<PAGE>
CONSOLIDATED SEMI-ANNUAL FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
(UNAUDITED)
[LOGO OF SECURITY CAPITAL U.S. REALTY APPEARS HERE]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Definition
For the purposes of this report, the term "SC-U.S. Realty" means Security
Capital U.S. Realty (the "Company") and its direct and indirect wholly owned
subsidiaries, including Security Capital Holdings S.A. (such subsidiaries
collectively referred to herein as "HOLDINGS"). All references herein to
"dollars" or "$" shall mean United States Dollars.
Introduction
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, which was incorporated in July 1995, has since funded the
following strategic investment positions:
<TABLE>
<CAPTION>
Total Cost as of Total Value as of
Initial Funding 30 June 2000 30 June 2000
Company Date (in millions)(/1/) (in millions)
------- --------------- ------------------ -----------------
<S> <C> <C> <C>
CarrAmerica................ April 1996 $ 700 $ 758(/2/)
City Center Retail......... April 1997 $ 176 $ 176(/3/)
CWS Communities............ December 1997 $ 254 $ 254(/3/)
Regency(/4/)............... July 1996 $ 760 $ 813(/2/)
Storage USA................ March 1996 $ 394 $ 347(/2/)
Urban Growth Property...... April 1997 $ 189 $ 189(/3/)
------ ------
Total...................... $2,473 $2,537
====== ======
</TABLE>
--------
(1) See "Capital Deployment Activities" for additional information regarding
commitments.
(2) Based on the closing price on the New York Stock Exchange ("NYSE") of
common shares held on such date.
(3) Private real estate investment trust ("REIT") or real estate operating
company. See Note 2A to the Consolidated Financial Statements for the
methodology utilised to assess the value of investments in private
entities.
(4) Includes the investments in Pacific Retail, which merged with Regency on
28 February 1999. See Note 3A to the Consolidated Financial Statements.
In addition to its six strategic investment positions, SC-U.S. Realty has
invested $40.5 million in two private investment positions, both of which are
U.S. real estate operating companies. As of 30 June 2000, the value of SC-U.S.
Realty's private investment positions represented approximately 1.6% of SC-
U.S. Realty's total assets.
On 15 March 2000, SC-U.S. Realty announced the sale of its investment in
the common shares and convertible subordinated debentures of Security Capital
Group Incorporated ("Security Capital Group") for $96.9 million.
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 to $250 million. As of 30 June 2000, the Company had repurchased
11,684,751 shares at an aggregate cost of $212.3 million, representing
approximately 13.5% of the Company's shares outstanding prior to implementing
the initial programme on 5 May 1999.
On 18 May 2000, the Company announced that Urban Growth Property purchased
11 parking properties in five cities for approximately $180 million. The
acquisition was funded by Urban Growth Property predominantly through
internally generated capital and secured financing with an institutional
lender. SC-U.S. Realty invested $12.5 million, which formally completes the
Company's total investment commitment to Urban Growth Property of $201
million.
During the six month period ended 30 June 2000, 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
1
<PAGE>
$116.8 million, of which approximately $112.0 million was distributed to SC-
U.S. Realty as a return of capital. 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.
During the six months ended 30 June 2000, the Company deployed an
additional $17.2 million in CWS Communities. As of 30 June 2000, SC-U.S.
Realty had outstanding contractual obligations of $46.6 million to CWS
Communities.
Operating Results
Six months ended 30 June 2000 and 1999
Net operating income increased by $6.5 million, or 22.6%, to $35.2 million
for the six months ended 30 June 2000 as compared to $28.7 million for the six
months ended 30 June 1999. The increase is mainly attributable to a decrease
in interest expense on HOLDINGS' $350 million unsecured line of credit, which
is guaranteed by the Company (the "new HOLDINGS Line"). On 30 December 1999,
the new HOLDINGS Line replaced the Company's $400 million unsecured line of
credit, which was guaranteed by HOLDINGS (the "Company Line") (both lines
referred to herein as the "Lines of Credit"). Interest on the Lines of Credit
decreased $3.4 million, or 40.2%, to $5.2 million for the six months ended 30
June 2000 as compared to $8.6 million for the six months ended 30 June 1999.
This is due to decreased levels of borrowings on the Lines of Credit.
Net Operating Income
Net operating income represents the difference between total income and
total expenses.
