<PAGE>
================================================================================
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
_______________
FORM 10-Q
_______________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 30 September 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-15111
____________________
SECURITY CAPITAL U.S. REALTY
(Exact name of registrant as specified in its charter)
_________________________
Grand Duchy of Luxembourg
(State or other jurisdiction
of incorporation or organization)
None
(I.R.S. Employer Identification No.)
25b, boulevard Royal
L-2449 Luxembourg
(Address of principal executive offices and zip code)
011 (352) (4637561)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
_____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
---
The number of shares outstanding of the Registrant's common stock as of 7
November 2000 was 74,883,958 of which 28,123,139 are American Depositary Shares.
================================================================================
<PAGE>
SECURITY CAPITAL U.S. REALTY
Table of Contents
<TABLE>
<CAPTION>
Number
Page
------------
PART I. Condensed Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Net Assets at 30 September 2000 (unaudited) and
31 December 1999........................................................................ 3
Condensed Consolidated Statements of Operations (unaudited) for the three and
nine-month periods ended 30 September 2000 and 1999..................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine-month periods
ended 30 September 2000 and 1999........................................................ 5
Condensed Consolidated Statements of Changes in Net Assets for the nine-month period
ended 30 September 2000 (unaudited) and the year ended 31 December 1999................. 6
Consolidated Statements of Changes in Shares Outstanding for the nine-month period
ended 30 September 2000 (unaudited) and the year ended 31 December 1999................. 6
Consolidated Financial Highlights for the nine-month period ended 30 September 2000
(unaudited) and the year ended 31 December 1999......................................... 6
Consolidated Schedules of Strategic Investment Positions at 30 September 2000
(unaudited) and 31 December 1999........................................................ 7
Consolidated Schedules of Other Investment Positions at 30 September 2000 (unaudited)
and 31 December 1999.................................................................... 8
Notes to Condensed Consolidated Financial Statements (unaudited)........................ 9
Report of Independent Public Accountants................................................ 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 22
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................ 23
</TABLE>
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS
At 30 September 2000 and 31 December 1999
(in thousands U.S. $, except share and per share amounts)
<TABLE>
<CAPTION>
September December
2000 1999
------------- -------------
Assets Unaudited
<S> <C> <C>
Strategic investment positions at value:
CarrAmerica (Cost $699,905; $699,905, respectively).................. $ 865,253 $ 604,247
City Center Retail (Cost $175,722; $304,132, respectively)........... 175,722 304,132
CWS Communities (Cost $268,739; $236,488, respectively).............. 268,739 236,488
Regency (Cost $759,807; $759,807, respectively)...................... 786,142 685,465
Storage USA (Cost $394,362; $394,362, respectively).................. 358,852 355,911
Urban Growth Property (Cost $225,082; $188,582, respectively)........ 225,082 188,582
Other investment positions at value:
Security Capital Group Incorporated (Cost $0; $165,000 respectively) -- 95,780
Private investment positions (Cost $39,602; $42,019, respectively)... 39,347 42,019
------------- -------------
Total investments..................................................... $2,719,137 $2,512,624
Cash and cash equivalents............................................. 344 2,732
Accounts receivable and other......................................... 19,709 15,530
------------- -------------
Total Assets.......................................................... $2,739,190 $2,530,886
============= =============
Liabilities
Accounts payable and accrued expenses................................. $ 7,594 $ 6,033
Taxes payable other than income taxes................................. 2,443 4,818
Deferred income tax................................................... 29,444 --
Line of credit........................................................ 56,000 239,000
Convertible notes..................................................... 399,424 386,157
------------- -------------
Total Liabilities..................................................... 494,905 $ 636,008
------------- -------------
Total Net Assets (Shareholders' Equity)............................... $2,244,285 $1,894,878
============= =============
Authorised 250,000,000 shares of $4.00 par value, 86,561,872 shares
issued and 74,883,958 outstanding at 30 September 2000 and
86,561,872 issued and 76,700,437 outstanding at 31 December 1999..... $ 346,247 $ 346,247
Share premium account................................................. 1,536,855 1,564,939
------------- -------------
Paid-In Capital....................................................... $1,883,102 $1,911,186
Legal reserve......................................................... $ 30,375 $ 30,375
Reserve for own shares................................................ 212,304 184,219
Undistributed net operating income.................................... 275,926 219,144
Accumulated net realised (loss)/gain.................................. (71,592) 11,844
Unrealised appreciation/(depreciation) on strategic investment and
other investment positions, net of deferred tax expense of $29,444
in 2000............................................................ 126,474 (277,671)
Acquisition of own shares............................................. (212,304) (184,219)
------------- -------------
Shareholders' Equity.................................................. $2,244,285 $1,894,878
============= =============
Net Asset Value per share............................................. $ 29.97 $ 24.70
============= =============
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
3
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands U.S. $)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30 September 30 September
------------------------ -----------------------
2000 1999 2000 1999
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income
Gross dividends from strategic investment positions:
CarrAmerica................................................ $ 13,229 $ 13,229 $ 39,687 $ 39,687
City Center Retail......................................... -- -- -- --
CWS Communities............................................ 3,801 2,431 10,934 5,579
Regency.................................................... 16,451 15,766 49,353 42,086
Storage USA................................................ 8,119 7,883 24,355 23,649
Urban Growth Property...................................... -- 7,049 -- 7,262
-------- --------- -------- ---------
41,600 46,358 124,329 118,263
Gross dividends from other investment positions............. -- 1,865 -- 8,176
-------- --------- -------- ---------
41,600 48,223 124,329 126,439
Interest income from Security Capital debentures............ -- 894 745 2,681
Interest and other income................................... 1,851 1,593 4,403 3,160
-------- --------- -------- ---------
Total Gross Income.......................................... 43,451 50,710 129,477 132,280
Withholding tax on dividends received...................... (6,240) (7,233) (18,595) (16,503)
-------- --------- -------- ---------
Total Income................................................ $ 37,211 $ 43,477 $110,882 $ 115,777
======== ========= ======== =========
Expenses
Operating advisor fees...................................... 8,309 8,283 23,415 24,996
Custodian fees.............................................. 125 125 458 361
Directors fees.............................................. 44 32 179 92
Professional expenses....................................... 691 104 1,355 731
Administrative expenses..................................... 571 322 918 1,026
Amortisation of convertible notes deferred costs............ 394 403 1,183 1,192
Taxes other than income taxes............................... (2,425) 1,033 (524) 3,122
Line of credit arrangement and commitment fees.............. 152 59 881 154
Interest on line of credit.................................. 863 5,916 6,026 14,555
Interest on convertible notes............................... 6,917 6,763 20,209 20,380
