Securities of a series and any coupons appertaining thereto: (a) The Issuer shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 607 who shall agree to comply with the provisions of this Article Fourteen applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any coupons appertaining thereto, (1) an amount in such currency, currencies or currency unit in which such Securities and any coupons appertaining hereto are then specified as payable at Stated Maturity) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal of (and premium, if any) and interest, if any, on such Securities and any coupons appertaining thereto, or (2) a 68 71 combination of currency, currencies or currency units in an amount, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (i) the principal (and premium, if any) and interest, if any, on such Outstanding Securities and any coupons appertaining thereto on the Stated Maturity of such principal or installment of principal or interest and (ii) any mandatory sinking fund Payments or analogous payments applicable to such Outstanding Securities any coupons appertaining thereto on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any coupons appertaining thereto. (b) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Issuer is a party or by which it is bound as expressed in the Officers' Certificate contemplated in subsection (f) below. (c) No Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to such Securities and any coupons appertaining thereto shall have occurred and be continuing on the date of such deposit or, insofar as Sections 501(6) and 501(7) are concerned as expressed in the Officers' Certificate contemplated in subsection (f) below, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (d) In the case of an election under Section 1402, the Issuer shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Outstanding Securities and any coupons appertaining thereto will not recognize income, gain or loss or Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (e) In the case of an election under Section 1403, the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Outstanding Securities and any coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (f) The Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each containing the representations in subsections (b) and (c) of this Section 1404 and each stating that all conditions precedent to the defeasance under Section 1402 or the covenant defeasance under Section 1403 (as the case may be) have been complied with 69 72 and an Opinion of Counsel to the effect that either (i) as a result of a deposit pursuant to subsection (a) above and the related exercise of the Issuer's option under Section 1402 or Section 1403 (as the case may be), registration is not required under the Investment Company Act of 1940, as amended, by the Issuer, with respect to the trust funds representing such deposit or by the Trustee for such trust funds or (ii) all necessary registrations under said Act have been effected. (g) Notwithstanding any other provisions of this Section, such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Issuer in connection therewith pursuant to Section 301. SECTION 1405. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and Government Obligations (or other property as may be provided pursuant to Section 301) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1405, the "Trustee") pursuant to Section 1404 in respect of any Outstanding Securities of any series and any Coupons appertaining thereto shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and any Coupons appertaining thereto and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities and any Coupons appertaining thereto of all sums due and to become due thereon in respect of principal (and premium if any) and interest on Additional Amounts, if any, but such money need not be segregated from other funds except to the extent required by law. Unless otherwise specified with respect to any Security pursuant to Section 301, if, after a deposit referred to in Section 1404(a) has been made, (a) the Holder of a Security in respect of which such deposit was made is entitled to, and does, elect pursuant to Section 301 or the terms of such Security to receive payment in a currency or currency unit other than that in which the deposit pursuant to Section 1404(a) has been made in respect of such Security, or (b) a Conversion Event occurs in respect of the currency or currency unit in which the deposit pursuant to Section 1404(a) has been made, the indebtedness represented by such Security and any coupons appertaining thereto shall be deemed to have been, and will be fully discharged and satisfied through the payment of the principal of (and premium, if any), and interest, if any, on such Security as the same becomes due out of the proceeds yielded by converting (from time to time as specified below in the case of any such election) the amount or other property deposited in respect of such Security into the currency or currency unit in which such Security becomes payable as a result of such election based on the applicable market exchange rate for such currency or currency unit published in the Wall Street Journal on the second Business Day prior to each payment date, or, with respect to a Conversion Event, in effect for such currency or currency unit (as nearly as feasible) at the time of the Conversion Event. Any fees or other charges incurred by the Trustee or otherwise imposed in connection with such conversion shall be borne by the Holders thereof and may be deducted by the Trustee from amounts otherwise due such Holders. 70 73 The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 1404 or the principal and interest received in respect thereof other than any such tax, fee or other charge which bylaw is for the account of the Holders of such Outstanding Securities and any Coupons appertaining thereto. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Issuer from time to time upon Issuer Request any money or Government Obligations (or other property and any proceeds therefrom) held by it as provided in Section 1404 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect a defeasance or covenant defeasance, as applicable, in accordance with this Article. ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES SECTION 1501. Purposes for Which Meetings May Be Called. A meeting of Holders of Securities of any series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series. SECTION 1502. Call, Notice and Place of Meetings. (a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 1501, to be held at such time and at such place in San Francisco, California, or in London as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 106, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (b) In case at any time the Issuer, pursuant to a Board Resolution, or the Holders of at least twenty-five percent (25%) in principal amount of the Outstanding Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 1501, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first mailing of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Issuer or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in San Francisco, California, New York, New York, or in London for such meeting and may call such meeting for such purposes by waiving notice thereof as provided in subsection (a) of this Section. 