The following table sets forth information regarding SC-U.S. Realty's net
operating income during the six-month periods ended 30 June 2000 and 1999:
<TABLE>
<CAPTION>
Six months ended 30 June
----------------------------
2000 1999
------------- -------------
Amount % Amount %
------- ----- ------- -----
(in thousands $, except %)
<S> <C> <C> <C> <C>
Total income...................................... $73,671 100.0% $72,300 100.0%
Total expenses.................................... 38,459 52.2 43,570 60.3
------- ----- ------- -----
Net operating income.............................. $35,212 47.8% $28,730 39.7%
======= ===== ======= =====
</TABLE>
The net operating income margin increased to 47.8% during 2000 from 39.7%
in 1999. This is primarily due to a lower interest expense on the Lines of
Credit.
Total Income. The following table sets forth information regarding SC-U.S.
Realty's total income during the six-month periods ended 30 June 2000 and
1999:
<TABLE>
<CAPTION>
Six months ended 30 June
-------------------------------
2000 1999
--------------- --------------
Amount % Amount %
-------- ----- ------- -----
(in thousands $, except %)
<S> <C> <C> <C> <C>
Gross dividends from strategic investment
positions
CarrAmerica................................. $ 26,458 35.9% $26,458 36.6%
City Center Retail(/1/)..................... -- -- -- --
CWS Communities............................. 7,133 9.7 3,148 4.4
Regency(/2/)................................ 32,902 44.7 26,320 36.4
Storage USA................................. 16,236 22.0 15,766 21.8
Urban Growth Property(/1/).................. -- -- 213 0.3
-------- ----- ------- -----
Subtotal.................................. $ 82,729 112.3% $71,905 99.5%
Gross dividends from other investment posi-
tions(/3/)................................... -- -- 6,311 8.7
-------- ----- ------- -----
Total gross dividends..................... $ 82,729 112.3% $78,216 108.2%
Interest income from affiliate................ 745 1.0 1,788 2.5
Interest income from non-affiliate and other
income....................................... 2,552 3.5 1,566 2.2
-------- ----- ------- -----
Total gross income........................ $ 86,026 116.8% $81,570 112.9%
Withholding tax on dividends received......... (12,355) (16.8) (9,270) (12.9)
-------- ----- ------- -----
Total income.............................. $ 73,671 100.0% $72,300 100.0%
======== ===== ======= =====
</TABLE>
2
<PAGE>
--------
(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) On 28 February 1999 Regency merged with Pacific Retail. In order to align
the dividend record date of the former Pacific Retail shareholders with
the dividend record date of Regency, Pacific Retail paid a pro-rata
dividend to its shareholders in the first quarter of 1999. As a result,
Pacific Retail shareholders only received 42 days worth of dividends in
the first quarter of 1999. See Note 3A to the Consolidated Financial
Statements.
(3) During the first quarter 2000, the Company completed the sale of its
publicly traded other investment positions' portfolio.
As the table indicates, most of SC-U.S. Realty's total income during 2000
and 1999 was derived from dividends from its strategic investment positions.
"Interest income from affiliate" represents interest earned on SC-U.S.
Realty's $55 million aggregate principal investment in Security Capital
Group's 6.5% convertible subordinated debentures due 2016. The debentures were
purchased by SC-U.S. Realty in April 1996 ($11 million aggregate principal
amount) and in March 1997 ($44 million aggregate principal amount) and were
convertible into shares of Class A common stock of Security Capital Group.
During the six months ended 30 June 2000, SC-U.S. Realty sold its investment
in Security Capital Group.
"Interest income from non-affiliate and other income" consists of interest
earned on cash balances and convertible debt of other investment positions.
The increase in this item between the six months ended 30 June 2000 and the
corresponding period in 1999 is attributable to higher interest earned on the
increased level of convertible debt of other investment positions held by SC-
U.S. Realty during 2000.
Total Expenses. For the six months ended 30 June 2000, total expenses
amounted to $38.5 million, of which $15.1 million, or 39.3%, represented fees
paid to the Operating Advisor and $19.2 million, or 49.9%, 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 new Holdings Line and (iii) related expenses.
During the period, general and administrative expenses were approximately $1.5
million, or 3.8% of total expenses, taxes were $1.9 million, or 4.9% of total
expenses, and amortisation of Convertible Notes deferred costs was $0.8
million, or 2.1% of total expenses.
For the six months ended 30 June 1999, total expenses amounted to $43.6
million, of which $16.7 million, or 38.4%, represented fees paid to the
Operating Advisor and $22.4 million, or 51.3%, represented (i) interest on the
Convertible Notes, (ii) interest on the Company Line and (iii) related
expenses. During the period, general and administrative expenses were
approximately $1.6 million, or 3.7% of total expenses, taxes were $2.1
million, or 4.8% of total expenses, and amortisation of Convertible Notes
deferred costs was $0.8 million, or 1.8% of total expenses.