-------- --------- -------- ---------
Total Expenses.............................................. 15,641 23,040 54,100 66,609
-------- --------- -------- ---------
Net Operating Income $ 21,570 $ 20,437 $ 56,782 $ 49,168
Net Realised And Unrealised Gain/(Loss) On Strategic
Investment And Other Investment Positions:
Net realised (loss)/gain on strategic investment and other
investment positions....................................... (377) (199) (83,436) 1,420
Net increase/(decrease) in appreciation on strategic
investment and other investment positions.................. 90,830 (190,228) 433,589 (163,265)
-------- --------- -------- ---------
Net Gain/(Loss) On Strategic Investment And Other
Investment Positions 90,453 (190,427) 350,153 (161,845)
-------- --------- -------- ---------
Increase/(Decrease) In Net Assets Resulting from Operations,
before tax 112,022 (169,990) 406,935 (112,677)
Deferred income tax expense 29,444 -- 29,444 --
-------- --------- -------- ---------
Increase/(Decrease) In Net Assets Resulting From
Operations................................................. $ 82,579 $(169,990) $377,491 $(112,677)
======== ========= ======== =========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
4
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended 30 September 2000 and 1999
(in thousands U.S. $)
Unaudited
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Operating Activities:
Increase in net assets resulting from operations...................... $ 377,491 $(112,677)
Adjustments to reconcile increase in net assets resulting from
operations to net cash provided by operating activities:
Movement in realised loss/(gain).................................... 83,436 (1,420)
Movement in unrealised gain (increase)/decrease..................... (433,589) 163,265
Movement in accretion on convertible notes.......................... 13,268 12,149
Movement in convertible notes deferred costs........................ 1,183 1,192
Changes in operating assets and liabilities:
Accounts receivable and other...................................... (5,362) 4,539
Accounts payable and accrued expenses.............................. 1,237 1,319
Operating advisor fees payable..................................... 323 (5,919)
Taxes payable other than income taxes.............................. (2,375) 2,364
Deferred income taxes.............................................. 29,444 --
--------- ---------
Net cash provided by operating activities........................ 65,056 64,812
--------- ---------
Investing Activities:
Return of capital - distribution from City Center Retail............. 111,989 --
Proceeds from sale of investment in Security Capital................. 96,889 --
Proceeds from sale of other investment positions..................... 5,312 135,384
Fundings in strategic investment positions:
CarrAmerica......................................................... -- (54)
City Center Retail.................................................. -- (78)
CWS Communities..................................................... (20,250) (82,926)
Advance - CWS Communities........................................... (12,000) --
Regency............................................................. -- (21)
Storage USA......................................................... -- (90)
Urban Growth Property............................................... -- (7,500)
Advances - Urban Growth Property.................................... (36,500) --
Fundings in other investment positions............................... (1,800) (23,770)
--------- ---------
Net cash provided by investing activities........................ 143,640 20,945
--------- ---------
Financing Activities:
Acquisition of own shares............................................ (28,084) (162,357)
Net (repayments)/drawdowns from line of credit....................... (183,000) 75,000
--------- ---------
Net cash (used) in financing activities.......................... (211,084) (87,357)
--------- ---------
Net decrease in cash and cash equivalents............................. (2,388) (1,600)
Cash and cash equivalents, beginning of the period.................... 2,732 2,994
--------- ---------
Cash and cash equivalents, end of the period.......................... $ 344 $ 1,394
========= =========
Supplemental disclosure of cash flow information:
Tax paid............................................................. $ 1,850 $ 619
========= =========
Interest paid on borrowings.......................................... $ 12,028 $ 14,264
========= =========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
5
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands U.S. $)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
30 September 31 December
2000 1999
----------------- -------------
Operations: Unaudited
<S> <C> <C>
Net operating income................................................. $ 56,782 $ 70,992
Net realised (loss) on strategic investment and other
investment positions.............................................. (83,436) (65,587)
Increase/(decrease) in appreciation on strategic investment and
other investment positions........................................ 433,589 (152,693)
Deferred income tax expense.......................................... (29,444) --
---------- ----------
Increase/(decrease) in net assets resulting from operations.......... $ 377,491 $ (147,288)
Capital Transactions:
(Decrease) in share premium account.................................. $ (28,084) $ (184,219)
Increase in reserve for own shares................................... 28,084 184,219
Acquisition of own shares during the period.......................... (28,084) (184,219)
---------- ----------
(Decrease) in net assets resulting from capital transactions......... $ (28,084) $ (184,219)
Net Assets:
Increase/(decrease) in net assets during the period.................. 349,407 $ (331,507)
Net assets at the beginning of the period............................ 1,894,878 2,226,385
---------- ----------
Net assets at the end of the period (includes undistributed net
operating income of $275,926 for 2000 and $219,144 for 1999)........ $2,244,285 $1,894,878
========== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHARES OUTSTANDING
<TABLE>
<CAPTION>
Number of shares
-----------------------------------------
Nine Months Ended Year Ended
30 September 31 December
2000 1999
------------------ -----------------
Unaudited
<S> <C> <C>
At the beginning of the period....................................... 76,700,437 86,561,872
Acquisition of own shares during the period.......................... (1,816,479) (9,861,435)
------------------ -----------------
At the end of the period............................................. 74,883,958 76,700,437
================== =================
</TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
30 September 31 December
2000 1999
---------------- -----------
Per-share data: Unaudited
<S> <C> <C>
Net asset value at the beginning of the period........................ $24.70 $25.72
Net operating income.................................................. 0.75 0.86
Net change in movement in unrealised appreciation and realised gain
on strategic investment and other investment positions in the
period, net of deferred tax expense in 2000.......................... 4.26 (2.65)
Acquisition of own shares during the period........................... 0.26 0.77
-------- ------
Net Asset Value per share at the end of the period.................... $29.97 $24.70
======== ======
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
6
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
At 30 September 2000
(in thousands U.S. $, except shares held and %)
Unaudited
<TABLE>
<CAPTION>
Number of Percentage
Strategic Investment Positions Security Type Shares Held Cost Value of Total Assets
---------------------------------------- -------------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
CarrAmerica Common Stock 28,603,417 $ 699,905 $ 865,253 31.6%
City Center Retail Common Stock 30,390,000 175,722 175,722 6.4%
CWS Communities (1) Common Stock 25,640,866 268,739 268,739 9.8%
Regency Common Stock 34,273,236 759,807 786,142 28.7%
Storage USA Common Stock 11,765,654 394,362 358,852 13.1%
Urban Growth Property (2) Common Stock 18,824,100 225,082 225,082 8.2%
------------- ------------- -------------
Total investment in strategic positions $2,523,617 $2,679,790 97.8%
============= ============= =============
</TABLE>
(1) In addition to the shares held with a cost and fair value of $256.7
million, there is an advance of $12.0 million to CWS Communities included
in these amounts.
(2) In addition to the shares held with a cost and fair value of $188.6
million, there are advances of $36.5 million to Urban Growth Property
included in these amounts.