71 74 SECTION 1503. Persons Entitled to Vote at Meetings. To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Issuer and its counsel. SECTION 1504. Quorum; Action. The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Securities of a series, the Persons entitled to vote such specified percentage in principal amount of the Outstanding Securities of such series shall constitute a quorum. In the absence of a quorum within 30 minutes after the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 1502(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of any adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum. Except as limited by the proviso to Section 902, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in principal amount of the outstanding Securities of that series; provided, however, that, except as limited by the provisions of Section 902, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Securities of such a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Securities of that series. Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the related Coupons, whether or not present or represented at the meeting. 72 75 Notwithstanding the foregoing provisions of this Section 1504, if any action is to be taken at a meeting of Holders of Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Securities affected thereby, or of the Holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting; and (ii) the principal amount of the Outstanding Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under this Indenture. SECTION 1505. Determination of Voting Rights; Conduct and Adjournment of Meetings. (a) Notwithstanding any provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner specified in Section 104 or having the nature of the Person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 104 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid or genuine without the proof specified in Section 104 or other proof. (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Issuer or by Holders of Securities as provided in Section 1502(b), in which case the Issuer or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting. (c) At any meeting each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy. 73 76 (d) Any meeting of Holders of Securities of any series duly called pursuant to Section 1502 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting, and the meeting may be so adjourned without further notice. SECTION 1506. Counting Votes and Recording Action of Meeting. The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in Duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any Series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the fact, setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 1502 and, if applicable, Section 1504. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Issuer and another to the Trustee to be reserved by the Trustee, the latter to have attached thereto the Ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE SIXTEEN THE GUARANTEE SECTION 1601. Applicability of Article; Guarantee. If, pursuant to Section 301, provision is made for the Guarantee of the Securities by the Guarantor, then the provisions of this Article Sixteen and Article Seventeen (if applicable) (with such modifications thereto as may be specified pursuant to Section 301 with respect to any Securities), shall be applicable to such Securities, Guarantees and any Coupons appertaining thereto, and the Issuer may at its option by Board Resolution delivered to the Trustee, at any time, with respect to such Securities, Guarantees and any Coupons appertaining thereto, elect to have this Article Sixteen and Article Seventeen (if applicable) be applied to such Securities, Guarantees and any Coupons appertaining thereto. The Guarantor hereby unconditionally guarantees to the Holders from time to time of the Securities (a) the full and prompt payment of the principal of and any premium, if any, on any Security when and as the same shall become due, whether at the maturity thereof, by acceleration, redemption or otherwise and (b) the full and prompt payment of any interest on any Security when and as the same shall become due and payable. Each payment by the Guarantor with respect to any Security shall be paid in the currency or currency unit specified in this Indenture or the related resolution of the Board of Directors of the Company or supplemental indenture for payments on such Security. Each and every default in the payment of the principal of or interest or any premium on any Security shall give rise to a separate cause of action hereunder, and separate suits may be brought hereunder as each cause of action arises. The 74 77 obligations of the Guarantor hereunder shall be evidenced by Guarantees accompanying the Securities issued hereunder. The obligations of the Guarantor hereunder shall be absolute and unconditional and shall remain in full force and effect until the entire principal and interest and any premium on the Securities shall have been paid or provided for in accordance with the provisions of this Indenture, and such obligations shall not be affected, modified or impaired upon the happening from time to time of any event, including without limitation any of the following, whether or not with notice to, or the consent of, the Guarantor: (a) the failure to give notice to the Guarantor of the occurrence of an Event of Default; (b) the waiver, surrender, compromise, settlement, release or termination of the payment, performance or observance by the Issuer or the Guarantor of any or all of the obligations, covenants or agreements of either of them contained in this Indenture or the Securities; (c) the acceleration, extension or any other changes in the time for payment of any principal of or interest or any premium on any Security or for any other payment under this Indenture or of the time for performance of any other obligations, covenants or agreements under or arising out of this Indenture or the Securities; (d) the modification or amendment (whether material or otherwise) of any obligation, covenant or agreement set forth in this Indenture or the Securities; (e) the taking or the omission of any of the actions referred to in this Indenture and in any of the actions under the Securities; (f) any failure, omission or delay on the part of the Trustee to enforce, assert or exercise any right, power or remedy conferred on the Trustee in this Indenture, or any other act or acts on the part of the Trustee or any of the Holders from time to time of the Securities or of any interest coupons appertaining thereto; (g) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition with creditors or readjustment of, or other similar proceedings affecting the Guarantor or the Issuer or any of the assets of