Net Realised Losses or Gains on Strategic Investment and Other Investment
Positions
During the six months ended 30 June 2000, one of SC-U.S. Realty'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 SC-U.S. Realty. SC-U.S. Realty realised a
loss of $16.4 million in relation to this return of capital. 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.
During the six months ended 30 June 2000, SC-U.S. Realty sold its
investment in the common shares and convertible subordinated debentures of
Security Capital Group 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. SC-U.S.
Realty, on a direct basis, had invested approximately $2.5 million in HQ
Global between August 1997
3
<PAGE>
and February 1999. Upon the closing of the merger, SC-U.S. Realty sold its
investment in HQ Global and realised a $2.2 million gain on the sale of these
securities.
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 SC-U.S. Realty 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 Group, were sold. Net realised
losses during the year ended 31 December 1999 were $65.6 million. During the
six months ended 30 June 1999, net realised gains on other investment
positions were $1.6 million.
Increase/(Decrease) in Appreciation of Strategic Investment and Other
Investment Positions
During the six-month periods ended 30 June 2000 and 1999, the principal
factor behind the movement in net assets resulting from operations was the
change in the unrealised appreciation of SC-U.S. Realty's strategic investment
and other investment positions.
During the six months ended 30 June 2000, the largest part of the increase
of $342.8 million in the unrealised appreciation was attributable to the
increase in the appreciation of SC-U.S. Realty's investment in CarrAmerica
($154.2 million, or 45.0% of the total increase), followed by Regency ($128.0
million, or 37.3%), and the other investment positions ($69.2 million, or
20.2%). This increase was partly offset by a decrease in the appreciation of
SC-U.S. Realty's investment in Storage USA ($8.6 million, or 2.5%).
During the six months ended 30 June 1999, the largest part of the increase
of $27.0 million in the unrealised appreciation was attributable to the
increase in the appreciation of SC-U.S. Realty's investment in CarrAmerica
($28.6 million, or 106.1% of the total increase), followed by the other
investment positions ($14.4 million, or 53.3%). This increase was partly
offset by a decrease in the appreciation of SC-U.S. Realty's investment in
Regency ($10.7 million, or 39.7%) and Storage USA ($5.1 million, or 19.1%). In
both periods, the increase in the unrealised appreciation of the strategic
investments is the result of the increase in the stock prices of the
investments principally due to the general improvement in the REIT market.
Liquidity and Capital Resources
SC-U.S. Realty's total indebtedness as of 30 June 2000 was approximately
$437.2 million and the value of SC-U.S. Realty's total assets was $2.6
billion. As of 30 June 2000, the closing share price on the Amsterdam AEX
Stock Exchange was $17.75 and the closing price of the American Depositary
Receipts ("ADRs") on the NYSE was $18.00. SC-U.S. Realty expects its principal
sources of liquidity to be from its receipt of dividends from strategic
investments and fundings from the new HOLDINGS Line. SC-U.S. Realty 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.
The lenders under the new HOLDINGS Line are Commerzbank Aktiengesellschaft
and a consortium of international banks. As of 30 June 2000, $42.5 million was
drawn and outstanding under the new HOLDINGS Line. The earliest date on which
the new HOLDINGS 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 a
three-year period, which would effectively extend the final loan payment to 1
December 2003. Borrowings under the new HOLDINGS 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 SC-U.S. Realty's current senior
unsecured long-term debt rating) or (b) at HOLDINGS' option, LIBOR plus a
margin of 1.00% to 1.85% per annum (also based on SC-U.S. Realty's current
senior unsecured long-term debt rating). 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 new HOLDINGS Line are subject to covenants
that SC-U.S. Realty must maintain at all times, including: (i) unsecured
liabilities may not exceed 40% of the market value of a borrowing base of
owned securities, (ii) shareholders' equity must exceed the sum of $1.5
billion and 75% of the net proceeds of sales of equity securities thereafter,
(iii) a ratio of total liabilities to net worth of not more than 1:1, (iv) a
fixed-charge coverage ratio of not less than 1.5:1, (v) an interest-coverage
ratio of not less than 2:1 and (vi) secured debt may
4
<PAGE>
not exceed 10% of consolidated market net worth. As of 30 June 2000, SC-U.S.
Realty was in compliance with these covenants.
Average daily borrowings under the new HOLDINGS Line for the six months
ended 30 June 2000 were $132.5 million, at a weighted average interest rate of
7.57% per annum.