At 31 December 1999
(in thousands U.S. $, except shares held and %)
<TABLE>
<CAPTION>
Number of Percentage
Strategic Investment Positions Security Type Shares Held Cost Value of Total Assets
---------------------------------------- ---------------- --------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Strategic Investment Positions
CarrAmerica Common Stock 28,603,417 $ 699,905 $ 604,247 23.9%
City Center Retail Common Stock 30,390,000 304,132 304,132 12.0%
CWS Communities Common Stock 23,615,858 236,488 236,488 9.3%
Regency Common Stock 34,273,236 759,807 685,465 27.1%
Storage USA Common Stock 11,765,654 394,362 355,911 14.1%
Urban Growth Property Common Stock 18,824,100 188,582 188,582 7.4%
----------- ----------- ------------
Total investment in strategic positions $2,583,276 $2,374,825 93.8%
=========== =========== ============
</TABLE>
The accompanying notes form an integral part of the condensed financial
statements.
7
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF OTHER INVESTMENT POSITIONS
At 30 September 2000
(in thousands U.S. $, except %)
Unaudited
<TABLE>
<CAPTION>
Percentage
Other Investment Positions Cost Value of Total Assets
-------------------------- ---- ----- ---------------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5% or greater interest. $39,273 $39,018 1.4%
Companies in which SC-U.S. Realty owns less than 5% interest.... 329 329 0.1%
------- ------- ---
Total investment in other investment positions.................. $39,602 $39,347 1.5%
======= ======= ===
</TABLE>
At 31 December 1999
(in thousands U.S. $, except %)
<TABLE>
<CAPTION>
Percentage
Other Investment Positions Cost Value of Total Assets
-------------------------- ---- ----- ---------------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5% or greater interest. $ 39,215 $ 39,215 1.6%
Companies in which SC-U.S. Realty owns less than 5% interest.... 2,804 2,804 0.1%
-------- -------- ---
Total investment in private investment positions................ $ 42,019 $ 42,019 1.7%
Investment in Security Capital Group Incorporated............... 165,000 95,780 3.8%
-------- -------- ---
Total investment in other investment positions.................. $207,019 $137,799 5.5%
======== ======== ===
</TABLE>
The accompanying notes form an integral part of the condensed financial
statements.
8
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
30 September 2000
(Unaudited)
Note 1--General
Organization and Transaction Agreement
Security Capital U.S. Realty (the "Company") is a research-driven real estate
company focused on taking significant strategic investment positions (with board
representation, consultation and other rights) in value-added real estate
operating companies based in the United States. The Company's primary capital
deployment objective is to take a proactive ownership role in businesses that it
believes can potentially generate above-average rates of return. The Company is
organised in Luxembourg as a Societe d'Investissement a Capital Fixe (a company
with a fixed capital).
The Company owns its assets through its direct and indirect wholly owned
subsidiaries, including Security Capital Holdings S.A. (such subsidiaries
collectively referred to herein as "HOLDINGS").
The Company is 40.6% owned by Security Capital Group Incorporated ("Security
Capital"). On 26 September 2000, the Company and Security Capital entered into
an agreement to combine the Company and Security Capital. Under the terms of
the transaction agreement shareholders of the Company will receive either (i)
1.15 shares of Security Capital Class B common stock for each outstanding share
of the Company or (ii) if they vote against the transaction and validly elect to
receive cash, they will receive an amount of cash in U.S. dollars equal to 1.15
multiplied by the average of the daily high and low per share sales prices of
the Security Capital Class B common stock on the New York Stock Exchange during
the fifteen trading days ending on the sixth trading day before the
extraordinary meeting of the shareholders to vote on the transaction. Security
Capital will acquire the assets of the Company, consisting primarily of the
shares in Security Capital Holdings S.A., and assume or provide the necessary
funds to satisfy the liabilities of the Company. If shareholders who vote
against the transaction validly elect to receive cash payments in an amount
exceeding $200 million in the aggregate, Security Capital will have the right to
terminate the transaction agreement.
Consummation of the transaction is dependent on, among other things, (i)
approval of the transaction agreement, which includes a plan of liquidation of
the Company, by a vote of two-thirds of the shares in attendance, by proxy or
otherwise, at an extraordinary meeting of shareholders of the Company assuming
at least a majority of outstanding shares are in attendance or represented and
(ii) approval by a majority vote of Security Capital shareholders at a special
meeting of stockholders of Security Capital of the issuance of Security Capital
Class B common stock necessary to effect the transaction.
Principles of Financial Presentation
The financial statements of the Company as of 30 September 2000 and for the
three and nine-month periods ended 30 September 2000 and 1999 are unaudited, and
pursuant to the rules of the Securities and Exchange Commission, certain
information and footnote disclosures normally included in financial statements
have been omitted. While management of the Company believes that the
disclosures presented are adequate, these interim financial statements should be
read in conjunction with the financial statements and notes included in the
Company's 1999 Annual Report on Form 20-F.
All accounts of HOLDINGS have been consolidated with the Company and all
significant intercompany transactions have been eliminated upon consolidation.
9
<PAGE>
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial statements for the
interim periods presented. The results of operations for the three and nine-
month periods ended 30 September 2000 and 1999 are not necessarily indicative of
the results to be expected for the entire year.
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company accounts for its investments at fair value in accordance with the
U.S. specialised industry accounting rules prescribed by the American Institute
of Certified Public Accountants (AICPA) Audit and Accounting Guide for
Investment Companies (the "Guide"). Under fair value accounting, unrealised
gains or losses are determined by comparing the fair value of the securities
held to the cost of such securities. Unrealised gains or losses relating to
changes in fair value of the Company's investments are reported as a component
of net earnings. Deferred income taxes, if any, are recorded at the applicable
statutory rate as the estimate of taxes payable as if such gains were realised.
Under current tax laws, and in light of the Company's operating methods and
plans, certain of the Company's investment gains in majority owned U.S. real
estate companies may be subject to income taxes.
As of 30 September 2000 and 31 December 1999, 25.9% and 30.5%, respectively,
of the Company's investments were in private or untraded securities valued at
their fair value as determined by the Board of Directors, using the methodology
described more fully in the notes to the consolidated financial statements in
the Company's 1999 Annual Report on Form 20-F. This value may differ from the
value that would have been used had a trading market for these securities
existed. The valuation of assets assumes that any assets disposed of would be
sold in an orderly process; any forced sale of assets under short-term
pressures, which is not foreseen, could adversely affect realisable values.
New Accounting Rules
During June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities". This
statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the Company
effective 1 January 2001. Management intends to adopt the statement as required
in fiscal 2000. Although the Company has not historically used such instruments,
it is not precluded from doing so. Management believes that the impact of such
adoption will not be material to the financial statements.
Note 2--Investments
The Company aims to have over 95% of its assets deployed in strategic
investment positions and less than 5% invested in other investment positions.