any of them, or any allegation or contest of the validity of the Guarantee in any such proceeding; (h) to the extent permitted by law, the release or discharge by operation of law of the Guarantor from the performance or observance of any obligation, covenant or agreement contained in this Indenture; 75 78 (i) to the extent permitted by law, the release or discharge by operation of law of the Issuer from the performance or observance of any obligation, covenant or agreement contained in this Indenture; (j) the default or failure of the Issuer or the Trustee fully to perform any of its obligations set forth in this Indenture or the Securities; (k) the invalidity, irregularity or unenforceability of this Indenture or the Securities or any part of any thereof; (l) any judicial or governmental action affecting the Issuer or any Securities or consent or indulgence granted by the Issuer by the Holders or by the Trustee; or (m) the recovery of any judgment against the Issuer or any action to enforce the same or any other circumstance which might constitute a legal or equitable discharge of a surety or guarantor. SECTION 1602. Proceedings Against the Guarantor. In the event of a default in the payment of principal of or any premium on any Security when and as the same shall become due, whether at the Stated Maturity thereof, by acceleration, call for redemption or otherwise, or in the event of a default in any sinking fund payment, or in the event of a default in the payment of any interest on any Security when and as the same shall become due, the Trustee shall have the right to proceed first and directly against the Guarantor under this Indenture without first proceeding against the Issuer or exhausting any other remedies which it may have and without resorting to any other security held by the Trustee. The Trustee shall have the right, power and authority to do all things it deems necessary or otherwise advisable to enforce the provisions of this Indenture relating to the Guarantee and protect the interests of the Holders of the Securities or coupons appertaining thereto and, in the event of a default in payment of the principal of or any premium on any Security when and as the same shall become due, whether at the Stated Maturity thereof, by acceleration, call for redemption or otherwise, or in the event of a default in the payment of any interest on any Security when and as the same shall become due, the Trustee may institute or appear in such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of its rights and the rights of the Holders of Securities, whether for the specific enforcement of any covenant or agreement in this Indenture relating to the Guarantee or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Without limiting the generality of the foregoing, in the event of a default in payment of the principal of or interest or any premium on any Security when due, the Trustee may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Guarantor and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Guarantor, wherever situated. SECTION 1603. Guarantee for Benefit of Holders of Securities. The Guarantee contained in this Indenture is entered into by the Guarantor for the benefit of the Holders from 76 79 time to time of the Securities and of any Coupons appertaining thereto. Such provisions shall not be deemed to create any right in, or to be in whole or in part for the benefit of any Person other than, the Trustee, the Guarantor, the Holders from time to time of the Securities and of any Coupons appertaining thereto, and their permitted successors and assigns. ARTICLE SEVENTEEN SUBORDINATION OF GUARANTEE SECTION 1701. Applicability of Article; Subordination. If, pursuant to Section 301, provision is made for the Guarantee of the Securities pursuant to Article Sixteen, then the provisions of this Article Seventeen (with such modifications thereto as may be specified pursuant to Section 301 with respect to any Securities), shall be applicable to such Securities, Guarantees and any Coupons appertaining thereto. Notwithstanding anything to the contrary in this Indenture or the Securities of any series, or any Coupons appertaining thereto, the Guarantor, for itself, its successors and assigns, covenants and agrees and each Holder of the Securities of any series by his acceptance thereof likewise covenants and agrees that all payments in respect of the Guarantee shall be junior and subordinate and subject in right of payment to all Guarantor Senior Debt as provided in this Article Seventeen. As used in this Article Seventeen, "Guarantor Senior Debt" shall mean (a) all indebtedness of the Guarantor and its Subsidiaries, including the Issuer, for money borrowed (including purchase-money obligations with an original maturity in excess of one year) or evidenced by debentures, notes or other corporate debt securities or similar instruments issued by the Guarantor; (b) indebtedness or obligations of the Guarantor and its Subsidiaries, including the Issuer, constituting a guarantee of indebtedness of or an obligation of others of the type referred to in (a) above; or (c) any modification, extension, renewal or refunding of any of the indebtedness or obligations referred to in (a) or (b) above, unless, in the case of any particular indebtedness or obligation, modification, extension, renewal or refunding, under the express provisions of the instrument creating or evidencing the same, or pursuant to which the same is outstanding, such indebtedness or other obligation or such modification, extension, renewal or refunding thereof is not superior in right of payment to the Guarantee. SECTION 1702. Default on Guarantor Senior Debt. Unless and until all Guarantor Senior Debt shall have been paid in full in accordance with its terms, the Guarantor will not, and will not permit any of its Subsidiaries to, directly or indirectly, make or agree to make any payment or prepayment (in cash or property, by set-off or otherwise), direct or indirect, in respect of the Guarantee (or any indebtedness subordinated to the Guarantee), and no such payment shall be due or payable or shall be accepted by any Holder of Securities, if an event of default with respect to any Guarantor Senior Debt (as defined in any agreement pursuant to which Guarantor Senior Debt shall have been issued) shall have occurred and be continuing or if such action would constitute an event of default on the part of the Guarantor in respect of any Guarantor Senior Debt or any instrument or agreement relating thereto and such event of default shall be continuing. 