Through offerings of its shares, the Company received gross equity proceeds
aggregating $2.1 billion in the period between 1 January 1996 and 31 December
1997, of which $1.1 billion was received in 1997 and $1.0 billion in 1996. In
addition, during May 1998, the Company issued $450 million (aggregate
principal amount at maturity) of Convertible Notes. The Convertible Notes were
issued at a discount to their aggregate principal amount at maturity. SC-U.S.
Realty used the net proceeds of approximately $352.7 million to repay
borrowings under the $700 million secured line of credit of HOLDINGS (the "old
HOLDINGS Line") which were incurred principally for the purpose of funding
commitments both to existing and new strategic investment positions. Under the
terms of the Convertible Notes, the Company is not permitted to incur Senior
Indebtedness (as defined in the Indenture dated as of 22 May 1998, between the
Company and State Street Bank and Trust Company, as trustee, as amended, the
"Indenture") that is not subordinated to the same extent as the Convertible
Notes or to incur Secured Indebtedness (as defined in the Indenture) that is
by its terms senior in right of payment to the Convertible Notes, except that
the Company is permitted to guarantee, on a secured and/or senior
unsubordinated basis, the obligations of any wholly owned subsidiary with
respect to any Permitted Indebtedness (as defined in the Indenture). As of and
for the six months ended 30 June 2000, SC-U.S. Realty was in compliance with
these covenants. The Convertible Notes are convertible into shares at the
option of the holder at any time prior to maturity, unless previously
redeemed, at a conversion rate equal to 26.39095 shares (giving effect to the
one-for-two reverse stock split which occurred on 18 June 1999) per $1,000
aggregate principal amount at maturity. The Convertible Notes may be redeemed,
in whole or in part, at the option of the Company on or after 23 May 2001 at
the accreted value thereof, together with accrued and unpaid interest. Upon a
change in control of SC-U.S. Realty, each holder of the Convertible Notes has
the right, at the holder's option, to require SC-U.S. Realty to repurchase
such holder's Convertible Notes, in whole or in part, at a purchase price
equal to the accreted value thereof, together with accrued and unpaid interest
through the repurchase date.
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 to $250 million. As of 30 June 2000, the Company had repurchased
11,684,751 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
Group and the distribution of net proceeds received by City Center Retail from
the sale of 23 properties. During the six months ended 30 June 2000, the sale
of these investments realised net proceeds of $213.6 million.
Capital Deployment Activities
During the six months ended 30 June 2000, SC-U.S. Realty deployed an
additional $29.8 million in strategic investment positions, received a
distribution of net proceeds from City Center Retail, in relation to the sale
of 23 properties, of approximately $112.0 million and received net proceeds of
$101.6 million from disposal of other investment positions. As of 30 June
2000, SC-U.S. Realty had outstanding contractual obligations of $46.6 million
to CWS Communities.
SC-U.S. Realty's existing and committed fundings at cost as of 30 June 2000
were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount to
Amount (Amount be
Committed Funded)(/1/) Funded(/1/)
---------- ------------ -----------
(in thousands $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE).................. $ 699,905 $ 699,905 $ --
City Center Retail (Private)............. 175,758 175,758 --
CWS Communities (Private)................ 300,330 253,739 46,591
Regency (NYSE: REG)(/2/)................. 759,807 759,807 --
Storage USA (NYSE: SUS).................. 394,362 394,362 --
Urban Growth Property (Private)(/3/)..... 201,082 201,082 --
Private investment positions............. 40,544 40,544 --
---------- ---------- -------
Total.................................... $2,571,788 $2,525,197 $46,591
========== ========== =======
</TABLE>
5
<PAGE>
--------
(1) Included in Total Amount Committed.
(2) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements.
(3) In addition to the shares held at fair value of $188.6 million, there is
an advance of $12.5 million to Urban Growth Property.
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 with internally generated free cash flow.