A. Strategic Investment Positions
Strategic investment positions represent significant (minimum of 25% of each
issuer's fully diluted common stock outstanding) equity ownership positions in
public companies or in private companies. With private companies which the
Company sponsors, it expects to own substantially more than 50% of the voting
shares. The Company will be the largest shareholder of its strategic investees,
have representation on their boards of directors, and will influence their
operations and strategies through ongoing consultation and research. Strategic
investees are characterised by the perceived potential for a superior market
niche and the ultimate potential for market preeminence with a focused strategy
and product.
10
<PAGE>
B. Other Investment Positions
Historically, other investment positions primarily consisted of ownership
positions of less than 10% of the fully diluted stock in entities taxed as real
estate investment trusts ("REITs") under the U.S. Internal Revenue Code of 1986
and other U.S. real estate companies. The investments took the form of either
direct investments in, or public market purchases of, shares of companies that
the Company believed possessed the requisite fundamentals to generate strong
cash flow growth and/or value appreciation. During the first quarter 2000, the
Company completed the sale of its public other investment positions' portfolio.
At 30 September 2000, the Company has invested $39.6 million primarily in two
private investment positions, both of which are U.S. real estate operating
companies.
As of 31 December 1999, the Company had deployed a total of $165.0 million in
securities of Security Capital, which in turn owned approximately 39.6% of the
Company as of 31 December 1999. This amount was made up of investments in
Security Capital common stock and convertible subordinated debentures. On 22
February 2000, the Company sold all the common stock of Security Capital,
receiving net proceeds of $57.0 million, and on 14 March 2000 the Company sold
all the debentures of Security Capital, receiving net proceeds of $39.9 million.
Note 3-- Line Of Credit
HOLDINGS has a $350 million unsecured line of credit which is guaranteed by
the Company (the "Line"). The earliest date on which the Line will expire is 1
December 2001, but HOLDINGS has the right on 1 December 2000 to convert the then
outstanding borrowings into a three-year term loan with quarterly amortisation
payments to be made over the three-year period, which would effectively extend
the final loan payment to 1 December 2003. Borrowings under the Line (and the
three-year term loan, if applicable) bear interest at (a) the sum of (x) the
greater of the federal funds rate plus 0.5% per annum or the United States prime
rate and (y) a margin of 0% to 0.85% per annum (based on the Company's current
senior unsecured long-term debt rating) or (b) at HOLDINGS's option, LIBOR plus
a margin of 1.00% to 1.85% per annum (also based on the Company's current senior
unsecured long-term debt). Additionally, there is a commitment fee of 0.15% to
0.20% per annum (based on the amount of the line which remains undrawn). All
borrowings under the Line are subject to covenants that the Company must
maintain at all times, including: (i) unsecured liabilities may not exceed 40%
of the market value of a borrowing base of owned securities, (ii) shareholders'
equity must exceed the sum of $1.5 billion and 75% of the net proceeds of sales
of equity securities after 30 December 1999, (iii) a ratio of total liabilities
to net worth of not more than 1:1, (iv) a fixed-charge coverage ratio of not
less than 1.5:1, (v) an interest-coverage ratio of not less than 2:1 and (vi)
secured debt may not exceed 10% of consolidated market net worth. As of 30
September 2000, the Company was in compliance with these covenants.
Average daily borrowings under the Line were $105.0 million for the nine-month
period ended 30 September 2000. Average daily borrowings under a previous line
of credit were $295.0 million for the nine-month period ended 30 September 1999.
The weighted average interest rates for these same periods were 7.7% per annum
and 6.5% per annum, respectively. The weighted average stated rate of interest
on borrowings outstanding at 30 September 2000 is 8.2%.
11
<PAGE>
Note 4-- Convertible Notes
Proceeds from the Company's 2% Senior Unsecured Convertible Notes ("Convertible
Notes") at issuance, and carrying amount as of the balance sheet dates, are as
follows:
<TABLE>
<CAPTION>
At 30 September At 31 December
2000 1999
--------------- --------------
in thousands U.S. $)
<S> <C> <C>
Convertible Notes proceeds....................... $360,554 $360,554
Accumulated accretion on Convertible Notes....... 38,870 25,603
-------- --------
$399,424 $386,157
======== ========
</TABLE>
During May 1998, the Company issued $450 million (aggregate principal amount
at maturity) of Convertible Notes which are convertible at the option of the
holder at any time prior to maturity at a conversion rate equal to 26.39095
shares of the Company per $1,000 aggregate principal amount at maturity of the
Convertible Notes or an aggregate of 11,875,927 shares upon conversion.
Interest is payable semi-annually at the rate of 2.0% per annum on 22 May and 22
November of each year. Effective 1 March 2000, the interest rate payable on the
Convertible Notes was increased to 2.25% per annum. The 2.25% per annum
interest rate was in effect until 14 May 2000, and as of the close of business
on 14 May 2000, the interest rate on the Convertible Notes was reduced to 2.0%
per annum. The Convertible Notes were sold at a discount to their principal
amount at maturity and additional interest accretes at an annual rate of 6.75%
less the 2.0% payment, compounded semi-annually, to par by 22 May 2003. The
Convertible Notes may be redeemed, in whole or in part, at the option of the
Company on or after 23 May 2001 at their accreted value, together with accrued
and unpaid interest. Upon a change in control of the Company, each holder of
Convertible Notes shall have the right, at the holder's option, to require the
Company to repurchase such holder's Convertible Notes, in whole or in part, at a
purchase price equal to their accreted value, together with accrued and unpaid
interest through the repurchase date.
If the transaction agreement to combine Security Capital and the Company, as
described in Note 1, is approved, then on the closing date the Company will
deposit with the indenture trustee for the Convertible Notes an amount which
will provide for the redemption of the Convertible Notes, at their then accreted
value, on the later of 23 May 2001 or the 30th day after the closing of the
transaction and for payment of all accrued and unpaid interest through the date
of redemption.
Conversion of the Convertible Notes would be anti-dilutive for the three and
nine-month periods ended 30 September 2000 and 1999.
Note 5--Advisory Agreement
The Company has an advisory agreement with Security Capital U.S. Realty
Management Holdings S.A. (the "Operating Advisor"), a wholly owned subsidiary of
Security Capital. This agreement requires the Operating Advisor to provide the
Company with advice with respect to strategy, investments, financing and certain
other administrative matters. The agreement automatically renews for successive
two-year periods unless either party gives notice it will not renew. The
Operating Advisor subcontracts for certain services through affiliates based in
London, United Kingdom and Chicago, Illinois, United States. The Operating
Advisor is entitled to an advisory fee, payable monthly in arrears, at an annual
rate of 1.25% of the average monthly value of invested assets (excluding
investments in Security Capital securities and investments of short-term cash
and cash equivalents). The Company pays its own third-party operating and
administrative expenses and transaction costs, although the Operating Advisor's
fee is reduced to the extent that third-party operating and administrative
expenses (but not transaction costs) exceed 0.25% per annum of the average
monthly value of invested assets (excluding investments in Security Capital
securities and investments of short-term cash and cash equivalents). Such third
party operating and administrative costs as a ratio of the average monthly value
of assets were 0.06% and 0.01% for the nine months ended 30 September 2000 and
1999, respectively.