77 80 SECTION 1703. Insolvency, etc. In the event of (i) any insolvency or bankruptcy proceeding, or any receivership, liquidation or other similar proceeding in connection therewith, relative to the Guarantor or its property, or (ii) any proceeding for voluntary liquidation, dissolution or other winding-up of the Guarantor, whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors, or (iv) any distribution, division, marshaling or application of any of the properties or assets of the Guarantor or the proceeds thereof, to creditors, voluntary or involuntary, and whether or not involving legal proceedings, then in any such event: (a) all Guarantor Senior Debt shall first be paid in full before any payment or distribution of any character, whether in cash, securities or other property, shall be made by the Guarantor in respect of the Guarantee; (b) any payment or distribution of any character, whether in cash, securities or other property, which would otherwise (but for the terms thereof) be payable or deliverable by the Guarantor in respect of the Guarantee (including any payment or distribution in respect of the Guarantee by reason of any other indebtedness of the Guarantor being subordinated to the Guarantee), shall be paid or delivered directly to the holders of Guarantor Senior Debt at the time outstanding (or their respective representatives), or to the trustee or trustees under any indenture under which any instruments evidencing any of such Guarantor Senior Debt may have been issued, ratably, according to the respective aggregate amounts remaining unpaid thereon, until all Guarantor Senior Debt shall have been paid in full (but subject to the power of a court of competent jurisdiction to make other equitable provision reflecting the rights of the Guarantor Senior Debt and the holders thereof with respect to the Securities by lawful plan of reorganization under applicable bankruptcy law), and the Holders of the Securities at the time outstanding irrevocably authorize, empower and direct all receivers, trustees, liquidators, conservators and others having authority in the premises to effect all such payments and deliveries; (c) the Holders of the Securities at the time outstanding irrevocably authorize and empower (without imposing any obligation on) each holder of Guarantor Senior Debt at the time outstanding and such holder's representatives to demand, sue for, collect and receive such holder's ratable share of all such payments and distributions and to receipt therefor, and to file and prove all claims therefor and take all such other action (including the right to vote such Guarantor Senior Debt holder's ratable share of the Securities) in the name of the Holders of the Securities or otherwise, as such Guarantor Senior Debt holder or such holder's representatives may determine to be necessary or appropriate for the enforcement of this Section 1703; and (d) the Holders of the Securities shall execute and deliver to each holder of Guarantor Senior Debt and such holder's representatives all such further instruments confirming the above authorization, and all such powers of attorney, proofs of claim, assignments of claim and other instruments, and shall take all such other action as may be requested by such holder or such holder's representatives, in order to enable such holder to enforce all claims upon or in respect of such holder's ratable share of the Securities. 78 81 SECTION 1704. Payments and Distributions Received. If any payment or distribution of any character (whether in cash, securities, or other property) or any security shall be received by the Trustee or any holder of any of the Securities in contravention of any of the terms hereof and before all Guarantor Senior Debt shall have been paid in full, such payment or distribution or security shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Guarantor Senior Debt at the time outstanding (or their respective representatives), or to the trustee or trustees under any indenture under which any instruments evidencing any of such Guarantor Senior Debt may have been issued, for application to the payment of all Guarantor Senior Debt remaining unpaid, ratably according to the respective aggregate amounts remaining unpaid thereof, to the extent necessary to pay all such Guarantor Senior Debt in full. In the event of the failure of the Trustee (pursuant to Section 1703) or any holder of any of the Securities to endorse or assign any such payment, distribution or security, each holder of Guarantor Senior Debt and each holder's representative is hereby irrevocably authorized to endorse or assign the same. SECTION 1705. Excess Guarantor Senior Debt Payment, Subrogation, etc. If cash, securities or other property otherwise payable or deliverable to the holders of the Securities shall have been applied, pursuant to Section 1703 or 1703, to the payment of Guarantor Senior Debt in full, then in such case, the Holders of the Securities (a) shall be entitled to receive from the holders of the Guarantor Senior Debt at the time outstanding any payments or distributions received by such holders of Guarantor Senior Debt in excess of the amount sufficient to pay all Guarantor Senior Debt in full, and (b) shall be subrogated to any rights of the holders of Guarantor Senior Debt to receive all further payments or distributions applicable to the Guarantor Senior Debt, until all amounts due and payable in respect of the Guarantee shall have been paid in full. No such payments or distributions received by the Holders of the Securities, by reason of such subrogation, of cash, securities or other property, which otherwise would be paid or distributed to the holders of the Guarantor Senior Debt, shall, as between the Guarantor and its creditors (other than the holders of the Guarantor Senior Debt), on the one hand, and the Holders of the Securities, on the other hand be deemed to be a payment by the Guarantor to or on account of the Guarantee. SECTION 1706. No Security. So long as any of the Guarantor Senior Debt shall not have been paid in full, the Guarantor shall not, and shall not permit any of its Subsidiaries to, give and the Holders of the Securities shall not demand, accept or receive any security, direct or indirect, for the Guarantor's obligation in respect of the Guarantee. SECTION 1707. Obligations Not Impaired. Nothing contained in this Article Seventeen or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Guarantor and the Holder of any Securities, the obligation of the Guarantor in respect of the Guarantee, which is absolute and unconditional, in accordance with Article Sixteen, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Guarantee other than the holders of the Guarantor Senior Debt, or is intended to or shall prevent the Trustee or the Holder of any Securities from exercising all rights, powers and remedies otherwise provided herein or permitted by applicable law, all subject to the rights, if any, of the holders of Guarantor Senior Debt under this Article Seventeen to receive such, securities or other 79 82 property otherwise payable or deliverable to the Holders of the Securities in respect of the Guarantee. Upon any distribution of assets of the Guarantor referred to in this Article Seventeen, the Trustee, subject to the provisions of Section 602, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Guarantor Senior Debt and other indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Seventeen. SECTION 1708. Subordinated Not Affected, etc. The terms of this Article Seventeen, the subordination effected hereby and the rights of the present or future