6
<PAGE>
SECURITY CAPITAL U.S. REALTY
Consolidated Financial Statements
At 30 June 2000
Unaudited
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Net Assets...................................... 8
Consolidated Statements of Operations...................................... 9
Consolidated Statements of Cash Flows...................................... 10
Consolidated Statements of Changes in Net Assets........................... 11
Consolidated Statements of Changes in Shares Outstanding................... 11
Consolidated Financial Highlights.......................................... 11
Consolidated Schedules of Strategic Investment Positions................... 12
Consolidated Schedules of Other Investment Positions....................... 13
Notes to the Consolidated Financial Statements............................. 14
</TABLE>
7
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF NET ASSETS
At 30 June 2000 and 31 December 1999
(in thousands U.S. $, except share and per share amounts)
<TABLE>
<CAPTION>
June December
2000 1999
---------- ----------
Unaudited Audited
<S> <C> <C>
ASSETS
Strategic investment positions at value (Note 3):
CarrAmerica (Cost $699,905; $699,905, respectively)... $ 758,437 $ 604,247
City Center Retail (Cost $175,758; $304,132,
respectively)........................................ 175,758 304,132
CWS Communities (Cost $253,739; $236,488,
respectively)........................................ 253,739 236,488
Regency (Cost $759,807; $759,807, respectively)....... 813,454 685,465
Storage USA (Cost $394,362; $394,362, respectively)... 347,271 355,911
Urban Growth Property (Cost $201,082; $188,582,
respectively)........................................ 201,082 188,582
Other investment positions at value (Note 3):
Security Capital Group Incorporated (Cost $0; $165,000
respectively)........................................ -- 95,780
Private investment positions (Cost $40,544; $42,019,
respectively)........................................ 40,544 42,019
---------- ----------
Total investments....................................... $2,590,285 $2,512,624
Cash and cash equivalents............................... 272 2,732
Accounts receivable and other (Note 4).................. 18,413 15,530
---------- ----------
TOTAL ASSETS............................................ $2,608,970 $2,530,886
---------- ----------
LIABILITIES
Accounts payable and accrued expenses (Note 5).......... $ 4,868 $ 6,033
Taxes payable (Note 9).................................. 5,182 4,818
Line of credit (Note 6)................................. 42,500 239,000
Convertible notes (Note 7).............................. 394,714 386,157
---------- ----------
TOTAL LIABILITIES....................................... $ 447,264 $ 636,008
---------- ----------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY)................. $2,161,706 $1,894,878
========== ==========
Authorised 250,000,000 shares of $4.00 par value,
86,561,872 shares issued and 74,877,121 outstanding at
30 June 2000 and 86,561,872 issued and 76,700,437
outstanding at 31 December 1999 (Note 13).............. $ 346,247 $ 346,247
Share premium account (Note 14)......................... 1,536,855 1,564,939
---------- ----------
PAID-IN CAPITAL......................................... $1,883,102 $1,911,186
Legal reserve (Note 12)................................. $ 30,375 $ 30,375
Reserve for own shares (Note 14)........................ 212,304 184,219
Undistributed net operating income...................... 254,356 219,144
Accumulated net realised (loss)/gain.................... (71,215) 11,844
Unrealised appreciation/(depreciation) on strategic
investment and other investment positions.............. 65,088 (277,671)
Acquisition of own shares (Note 14)..................... (212,304) (184,219)
---------- ----------
SHAREHOLDERS' EQUITY.................................... $2,161,706 $1,894,878
========== ==========
Net Asset Value per share (Note 14)..................... $ 28.87 $ 24.70
</TABLE>
The accompanying notes form an integral part of the financial statements.
8
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended 30 June 2000 and 1999
(in thousands U.S. $)
Unaudited
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
INCOME
Gross dividends from strategic investment positions:
CarrAmerica.............................................. $ 26,458 $26,458
City Center Retail(/1/).................................. -- --
CWS Communities.......................................... 7,133 3,148
Regency (Note 3A)........................................ 32,902 26,320
Storage USA.............................................. 16,236 15,766
Urban Growth Property(/1/)............................... -- 213
-------- -------
$ 82,729 $71,905
Gross dividends from other investment positions............ -- 6,311
-------- -------
$ 82,729 $78,216
Interest income from affiliate............................. 745 1,788
Interest income from non-affiliate and other income........ 2,552 1,566
-------- -------
TOTAL GROSS INCOME......................................... $ 86,026 $81,570
Withholding tax on dividends received.................... (12,355) (9,270)
-------- -------
TOTAL INCOME............................................... $ 73,671 $72,300
======== =======
EXPENSES
Operating advisor fees..................................... $ 15,106 $16,713
Custodian fees............................................. 333 236
Directors fees............................................. 135 60
Professional expenses...................................... 664 629
Administrative expenses.................................... 347 703
Amortisation of convertible notes deferred costs........... 789 789
Taxes...................................................... 1,901 2,089
Line of credit arrangement and commitment fees............. 729 95
Interest on line of credit................................. 5,163 8,639
Interest on convertible notes.............................. 13,292 13,617
-------- -------
TOTAL EXPENSES............................................. $ 38,459 $43,570
-------- -------
NET OPERATING INCOME....................................... $ 35,212 $28,730
NET REALISED AND UNREALISED GAIN/(LOSS) ON STRATEGIC
INVESTMENT AND OTHER INVESTMENT POSITIONS
Net realised (loss)/gain on strategic investment and other
investment positions...................................... $(83,059) $ 1,620
Net increase in appreciation on strategic investment and
other investment positions................................ 342,759 26,963
-------- -------
NET GAIN ON STRATEGIC INVESTMENT AND OTHER INVESTMENT
POSITIONS................................................. $259,700 $28,583
-------- -------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $294,912 $57,313
======== =======
</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.