12
<PAGE>
The Company pays fees to (i) Banque Internationale a Luxembourg as
Administrative Agent, Corporate Agent and Paying Agent, (ii) First European
Transfer Agent S.A. as Registrar and Transfer Agent, and (iii) Security Capital
European Services S.A. as Domiciliary Agent and Service Agent, in accordance
with usual practice in Luxembourg. Such fees are payable quarterly and are
based on the Company's gross assets.
Note 6--Taxation
Security Capital U.S. Realty, as separate from HOLDINGS, is not liable for any
Luxembourg tax on income. Security Capital U.S. Realty is liable in Luxembourg
for a capital tax of 0.06% per annum of its net asset value. Cash dividends and
interest received by Security Capital U.S. Realty or HOLDINGS on their
investments may be subject to non-recoverable withholding or other taxes in the
countries of origin. U.S. withholding tax rates of 15% were generally in effect
for dividends received for all periods presented.
Under the current United States-Luxembourg tax treaty, the Company believes
that HOLDINGS qualifies for a 15% rate of withholding tax on dividends of
operating income from the REIT investments currently held by HOLDINGS and from
its future REIT investments (if any). The Company also believes that HOLDINGS
will qualify for a 15% rate of withholding tax under the proposed United States-
Luxembourg tax treaty ratified by the United States on most, if not all, of the
REIT investments currently held by HOLDINGS and from future REIT investments (if
any). The Company's beliefs are based on the advice of tax counsel and the
manner in which management intends to operate the Company. There can be no
assurance that these favourable rates will be achieved as to all such
investments. These benefits are also dependent on HOLDINGS meeting the
"limitations on benefits" test under Article 24 of the proposed new treaty. The
tests prescribed by Article 24, particularly in terms of stock ownership
requirements, base erosion and publicly traded criteria, are inherently factual
in nature. Such tests will only need to be applied to HOLDINGS at a future, and
presently indeterminate, point in time and will be dependent on the particular
facts at such time. However, management will use its best efforts to ensure
that HOLDINGS meets the conditions for claiming the reduced treaty withholding
tax rate at the relevant times and the Company currently believes that such
conditions will be met.
Under the U.S. Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
the gain on disposition of a majority-owned U.S. real property interest by the
Company would be subject to U.S. income tax. Accordingly a deferred tax expense
and deferred tax liability has been provided on the unrealised gain on the
Company's investment in Regency as of 30 September 2000.
HOLDINGS, an ordinary corporate taxpayer under Luxembourg law, owns all of the
consolidated group's interests in REITs and other U.S. real estate companies.
Corporations which are resident Luxembourg taxpayers are taxed on their
worldwide net income, determined on the basis of gross income less costs
incurred. Certain items of income and capital gains are excluded from the
calculation of income received for tax purposes, including income and capital
gains from certain investments which meet certain holding period (generally one
calendar year) and size requirements. HOLDINGS operates so as to have the
highest possible percentage of its investments qualify for the exclusion.
Interest accrued on advances from the Company to HOLDINGS is deducted in
determining HOLDINGS's taxable income.
13
<PAGE>
Income paid from HOLDINGS to the Company is subject to various levels of tax,
including withholding taxes. Gross cash (but not accrued) interest payments
from HOLDINGS to the Company are subject to withholding tax at a rate of 3.75%.
No dividends were paid to the Company during the reporting periods.
<TABLE>
<CAPTION>
For the nine months ended
30 September
--------------------------
(in thousands U.S. $)
2000 1999
--------- ----------
<S> <C> <C>
Gross cash interest payments........................... $24,985 $24,217
========= ==========
Capital tax............................................ $ 942 $ 919
Withholding tax........................................ (1,466) 2,203
--------- ----------
$ (524) $ 3,122
========= ==========
</TABLE>
Note 7--Directors' Share Option Equivalents
Each of the Company's independent directors has received share option
equivalents ("SOE") of 25,000 shares of the Company at exercise prices ranging
from $12.30 to $28.88 per share. All grants of SOEs were for services rendered
by the Board of Directors subsequent to their grant. SOEs do not represent a
right to purchase shares from the Company, but a right to receive a restricted
cash payment equal to the excess, if any, of the closing stock price of 25,000
shares on the day of exercise over the exercise price, which was the closing
stock price on the date of grant. Such payments must be applied to the purchase
of shares or American Depositary Shares in the open market at the closing stock
price on the date of exercise. Directors were granted a vested right to
exercise one half of their SOEs immediately, and rights to the balance vest on
the fourth anniversary of their issuance. The right to exercise all SOEs expires
five years from the date of grant. The transaction agreement described in Note
1, if approved, provides for immediate vesting of all the Company's outstanding
SOEs.
The Company accrues an expense and a liability over the vesting period. This
accrual is adjusted for changes in the Company's closing stock price at each
balance sheet date with the resultant change representing a charge/(reduction)
to administrative expenses for the period in the consolidated statement of
operations. The charges/(reduction) were $290,250 and $(235,000) for the nine
months ended 30 September 2000 and 1999, respectively. At 30 September 2000,
there were 150,000 SOEs granted at a weighted average exercise price of $18.11,
of which 100,000 were vested at a weighted average exercise price of $16.80.
14
<PAGE>
Note 8--Commitments
The Company's existing and committed fundings at cost as of 30 September 2000
were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount
Amount (Amount to be
Committed Funded) Funded
------------------ ----------------- ----------------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE) $ 699,905 $ 699,905 $ --
City Center Retail (Private) 175,722 175,722 --
CWS Communities (Private) 300,330 268,739 31,591
Regency (NYSE: REG) 759,807 759,807 --
Storage USA (NYSE: SUS) 394,362 394,362 --
Urban Growth Property (Private) 188,582 188,582 --
Private investment positions 40,544 40,544 --
---------- ---------- ----------------
Total $2,559,252 $2,527,661 $31,591
========== ========== ================
</TABLE>
Capital deployed to additional strategic investment positions, as well as
further funding to existing strategic investees, will generally be initially
funded with borrowings under the new HOLDINGS Line. These borrowings are
expected to be reduced by internally generated free cash flow. If the
transaction agreement to combine Security Capital and the Company, as described
in Note 1, is approved, then on the closing date the funding obligation to CWS
Communities will be assumed by Security Capital.