holders of the Guarantor Senior Debt, shall not be affected by (a) any instrument of or addition or supplement to any Guarantor Senior Debt or any instrument or agreement relating thereto, (b) any exercise or nonexercise of any right, power or remedy under or in respect of any Guarantor Senior Debt or any instrument or agreement relating thereto, (c) any sale, exchange, release or other transaction affecting all or any part of the property at any time pledged or mortgaged to secure, or however securing, Guarantor Senior Debt, (d) any waiver, consent, release, indulgence, extension, renewal, modification, delay, noncompliance or other action, inaction or omission, in respect of any Guarantor Senior Debt or this Indenture or any instrument or agreement relating thereto, (e) any act or failure to act on the part of the Guarantor, or (f) any act or failure to act, in good faith, by any such holder, whether or not any Holder of any Securities shall have had notice or knowledge of any of the foregoing. SECTION 1709. Changes, Waivers, etc. Neither this Article Seventeen nor any terms hereof may be changed or waived except with the prior written consent of the holders of all of the Guarantor Senior Debt at the time outstanding. Neither the Securities nor any term thereof may be changed, waived or canceled in any manner that would have any adverse effect upon the rights of the holders of the Guarantor Senior Debt at the time outstanding. SECTION 1710. Payment in Full of Guarantor Senior Debt. For all purposes of this Article Seventeen, Guarantor Senior Debt shall not be deemed to have been paid in full unless (a) the holders thereof (or their duly authorized representatives) shall have received cash or readily marketable securities, taken at their then market value, equal to the amount of Guarantor Senior Debt at the time outstanding, or (b) other equitable provisions have been effected by action of a court of competent jurisdiction or agreement among the holders of Guarantor Senior Debt. SECTION 1711. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment of moneys to or by the Trustee, unless and until the Trustee shall have received written notice thereof from the Guarantor or from one or more holders of the Guarantor Senior Debt or from any trustee therefor; and, prior to the receipt 80 83 of any such written notice, the Trustee, subject to the provisions of Article Six, shall be entitled to assume that no such facts exist. SECTION 1712. Application by Trustee of Moneys Deposited with It. Anything in this Indenture to the contrary notwithstanding, any deposit of moneys by the Guarantor with the Trustee or any payment agent (whether or not in trust) for payment in respect of the Guarantee shall be subject to the provisions of this Article Seventeen except that, if prior to the Business Date on which by the terms of this Indenture any such moneys may become payable for any purpose the Trustee shall not have received with respect to such moneys the notice provided for in Section 1711, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. SECTION 1713. Securityholders Authorize Trustee to Effectuate Subordination of Guarantee. Each Holder of the Securities by his acceptance thereof authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Seventeen and appoints the Trustee his attorney-in-fact for such purpose, including taking action on behalf of the Holders of the Securities, when required, as specified in Section 1704 and including, in the event of any dissolution, winding-up, liquidation or reorganization of the Guarantor (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise) tending towards liquidation of the business and assets of the Guarantor, the immediate filing of a claim for amounts due and payable in respect of the Guarantee in the form required in such proceedings and causing such claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holder or holders of Guarantor Senior Debt are hereby authorized to and have the right to file and are hereby authorized to file an appropriate claim for and on behalf of the Holders of such Securities. SECTION 1714. Right of Trustee to Hold Guarantor Senior Debt. The Trustee shall be entitled to all of the rights set forth in this Article Seventeen in respect of any Guarantor Senior Debt at any time held by it to the same extent as any other holder of Guarantor Senior Debt, and nothing in Article Six or elsewhere in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. This Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 81 84 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and the corporate seal of the Guarantor to be hereunto affixed and attested, as of the day and year first above written. ESSEX PORTFOLIO, L.P. By: Essex Property Trust, Inc., as General Partner By:________________________ Name: Title: (Seal) Attest: - --------------------------- Title: ESSEX PROPERTY TRUST, INC. By:_________________________ Name: Title: (Seal) Attest: - --------------------------- Title: [ ] as Trustee By:________________________ Name: Title: Attest: - --------------------------- Title: 82 85 STATE OF ) COUNTY OF ) ss.: On the ______ day of _____________________, 1995, before me personally came _____________________ to me known, who, being by me duly sworn, did depose and say that he is the __________________ of Essex Property Trust, Inc., one of the entities described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to the said instrument is such corporation seal; that it was so affixed by authority of the corporation, and that he signed his name thereto by like authority. --------------------------------- 83 86 EXHIBIT A-1 FORM OF CERTIFICATE TO BE GIVEN BY PERSON ENTITLED TO RECEIVE BEARER SECURITY OR TO OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE (Insert title or sufficient description of Securities to be delivered). This is to certify that, as of the date, hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source ("United States person(s)"), (ii) are owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in United States Treasury Regulations Section 2.165-12(c)(1)(v) are herein referred to as "financial institutions") purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institutions hereby agrees, on its own behalf or through its agent, that you may advise Essex Portfolio, L.P., or its agent that such financial institutions will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by United States or foreign financial institution for purposes of resale during the restricted period (as defined in United States Treasury Regulations Section 1.163-5(c)(1)(i)(D)(7)), and, in addition, if the owner is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)), this is to further certify that such financial institution has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. As used herein, "United States" means the United States of America (including the States and the District of Columbia); and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. We undertake to advise you promptly by facsimile on or prior to the date on which you intend to submit your certification relating to the above-captioned Securities held by you for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. This certificate excepts and does not relate to (U.S.