The accompanying notes form an integral part of the financial statements.
9
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND 1999
(in thousands U.S. $)
Unaudited
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Operating Activities:
Increase in net assets resulting from operations....... $ 294,912 $ 57,313
Adjustments to reconcile increase in net assets
resulting from operations to net cash provided by
operating activities:
Movement in realised loss/(gain)..................... 83,059 (1,620)
Movement in unrealised gain.......................... (342,759) (26,963)
Movement in accretion on convertible notes........... 8,557 7,992
Movement in convertible notes deferred costs......... 789 789
Changes in operating assets and liabilities:
Accounts receivable and other...................... (3,672) 4,879
Accounts payable and accrued expenses.............. (1,360) 62,109
Operating advisor fees payable..................... 195 (5,718)
Taxes payable...................................... 364 1,475
--------- ---------
Net cash provided by operating activities........ $ 40,085 $ 100,256
--------- ---------
Investing Activities:
Return of capital--distribution from City Center
Retail................................................ $ 111,989 $ --
Proceeds from sale of investment in Security Capital
Group................................................. 96,889 --
Proceeds from sale of other investment positions....... 4,712 82,416
Fundings in strategic investment positions:
CarrAmerica.......................................... -- (51)
City Center Retail................................... -- (78)
CWS Communities...................................... (17,251) (70,926)
Advance--CWS Communities............................. -- (24,000)
Regency (Note 3A).................................... -- (18)
Storage USA.......................................... -- (88)
Urban Growth Property................................ (12,500) --
Fundings in other investment positions................. (1,800) --
--------- ---------
Net cash provided/(used) by investing
activities...................................... $ 182,039 $ (12,745)
--------- ---------
Financing Activities:
Acquisition of own shares.............................. $ (28,084) $(117,955)
Net (repayments)/drawdowns from line of credit......... (196,500) 31,500
--------- ---------
Net cash (used) in financing activities.......... $(224,584) $ (86,455)
--------- ---------
Net (decrease)/increase in cash and cash equivalents..... $ (2,460) $ 1,056
Cash and cash equivalents, beginning of the period....... 2,732 2,994
--------- ---------
Cash and cash equivalents, end of the period............. $ 272 $ 4,050
========= =========
Supplemental disclosure of cash flow information:
Tax paid............................................... $ 1,537 $ 619
========= =========
Interest paid on borrowings............................ $ 10,680 $ 14,264
========= =========
</TABLE>
The accompanying notes form an integral part of the financial statements.
10
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the six months ended 30 June 2000 and 1999
(in thousands U.S. $, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C> <C>
OPERATIONS:
Net operating income............................... $ 35,212 $ 28,730
Net realised (loss)/gain on strategic investment
and other investment positions.................... (83,059) 1,620
Increase in appreciation on strategic investment
and other investment positions.................... 342,759 26,963
---------- ---------- ---
Increase in net assets resulting from operations... $ 294,912 $ 57,313
CAPITAL TRANSACTIONS:
(Decrease) in share premium account................ $ (28,084) $ (117,955)
Increase in reserve for own shares................. 28,084 117,955
Acquisition of own shares during the period........ (28,084) (117,955)
---------- ---------- ---
(Decrease) in net assets resulting from capital
transactions...................................... $ (28,084) $ (117,955)
NET ASSETS:
Increase/(Decrease) in net assets during the
period............................................ $ 266,828 $ (60,642)
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 $254,356 for
2000 and $176,882 for 1999)....................... $2,161,706 $2,165,743
========== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHARES OUTSTANDING
For the six months ended 30 June 2000 and 1999
Unaudited
<TABLE>
<CAPTION>
Number of shares
----------------------
2000 1999
---------- ----------
<S> <C> <C>
At the beginning of the period.......................... 76,700,437 86,561,872
Acquisition of own shares during the period............. (1,823,316) (6,030,255)
---------- ----------
At the end of the period................................ 74,877,121 80,531,617
========== ==========
</TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
For the six months ended 30 June 2000 and 1999
Unaudited
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Per share data:
Net asset value at the beginning of the period................. $24.70 $25.72
Net operating income........................................... 0.46 0.33
Net change in movement in unrealised appreciation and realised
gain on strategic investment and other investment positions in
the period.................................................... 3.39 0.33
Acquisition of own shares during the period.................... 0.32 0.51
------ ------
Net Asset Value per share at the end of the period............... $28.87 $26.89
====== ======
</TABLE>
The accompanying notes form an integral part of the financial statements.