Note 9 --Legal Reserve
According to Luxembourg law, an annual transfer of 5% of the net profit to a
legal reserve is required until this reserve equals 10% of the value of the
issued Share capital. No transfer will be made in 2000 as a result of the
decrease in net assets resulting from operations for the year ended 31 December
1999.
Note 10 - Share Repurchase Programme
On 29 March 2000, the Company announced the completion of its second $100
million share repurchase programme. The Company also announced that its Board
of Directors authorised an increase in the Company's share repurchase programme
by $50 million to $250 million. As of 30 September 2000, the Company had
repurchased 11,677,914 shares at an aggregate cost of $212.3 million,
representing approximately 13.5% of the Company's shares outstanding at the
commencement of the initial programme. As of 30 September 2000 the share
purchase programme has been suspended pending the closing of the transaction
agreement to combine the Company and Security Capital. The net asset value per
share as of 30 September 2000 has been calculated on 74,883,958 shares
outstanding.
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital U.S. Realty
Luxembourg
We have reviewed the condensed consolidated statement of net assets (including
the consolidated schedules of investments) as of 30 September 2000 and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended 30 September 2000 and 1999, the condensed consolidated
statements of changes in net assets, the consolidated statement of changes in
shares outstanding and consolidated financial highlights for the nine-months
ended 30 September 2000, and the condensed consolidated statements of cash flows
for the nine-month periods ended 30 September 2000 and 1999 of Security Capital
U.S. Realty (the "Company"). These condensed consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of net
assets (including the consolidated statement of investments) as of 31 December
1999 and the related consolidated statements of operations, the consolidated
statement of changes in net assets, the consolidated statement of changes in
shares outstanding, the consolidated financial highlights, and the consolidated
statement of cash flows for the year then ended (not presented herein), and in
our report dated 25 February 2000 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated statement of net assets as of 31
December 1999 and the condensed consolidated statement of changes in net assets
for the year ended 31 December 1999, is fairly stated in all material respects
in relation to the consolidated statement of net assets and consolidated
statement of changes in net assets from which it has been derived.
PricewaterhouseCoopers S.a r.l. Luxembourg, 2 November 2000
Reviseur d'entreprises
Represented by
Pascal Rakovsky
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with Security Capital
U.S. Realty's (the "Company") 1999 Annual Report on Form 20-F (the "1999 Form
20-F") as well as the financial statements and the notes thereto in Item 1 of
this report. In addition to historical information, this discussion contains
forward-looking statements under the federal securities laws. These statements
are based on current expectations, estimates and projections about the industry
and markets in which the Company operates, management's beliefs and assumptions
made by management. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise. See the Company's 1999 Annual Report on Form 20-F
for a discussion of various risk factors associated with forward-looking
statements made in the document.
The Company is 40.6% owned by Security Capital Group Incorporated ("Security
Capital"). On 26 September 2000, the Company and Security Capital entered into
an agreement to combine the Company and Security Capital. Under the terms of
the transaction agreement shareholders of the Company will receive either (i)
1.15 shares of Security Capital Class B common stock for each outstanding share
of the Company or (ii) if they vote against the transaction and validly elect to
receive cash, they will receive an amount of cash in U.S. dollars equal to 1.15
multiplied by the average of the daily high and low per share sales prices of
the Security Capital Class B common stock on the New York Stock Exchange during
the fifteen trading days ending on the sixth trading day before the
extraordinary meeting of the shareholders to vote on the transaction. Security
Capital will acquire the assets of the Company, consisting primarily of the
shares in Security Capital Holdings S.A., and assume or provide the necessary
funds to satisfy the liabilities of the Company. If shareholders who vote
against the transaction validly elect to receive cash payments in an amount
exceeding $200 million in the aggregate, Security Capital will have the right to
terminate the transaction agreement.
Consummation of the transaction is dependent on, among other things, (i)
approval of the transaction agreement, which includes a plan of liquidation of
the Company, by a vote of two-thirds of the shares in attendance, by proxy or
otherwise, at an extraordinary meeting of shareholders of the Company assuming
at least a majority of outstanding shares are in attendance or represented and
(ii) approval by a majority vote of Security Capital shareholders at a special
meeting of stockholders of Security Capital of the issuance of Security Capital
Class B common stock necessary to effect the transaction.
Results of Operations
Nine Months Ended 30 September 2000 and 1999
Net operating income increased by $7.6 million, or 15.5%, to $56.8 million for
the nine months ended 30 September 2000 as compared to $49.2 million for the
nine months ended 30 September 1999. The increase is mainly attributable to a
decrease in interest expense on the line of credit. Line of credit interest
decreased $8.5 million, or 58.6%, to $6.0 million for the nine months ended 30
September 2000 as compared to $14.6 million for the nine months ended 30
September 1999 due to decreased levels of borrowings.
17
<PAGE>
Net Operating Income
The following table sets forth information regarding the Company's net
operating income, representing the difference between total income and total
expenses, during the nine-month periods ended 30 September 2000 and 1999:
<TABLE>
<CAPTION>
Nine months ended 30 September
------------------------------
2000 1999
---- ----
Amount % Amount %
------ -- ------ ---
(in thousands $, except %)
<S> <C> <C> <C> <C>
Total Income............................. $110,882 100.0% $115,777 100.0%
Total Expenses........................... 54,100 48.8% 66,609 57.5%
-------- ----- -------- -----
Net Operating Income..................... $ 56,782 51.2% $ 49,168 42.5%
======== ===== ======== =====
</TABLE>
The net operating income margin increase in 2000 over 1999 is primarily due
to a lower interest expense on the line of credit and also due to a reduction in
taxes other than income taxes described below.
Total Income. The following table sets forth information regarding the
Company's total income during the nine-month periods ended 30 September 2000 and
1999:
<TABLE>
<CAPTION>
Nine months ended 30 September
------------------------------
2000 1999
---- ----
Amount % Amount %
------ --- ------ ---
(in thousands $, except %)
<S> <C> <C> <C> <C>
Gross dividends from strategic investment positions
CarrAmerica $ 39,687 35.8% $ 39,687 34.3%
City Center Retail/(1)/ -- -- -- --
CWS Communities 10,934 9.9% 5,579 4.8%
Regency 49,353 44.5% 42,086 36.4%
Storage USA 24,355 22.0% 23,649 20.4%
Urban Growth Property/(1)/ -- -- 7,262 6.3%
-------- ----- -------- -----
Subtotal 124,329 112.2% 118,263 102.2%
Gross dividends from other investment positions/(2)/ -- -- 8,176 7.1%
-------- ----- -------- -----
Total gross dividends 124,329 112.2% 126,439 109.3%
Interest income from Security Capital debentures 745 0.7% 2,681 2.3%
Interest and other income 4,403 4.0% 3,160 2.7%
-------- ----- -------- -----
Total gross income 129,477 116.9% 132,280 114.3%
Withholding tax on dividends received (18,595) (16.9%) (16,503) (14.3%)
-------- ===== ======== =====
Total income $110,882 100.0% $115,777 100.0%
======== ===== ======== =====
</TABLE>
_____________________
(1) In order to more efficiently fund ongoing operations, the respective board
of directors of City Center Retail and Urban Growth Property determined
that a dividend will be paid in the fourth quarter of each year.