$)_____ of such interest in the above-captioned Securities in respect of which we are not able to certify and as to which we understand an exchange for an interest in a permanent global Security or an exchange for and delivery of definitive Securities (or, if relevant, collection of any interest) cannot be made until we do so certify. 1 87 We understand that this certificate may be required in connection with certain tax legislation in the United States. if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings. Dated 19___ (To be dated no earlier than the 15th day prior to (i) the Exchange Date or (ii) the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable) (Name of Person Making Certification) (Authorized Signatory) Name: Title: 2 88 EXHIBIT A-2 FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR AND CEDEL S.A. IN CONNECTION WITH THE EXCHANGE OF A PORTION OF A TEMPORARY GLOBAL SECURITY OR TO OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE CERTIFICATE (Insert title or sufficient description of Securities to be delivered) This is to certify that, based solely on written certifications that we have received in writing, by tested telex or by electronic transmission from each of the persons appearing in our records as persons entitled to a portion of the principal amount set forth below (our "Member Organizations") substantially in the form attached hereto, as of the date hereof, (U.S.$)_____ principal amount of the above-captioned Securities (i) is owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States person(s)"), (ii) is owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) are herein referred to as "financial institutions") purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date thereof (and in either case (a) or (b), each such financial institution will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in United States Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and, to the further effect, that financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. As used herein, "United States" means the United States of America (including the States and the District of Columbia); and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. We further certify that (i) we are not making available herewith for exchange (or, if relevant, collection of any interest) any option of the temporary global Security representing the above-captioned Securities excepted in the above-referenced certificates of Member Organizations and (ii) as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange (or, if relevant, collection of any interest) are no longer true and cannot be relied upon as of the date hereof. 1 89 We understand that this certification is required in connection with certain tax legislation in the United States. If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings. Date: ___19 (To be dated no earlier than the Exchange Date or the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable) - ----------------------------------------------------------- (Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euroclear System) (Cedel S.A.) 2 90 TABLE OF CONTENTS
PAGE ---- RECITALS OF THE ISSUER AND THE GUARANTOR.....................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION......................1 SECTION 101. Definitions..............................................1 SECTION 102. Compliance Certificates and Opinions.....................9 SECTION 103. Form of Documents Delivered to Trustee..................10 SECTION 104. Acts of Holders.........................................10 SECTION 105. Notices, etc., to Trustee and Issuer....................12 SECTION 106. Notice to Holders; Waiver...............................12 SECTION 107. Effect of Headings and Table of Contents................13 SECTION 108. Successors and Assigns..................................13 SECTION 109. Separability Clause.....................................13 SECTION 110. Benefits of Indenture...................................13 SECTION 111. Governing Law...........................................13 SECTION 112. Legal Holidays..........................................13 ARTICLE TWO SECURITIES FORMS............................................................14 SECTION 201. Forms of Securities.....................................14 SECTION 202. Form of Trustee's Certificate of Authentication.........14 SECTION 203. Securities Issuable in Global Form......................15 ARTICLE THREE THE SECURITIES..............................................................15 SECTION 301. Amount Unlimited; Issuable in Series....................15 SECTION 302. Denominations...........................................19
i 91 TABLE OF CONTENTS (CONT.'D)
PAGE ---- SECTION 303. Execution, Authentication, Delivery and Dating...........19 SECTION 304. Temporary Securities.....................................21 SECTION 305. Registration, Registration of Transfer and Exchange......24 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.........27 SECTION 307. Payment of Interest -- Interest Rights Preserved.........28 SECTION 308. Persons Deemed Owners....................................30 SECTION 309. Cancellation.............................................31 SECTION 310. Computation of Interest..................................31 ARTICLE FOUR SATISFACTION AND DISCHARGE...................................................31 SECTION 401. Satisfaction and Discharge of Indenture..................31 SECTION 402. Application of Trust Funds...............................33 ARTICLE FIVE REMEDIES.....................................................................33 SECTION 501. Events of Default........................................33 SECTION 502. Acceleration of Maturity; Rescission and Annulment.......35 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee..................................36 SECTION 504. Trustee May File Proofs of Claim.........................37 SECTION 506. Trustee May Enforce Claims Without Possession of Securities of Coupons................................37 SECTION 506. Application of Money Collected...........................38 SECTION 507. Limitation on Suits......................................38 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium, if any, Interest and Additional Amount.........39 SECTION 509. Restoration of Rights and Remedies.......................39 SECTION 510. Rights and Remedies Cumulative...........................39 SECTION 511. Delay or Omission Not Waiver.............................39
ii 92 TABLE OF CONTENTS (CONT.'D)