11
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
AT 30 JUNE 2000
(in thousands U.S. $, except shares held and %)
Unaudited
<TABLE>
<CAPTION>
Number of
Strategic Investment Security Shares Percentage
Positions Type Held Cost Value of Total Assets
-------------------- ------------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,905 $ 758,437 29.1%
City Center Retail...... Common Stock 30,390,000 175,758 175,758 6.7%
CWS Communities......... Common Stock 25,340,858 253,739 253,739 9.7%
Regency (Note 3A)....... Common Stock 34,273,236 759,807 813,454 31.2%
Storage USA............. Common Stock 11,765,654 394,362 347,271 13.3%
Urban Growth Proper-
ty(/1/)................ Common Stock 18,824,100 201,082 201,082 7.7%
---------- ---------- ----
Total investment in
strategic positions.... $2,484,653 $2,549,741 97.7%
========== ========== ====
--------
(1) In addition to the shares held at fair value of $188.6 million, there is an
advance of $12.5 million to Urban Growth Property
AT 31 DECEMBER 1999
(in thousands U.S. $, except shares held and %)
Audited
<CAPTION>
Number of
Strategic Investment Security Shares Percentage
Positions Type Held Cost Value of Total Assets
-------------------- ------------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
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 (Note 3A)....... 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 financial statements.
12
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF OTHER INVESTMENT POSITIONS
AT 30 JUNE 2000
(in thousands U.S. $, except %)
Unaudited
<TABLE>
<CAPTION>
Percentage
of Total
Other Investment Positions Cost Value Assets
-------------------------- -------- -------- ----------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5% or
greater interest................................. $ 40,215 $ 40,215 1.5%
Companies in which SC-U.S. Realty owns less than
5% interest...................................... 329 329 0.1%
-------- -------- ---
Total investment in private investment positions.. $ 40,544 $ 40,544 1.6%
-------- -------- ---
Total investment in other investment positions.... $ 40,544 $ 40,544 1.6%
======== ======== ===
AT 31 DECEMBER 1999
(in thousands U.S. $, except %)
Audited
<CAPTION>
Percentage
of Total
Other Investment Positions Cost Value 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 financial statements.
13
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANISATION
Security Capital U.S. Realty (the "Company") (New York Stock Exchange
("NYSE"): RTY, Amsterdam AEX Stock Exchange ISIN Code: LU0060100673, Bloomberg
Symbol: SCUS NA, Reuters Symbol: CAPAu.AS) was incorporated on 7 July 1995.
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"). All accounts of HOLDINGS have
been consolidated with the Company and all significant intercompany
transactions have been eliminated upon consolidation. References herein to SC-
U.S. Realty are to the consolidated entity consisting of Security Capital U.S.
Realty and HOLDINGS, unless noted otherwise.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States and with
Luxembourg regulatory requirements. The preparation of financial statements in
accordance with GAAP requires the Company's management to make estimates of
certain reported amounts in the financial statements. Actual results may
differ from those estimates.
A. Fair Value Basis of Presentation
SC-U.S. Realty accounts for its investments at fair value in accordance
with the U.S. specialised industry accounting rules prescribed by the American
Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide
for Investment Companies (the "Guide"). Thus, SC-U.S. Realty's investments in
publicly traded companies are valued at market determined by using closing
market prices on the NYSE, or other recognised stock exchange when
appropriate, as of the balance sheet date, subject to an appropriate
adjustment for transfer restrictions, if any. For privately held investments
in which SC-U.S. Realty has an ownership interest, SC-U.S. Realty will,
whenever the Board of Directors believes significant developments have
occurred affecting the value of an investment and on at least an annual basis,
utilise valuation evidence and methodologies appropriate to the nature of the
investment to derive fair value. These will include external valuations, cash
flow valuation techniques and valuation information derived through placements
of private company securities as well as review by management for other
specific indicators of changes in value relating to property performance
and/or significant changes in local or general market conditions. The Board of
Directors, in its discretion, may permit some other method of valuation to be
used if it determines that such valuation better reflects the fair value of
any assets of the Company.
Under fair value accounting, unrealised gains or losses are determined by
comparing the fair value of the securities held to the cost of such
securities. Unrealised gains or losses relating to changes in fair value of
SC-U.S. Realty's investments are reported as a component of net earnings.