(2) During the first quarter 2000, the Company completed the sale of its public
other investment positions' portfolio.
18
<PAGE>
As the table indicates, most of the Company's total income during 2000 and
1999 were derived from dividends from its strategic investment positions. The
increase in CWS Communities' dividends is attributed to increased investment in
shares in 2000 versus 1999 and a period to date aggregate dividend rate of $0.45
per share in 2000 versus $0.39 in 1999. The increase in Regency dividends is
attributed to period to date aggregate dividend rate of $1.44 per share in 2000
versus $1.38 in 1999.
"Interest income from Security Capital debentures" represents interest earned
on the Company's $55 million aggregate principal investment in Security Capital
Group's 6.5% convertible subordinated debentures due 2016 ("Security Capital
Debentures"). The Company sold its investment in Security Capital in March
2000.
"Interest and other income" consists of interest earned on cash balances,
advances to CWS Communities and Urban Growth Property, and convertible debt of
other investment positions. The increase in this item between the nine months
ended 30 September 2000 and the corresponding period in 1999 is attributable to
interest earned on the increased level of advances to CWS Communities and Urban
Growth Property and convertible debt of other investment positions held by the
Company during 2000.
Total Expenses. For the nine months ended 30 September 2000, total expenses
amounted to $54.1 million, of which $23.4 million, or 43.3%, represented fees
paid to Security Capital U.S. Realty Management Holdings S.A. (the "Operating
Advisor"), a wholly owned subsidiary of Security Capital, and $28.3 million, or
52.3%, represented (i) interest on the 2% Senior Unsecured Convertible Notes due
2003 ($450 million aggregate principal amount at maturity) (the "Convertible
Notes") issued in May 1998, (ii) interest on the line of credit and (iii)
related expenses. For the nine months ended 30 September 1999, total expenses
amounted to $66.6 million, of which $25.0 million, or 37.5%, represented fees
paid to the Operating Advisor and $36.3 million, or 54.5%, represented (i)
interest on the Convertible Notes, (ii) interest on the line of credit and (iii)
related expenses. The decrease in interest expense is due to decreased average
borrowings on the line of credit. The other significant decrease in expenses
was in withholding taxes which in third quarter 2000 reflect a $3.1 million
reversal of accrued tax payable on interest payments between HOLDINGS and
Security Capital U.S. Realty as a result of a tax opinion received by the
Company.
Net Realised Losses or Gains on Strategic Investment and Other Investment
Positions
During the nine months ended 30 September 2000, one of the Company's private
strategic investees, City Center Retail, sold 23 properties for approximately
$208.2 million. Net proceeds to City Center Retail from the sale, after debt
repayment and closing costs, were $116.8 million, of which approximately $112.0
million was distributed to the Company. City Center Retail's remaining assets
consist of five properties with a total expected cost upon completion of
development and stabilisation of approximately $249.3 million. The Company
realised a loss of $16.4 million in relation to this return of capital.
During the nine months ended 30 September 2000, the Company sold its
investment in the common shares and Security Capital Debentures for $96.9
million, realising a loss on disposal of $68.9 million.
In June 2000, CarrAmerica, a public strategic investee, announced its closing
on a transaction that merged its executive office suites affiliate, HQ Global
Workplaces, Inc. ("HQ Global"), with Vantas Incorporated. The Company, on a
direct basis, had invested approximately $2.5 million in HQ Global between
August 1997 and February 1999. Upon the closing of the merger, the Company sold
its investment in HQ Global and realised a $2.2 million gain on the sale of
these securities.
19
<PAGE>
Historically, other investment positions were investments in publicly traded
REITs, which were generally held for an intermediate term of 12 to 18 months,
although the sale of such positions could occur sooner or later, depending on
market or business conditions and on whether the return objectives had been
realised. The objective of these other investment positions was to realise
attractive total returns through dividends and share price appreciation and to
provide the Company with an efficient method of maintaining a portion of its
assets in relatively liquid investments (which assets could be redeployed on
relatively short notice). During the year ended 31 December 1999, all of the
publicly traded other investment positions, except for the investment in
Security Capital, were sold. Net realised losses during the year ended 31
December 1999 were $65.6 million. During the nine months ended 30 September
1999, net realised gains on other investment positions were $1.4 million.
Increase/(Decrease) in Appreciation of Strategic Investment and Other
Investment Positions
During the nine-month periods ended 30 September 2000 and 1999, the principal
factor behind the movement in net assets resulting from operations was the
change in the unrealised appreciation of the Company's strategic investment and
other investment positions.
During the nine months ended 30 September 2000, the largest part of the
increase of $433.6 million in the unrealised appreciation was attributable to
the increase in the appreciation of the Company's investment in CarrAmerica
($261.0 million, or 60.2% of the total increase), followed by Regency ($100.7
million, or 23.2%), and the other investment positions ($69.0 million, or
15.9%).
During the nine months ended 30 September 1999, the largest part of the
decrease of $163.3 million in the unrealised appreciation was attributable to
the decrease in the value of the investment in CarrAmerica ($59.0 million, or
36.2% of the total increase), followed by a decrease in the value of the
investment in Storage USA ($56.7 million, or 34.7%) and Regency ($42.9 million,
or 26.2%).
The increase in the unrealised appreciation of the strategic investments in
2000 versus 1999 is the result of the increase in the stock prices of the
investments principally due to the general improvement in the real estate
investment trust ("REIT") market year to date in 2000.
Liquidity and Capital Resources
The Company's total indebtedness as of 30 September 2000 was approximately
$455.4 million and the value of the Company's total assets was $2.7 billion. As
of 30 September 2000, the closing share price on the Amsterdam AEX Stock
Exchange was $20.50 and the closing price of the American Depositary Receipts on
the New York Stock Exchange was $21.375. The Company expects its principal
sources of liquidity to be from its receipt of dividends from strategic
investments and fundings from the Line. The Company expects that these sources
will enable it to meet both its short-term and long-term cash requirements for
its funding commitments, working capital and debt repayment for the next 12
months.