PAGE ---- SECTION 512. Control by Holders of Securities.........................40 SECTION 513. Waiver of Past Defaults..................................40 SECTION 514. Waiver of Usury, Stay or Extension Laws..................40 SECTION 515. Undertaking for Costs....................................41 ARTICLE SIX THE TRUSTEE...................................................................41 SECTION 601. Notice of Defaults........................................41 SECTION 602. Certain Rights of Trustee.................................42 SECTION 603. Not Responsible for Recitals or Issuance of Securities....44 SECTION 604. May Hold Securities and Guarantees........................44 SECTION 605. Money Held in Trust.......................................44 SECTION 606. Compensation and Reimbursement............................44 SECTION 607. Corporate Trustee Required; Eligibility; Conflicting Interests....................................45 SECTION 608. Resignation and Removal; Appointment of Successor.........45 SECTION 609. Acceptance of Appointment by Successor....................47 SECTION 610. Merger, Conversion, Consolidation or Succession to Business...................................48 SECTION 611. Appointment of Authentication Agent.......................48 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER..............................50 SECTION 701. Disclosure of Names and Addresses of Holders..............50 SECTION 702. Reports by Trustee........................................50 SECTION 703. Reports by Issuer and the Guarantor.......................50 SECTION 704. Issuer to Furnish to Trustee Names and Addresses of Holders.....................................51
iii 93 TABLE OF CONTENTS (CONT.'D)
PAGE ---- ARTICLE EIGHT CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE..............................51 SECTION 801. Consolidation and Merger of Issuer and Sale, Lease and Conveyance Permitted Subject to Certain Conditions.......................................51 SECTION 802. Rights and Duties of Successor Person.....................52 SECTION 803. Officers' Certificate and Opinion of Counsel..............52 ARTICLE NINE SUPPLEMENTAL INDENTURES.......................................................53 SECTION 901. Supplemental Indentures Without Consent of Holders........53 SECTION 902. Supplemental Indentures with Consent of Holders...........54 SECTION 903. Execution of Supplemental Indentures......................55 SECTION 904. Effect of Supplemental Indentures.........................55 SECTION 905. Conformity with Trust Indenture Act.......................56 SECTION 906. Reference in Securities to Supplemental Indentures........56 ARTICLE TEN COVENANTS.....................................................................56 SECTION 1001. Payment of Principal, Premium, if any, Interest and Additional Amounts..........................56 SECTION 1002. Maintenance of Office or Agency...........................56 SECTION 1003. Money for Securities Payments to Be Held in Trust.........58 SECTION 1004. Existence.................................................59 SECTION 1005. Statement as to Compliance................................60 SECTION 1006. Maintenance of Properties.................................60 SECTION 1007. Insurance.................................................60 SECTION 1008. Payment of Taxes and Other Claims.........................60 SECTION 1009. Additional Amounts........................................60
iv 94 TABLE OF CONTENTS (CONT.'D)
PAGE ---- SECTION 1010. Waiver of Certain Covenants...............................61 ARTICLE ELEVEN REDEMPTION OF SECURITIES......................................................62 SECTION 1101. Applicability of Article..................................62 SECTION 1102. Election to Redeem; Notice to Trustee.....................62 SECTION 1103. Selection by Trustee of Securities to Be Redeemed.........62 SECTION 1104. Notice of Redemption......................................62 SECTION 1105. Deposit of Redemption Price...............................64 SECTION 1106. Securities Payable on Redemption Date.....................64 SECTION 1107. Securities Redeemed in Part...............................65 ARTICLE TWELVE SINKING FUNDS.................................................................65 SECTION 1201. Applicability of Article..................................65 SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.....66 SECTION 1203. Redemption of Securities for Sinking Fund.................66 ARTICLE THIRTEEN REPAYMENT AT THE OPTION OF HOLDERS............................................67 SECTION 1301. Applicability of Article..................................67 SECTION 1302. Repayment of Securities...................................67 SECTION 1303. Exercise of Option........................................67 SECTION 1304. When Securities Presented for Recipient Become Due and Payable..........................................68 SECTION 1305. Securities Repaid in Part.................................69
v 95 TABLE OF CONTENTS (CONT.'D)
PAGE ---- ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE............................................69 SECTION 1401. Applicability of Article; Issuer's Option to Effect Defeasance or Covenant Defeasance........................69 SECTION 1402. Defeasance and Discharge..................................69 SECTION 1403. Covenant Defeasance.......................................70 SECTION 1404. Conditions to Defeasance or Covenant Defeasance...........70 SECTION 1405. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.........72 ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES.............................................73 SECTION 1501. Purposes for Which Meetings May Be Called.................73 SECTION 1502. Call, Notice and Place of Meetings........................73 SECTION 1503. Persons Entitled to Vote at Meetings......................74 SECTION 1504. Quorum; Action............................................74 SECTION 1505. Determination of Voting Rights; Conduct and Adjournment of Meetings..................................75 SECTION 1506. Counting Votes and Recording Action of Meeting............76 ARTICLE SIXTEEN THE GUARANTEE.................................................................76 SECTION 1601. Applicability of Article; Guarantee.......................76 SECTION 1602. Proceedings Against the Guarantor.........................78 SECTION 1603. Guarantee for Benefit of Holders of Securities............79
vi 96 TABLE OF CONTENTS (CONT.'D)
PAGE ---- ARTICLE SEVENTEEN SUBORDINATION OF GUARANTEE....................................................79 SECTION 1701. Applicability of Article; Subordination...................79 SECTION 1702. Default on Guarantor Senior Debt..........................80 SECTION 1703. Insolvency, etc...........................................80 SECTION 1704. Payments and Distributions Received.......................81 SECTION 1705. Excess Guarantor Senior Debt Payment, Subrogation, etc....81 SECTION 1706. No Security...............................................82 SECTION 1707. Obligations Not Impaired..................................82 SECTION 1708. Subordinated Not Affected, etc............................82 SECTION 1709. Changes, Waivers, etc.....................................82 SECTION 1710. Payment in Full of Guarantor Senior Debt..................83 SECTION 1711. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice..........................83 SECTION 1712. Application by Trustee of Moneys Deposited with It........83 SECTION 1713. Securityholders Authorize Trustee to Effectuate Subordination of Guarantee....................83 SECTION 1714. Right of Trustee to Hold Guarantor Senior Debt............84
EXHIBIT A-1....................................................................1 EXHIBIT A-2....................................................................1 vii EX-8.1 3 OPINION OF MORRISON & FOERSTER LLP (TAX MATTERS) 1 EXHIBIT 8.1 March 5, 1998 Essex Property Trust, Inc. 777 California Avenue Palo Alto, California 94304 Ladies and Gentlemen: We have acted as counsel to Essex Property Trust, Inc., a Maryland corporation (the "Company"), in connection with the shelf registration by (A) the Company of (i) shares of its common stock, par value $0.0001 per share (the "Common Stock"), (ii) shares or fractional shares of its preferred stock, par value $0.0001 per share (the "Preferred Stock"), (iii) shares of Preferred Stock represented by Depositary Shares, (iv) warrants to purchase the Preferred Stock or the Common Stock (the "Warrants"), and (v) unconditional guarantees (the "Guarantees") of the Debt Securities (defined below), with an aggregate public offering price of $100,000,000, and (B) Essex Portfolio, L.P. a California limited partnership (the "Operating Partnership"), of unsecured non-convertible investment grade debt securities (the "Debt Securities"), with an aggregate public offering price of $250,000,000. The Common Stock, Preferred Stock, Depositary Shares, Warrants, Guarantees and Debt Securities are the subject of a Registration Statement (File No. 333-44467)(the "Registration Statement") filed by the Company and the Operating Partnership on Form S-3 with the Securities and Exchange Commission (the "SEC") on January 16, 1998, under the Securities Act of 1933 (the "Act"), as amended by Amendment No. 1 to the Registration Statement, filed with the SEC on March 5, 1998. Capitalized terms not defined herein shall have the meanings ascribed to them (or incorporated by reference) in the Registration Statement. We have been requested to provide you with our opinion as to whether the Company currently and for each of the past three years has operated in a manner to qualify it as a real estate investment trust ("REIT"), within the meaning of Section 856(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of the opinion set forth below, we have relied, with your consent, upon the accuracy and completeness of the statements and representations (which statements and representations we have neither investigated nor verified) contained in the 2 Essex Property Trust, Inc. March 5, 1998 Page 2 certificate of the Company dated January 16, 1998 (the "Certificate"). We have also relied upon the accuracy of the Registration Statement. Based upon such statements, representations and assumptions, and subject to, the succeeding paragraphs, we are of the opinion that, as of the date hereof and for its taxable years ended December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997, the Company has operated in a manner to qualify it as a REIT under the Code, and if it continues to operate in the same manner, it will continue to so qualify. Our opinion is based upon the documents referred to above and the current provisions of the Code, Treasury Regulations promulgated thereunder, published pronouncements of the IRS and case law, any of which may be changed at any time, possibly with retroactive effect. You should also be aware that opinions of counsel are not binding upon the IRS or the courts. Any change in applicable law, or any inaccuracy in the statements, representations and assumptions on which we have relied may affect the continuing validity of the opinion set forth herein. This opinion addresses only the operation of the Company in a manner to qualify it as a REIT as of the date hereof and during each of the past four taxable years. We undertake no obligation to update this opinion, or to ascertain after the date hereof whether circumstances occurring after such date may affect the conclusions set forth herein. We hereby consent to the reference to our firm name and to this opinion in the Registration Statement and the prospectus contained therein. In giving such consent, however, we do not admit and we hereby disclaim that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the SEC promulgated thereunder, nor do we thereby admit that we are experts with respect to any part of the Registration Statement within the meaning of the term "experts" as used in the Act or the rules and regulations of the SEC promulgated thereunder. Very truly yours, /s/ Morrison & Foerster LLP EX-23.1 4 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Partners Essex Portfolio L.P.: We consent to inclusion in the registration statement dated January 16, 1998 on Form S-3 of Essex Portfolio, L.P. of our report dated January 31, 1997, relating to the balance sheets of Essex Portfolio, L.P., as of December 31, 1996 and 1995, and the related statements of operations, partners' capital and cash flows for the years ended December 31, 1996 and 1995, and the period June 13, 1994 through December 31, 1994 and of Essex Partners Properties (the Predecessor) for the period January 1, 1994 through June 12, 1994 and the related financial statement schedule. We also consent to incorporation by reference in the aforementioned registration statement of our report dated January 31, 1997, relating to the consolidated balance sheets of Essex Property Trust, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows of Essex Property Trust, Inc. for the years ended December 31, 1996 and 1995, and the period June 13, 1994 through December 31, 1994 and of Essex Partners Properties (the Predecessor) for the period January 1, 1994 through June 12, 1994 and the related financial statement schedule, which report appears in the December 31, 1996 annual report on Form 10-K of Essex Property Trust, Inc. We also consent to incorporation by reference in the aforementioned registration statement of our report dated August 15, 1997, relating to the Combined Historical Summary of Gross Income and Direct Operating Expenses of Wilshire Promenade, Tara Village, Evergreen Heights, The Bluffs II, The Village Apartments, Camarillo Lots 7, 8, and 9, and Huntington Breakers Apartments for the year ended December 31, 1996, which report appears in Attachment A to Form 8-K dated August 29, 1997. We also consent to incorporation by reference in the aforementioned registration statement of our report dated October 1, 1997, relating to the Combined Statement of Revenues and Certain Expenses of Stonehedge Village, Bridle Trails, Spring Lake and Maple Leaf for the year ended December 31, 1996, which report appears in Attachment A to Form 8-K dated December 1, 1997. We also consent to the reference to our firm under the heading "Experts" in the aforementioned registration statement. KPMG Peat Marwick LLP San Francisco, California January 16, 1998 -----END PRIVACY-ENHANCED MESSAGE-----