As of 30 September 2000, $56.0 million was drawn and outstanding under the
Line. The earliest date on which the Line will expire is 1 December 2001, but
HOLDINGS has the right on 1 December 2000 to convert the then outstanding
borrowings into a three-year term loan with quarterly amortisation payments to
be made over the three-year period, which would effectively extend the final
loan payment to 1 December 2003. Borrowings under the Line (and the three-year
term loan, if applicable) bear interest at (a) the sum of (x) the greater of the
federal funds rate plus 0.5% per annum or the United States prime rate and (y) a
margin of 0% to 0.85% per annum (based on the Company's current senior unsecured
long-term debt rating) or (b) at HOLDINGS's option, LIBOR plus a margin of 1.00%
to 1.85% per annum (also based on the Company's current senior unsecured long-
term debt). Additionally, there is a commitment fee of 0.15% to 0.20% per annum
(based on the amount of the line which remains undrawn). All borrowings under
the Line are subject to covenants that the Company must maintain at all times,
including: (i) unsecured liabilities may not exceed 40% of the market value of a
borrowing base of owned securities, (ii) shareholders' equity must exceed the
sum of $1.5 billion and 75% of the net proceeds of sales of equity securities
after 30 December 1999, (iii) a ratio of total liabilities to net worth of not
more than 1:1, (iv) a fixed-charge coverage ratio of not less than 1.5:1, (v) an
interest-coverage ratio of not less than 2:1 and (vi) secured debt may not
exceed 10% of consolidated market net worth. As of 30 September 2000, the
Company was in compliance with these covenants.
20
<PAGE>
Average daily borrowings under the Line were $105.0 million for the nine-month
period ended 30 September 2000. Average daily borrowings under a previous line
of credit were $295.0 million for the nine-month period ended 30 September 1999.
The weighted average interest rates for these same periods were 7.7% per annum
and 6.5% per annum, respectively. The weighted average stated rate of interest
on borrowings outstanding at 30 September 2000 is 8.2%.
During May 1998, the Company issued $450 million (aggregate principal amount
at maturity) of Convertible Notes which are convertible at the option of the
holder at any time prior to maturity at a conversion rate equal to 26.39095
shares of the Company, per $1,000 aggregate principal amount at maturity of the
Convertible Notes or an aggregate of 11,875,927 shares upon conversion.
Interest is payable semi-annually at the rate of 2.0% per annum on 22 May and 22
November of each year. Effective 1 March 2000, the interest rate payable on the
Convertible Notes was increased to 2.25% per annum. The 2.25% per annum
interest rate was in effect until 14 May 2000, and as of the close of business
on 14 May 2000, the interest rate on the Convertible Notes was reduced to 2.0%
per annum. The Convertible Notes were sold at a discount to their principal
amount at maturity and additional interest accretes at an annual rate of 6.75%
less the 2.0% payment, compounded semi-annually, to par by 22 May 2003. The
Convertible Notes may be redeemed, in whole or in part, at the option of the
Company on or after 23 May 2001 at their accreted value, together with accrued
and unpaid interest. Upon a change in control of the Company, each holder of
Convertible Notes shall have the right, at the holder's option, to require the
Company to repurchase such holder's Convertible Notes, in whole or in part, at a
purchase price equal to their accreted value, together with accrued and unpaid
interest through the repurchase date.
If the transaction agreement to combine Security Capital and the Company, as
described in Note 1, is approved, then on the closing date the Company will
deposit with the indenture trustee for the Convertible Notes an amount which
will provide for the redemption of the Convertible Notes, at their then accreted
value, on the later of 23 May 2001 or the 30th day after the closing of the
transaction and for payment of all accrued and unpaid interest through the date
of redemption.
On 29 March 2000, the Company announced the completion of its second $100
million share repurchase programme. The Company also announced that its Board of
Directors authorised an increase in the Company's share repurchase programme by
$50 million to $250 million. As of 30 September 2000, the Company had
repurchased 11,677,914 shares at an aggregate cost of $212.3 million,
representing approximately 13.5% of the Company's shares outstanding at the
commencement of the initial programme. This share repurchase programme has been
funded with proceeds received from the sale of the public other investment
positions' portfolio, the sale of the common stock and debentures of Security
Capital and the distribution of net proceeds received by City Center Retail from
the sale of 23 properties. During the nine months ended 30 September 2000, the
sale of these investments realised net proceeds of $213.6 million. As of 30
September 2000 the share repurchase programme has been suspended pending the
closing of the transaction agreement to combine the Company with Security
Capital.
Capital Deployment Activities
During the nine months ended 30 September 2000, the Company deployed an
additional $68.8 million in strategic investment positions (including an advance
to CWS Communities of $12.0 million and $36.5 million in advances to Urban
Growth Property), received a distribution of net proceeds from City Center
Retail, in relation to the sale of 23 properties, of $112.0 million and received
net proceeds of $102.2 million from disposal of other investment positions. As
of 30 September 2000, the Company had outstanding contractual obligations of
$31.6 million to CWS Communities.
21
<PAGE>
The Company's existing and committed fundings at cost as of 30 September 2000
were as follows:
<TABLE>
<CAPTION>
Total Total Cost
Amount (Amount Amount to be
Committed Funded)/(1)/ Funded/(1)/
----------------- --------------- -------------
(in thousands $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE) $ 699,905 $ 699,905 $ --
City Center Retail (Private) 175,722 175,722 --
CWS Communities (Private) 300,330 268,739 31,591
Regency (NYSE: REG) 759,807 759,807 --
Storage USA (NYSE: SUS) 394,362 394,362 --
Urban Growth Property (Private) 188,582 188,582 --
Private investment positions 40,544 40,544 --
---------- ---------- ----------
Total $2,559,252 $2,527,661 $31,591
========== ========== ==========
</TABLE>
_____________________
(1) Included in Total Amount Committed.
If the transaction agreement to combine Security Capital and the Company, as
described in Note 1, is approved, then on the closing date the funding
obligation to CWS Communities will be assumed by Security Capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of 30 September 2000 no significant change had occurred in the Company's
interest rate risk, equity price risk and currency exchange risk as discussed in
the Company's 1999 Form 20-F.
22
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Transaction Agreement dated as of 26 September 2000 by and among Security
Capital Group Incorporated, SC Realty Incorporated and Security Capital U.S.
Realty (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by Security Capital Group Incorporated on 26 September 2000)
4.1 Articles of Incorporation of Security Capital U.S. Realty (the "Company")
(incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form F-1, file no. 333-34048 (the "Form F-1"))
4.2 Indenture dated as of 22 May 1998 between the Company and State Street Bank
and Trust Company (incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 20-F, file no. 0-25815 (the "Form 20-F))
4.3 First Supplemental Indenture dated as of 22 May 1998 between the Company
and State Street Bank and Trust Company (incorporated by reference to Exhibit
4.3 of the Form 20-F)
4.4 Form of the Convertible Notes due 2003 (incorporated by reference to
Exhibit 4.4 of the Form 20-F)
27 Financial Data Schedules
(b) Reports on Form 8-K. None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Security Capital U.S. Realty
/s/ Constance B. Moore
--------------------------
Managing Director
(Principal Financial Officer)
Date: November 7, 2000
24