Deferred income taxes, if any, are recorded at the applicable statutory rate
as the estimate of taxes payable as if such gains were realised. Under current
tax laws, and in light of SC-U.S. Realty's operating methods and plans,
certain of SC-U.S. Realty's investment gains generally are not subject to
income taxes.
As of 30 June 2000 and 31 December 1999, 25.2% and 30.5%, respectively, of
SC-U.S. Realty's investments were in private or untraded securities valued at
their fair value as determined by the Board of Directors, using the
methodology described above. This value may differ from the value that would
have been used had a trading market for these securities existed. The
valuation of assets assumes that any assets disposed of would be sold in an
orderly process; any forced sale of assets under short-term pressures, which
is not foreseen, could adversely affect realisable values.
B. Accounting for Investments and Income
All purchases and sales of publicly traded securities are recorded as of
the trade date (i.e., the date that SC-U.S. Realty's broker actually executes
an order to buy or sell). All purchases and sales of privately held securities
are recorded as of the date the actual purchase or sale is made. Dividend
income is recorded on the ex-dividend
14
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date for each dividend declared by an issuer. Dividends received are presented
on a gross basis. HOLDINGS may be entitled to refunds on a portion of the
withholding tax because the withholding tax is not levied on the portion of
dividends which is a return of capital. Interest income is recorded on the
accrual basis. Interest received is stated net of withholding taxes. Realised
gains and losses on sales of shares are determined on the average cost method.
C. Cash and Cash Equivalents
SC-U.S. Realty considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
D. Deferred Financing Costs/Discounts
Underwriting fees relating to the issuance of the $450 million aggregate
principal amount at maturity of the Company's 2% Senior Unsecured Convertible
Notes due 2003 (the "Convertible Notes") are capitalised and amortised over
the term of the obligation. Discounts on the Convertible Notes are accreted as
a component of interest expense using the effective interest method over the
term of the obligation.
E. New Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the Company
effective 1 January 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 3--INVESTMENTS
SC-U.S. Realty 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 SC-U.S. Realty sponsors, it expects to own substantially more than 50%
of the voting shares. SC-U.S. Realty 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.
The merger of Pacific Retail and Regency occurred on 28 February 1999.
Shareholders of Pacific Retail received 0.48 shares of Regency common stock
for each common share of Pacific Retail they owned. For the six-month periods
ended 30 June 2000 and 1999 and for the year ended 31 December 1999, the
financial information for Pacific Retail has been reflected in the financial
information of Regency.
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 Code 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 SC-U.S. Realty
believed possessed the requisite fundamentals to generate strong cash flow
growth and/or value appreciation. During the first quarter 2000, SC-U.S.
Realty completed the sale of its publicly traded other investment positions
portfolio. SC-U.S. Realty has invested $40.5 million in two private investment
positions, both of which are U.S. real estate operating companies.
As of 31 December 1999, SC-U.S. Realty had deployed a total of $165.0
million in securities of Security Capital Group Incorporated ("Security
Capital Group"). This amount was made up of an investment of $110.0 million
(representing 52,430.9 shares of Class A common stock and $55.0 million
aggregate principal amount of
15
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.5% convertible subordinated debentures due 2016) and an additional $55.0
million (representing 1,964,286 shares of Class B common stock) invested
during Security Capital Group's initial public offering in September 1997. On
13 January 2000, the Board of Directors determined that the securities of
Security Capital Group should be sold. On 22 February 2000, SC-U.S. Realty
sold all the common stock of Security Capital Group, receiving net proceeds of
$57.0 million, and on 14 March 2000, SC-U.S. Realty sold all the debentures of
Security Capital Group, receiving net proceeds of $39.9 million.
NOTE 4--ACCOUNTS RECEIVABLE AND OTHER
<TABLE>
<CAPTION>
At 30 June 2000 At 31 December 1999
--------------------- ---------------------
(in thousands U.S. $) (in thousands U.S. $)
<S> <C> <C>
Dividends.......................... $ 6,901 $ 6,701
Funds in escrow.................... 864 --
Deferred issue costs on Convertible
Notes(/1/)........................ 4,566 5,354
Interest........................... 5,732 3,473
Refund of withholding tax.......... 350 --
Other.............................. -- 2
------- -------
$18,413 $15,530
======= =======
</TABLE>
--------
(1) Represents the underwriting fees of $7.9 million relating to the issuance
of the Convertible Notes (see Note 7). The fees have been deferred and
will be fully amortised over a period of five years starting from the
issue date of 22 May 1998.
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
At 30 June 2000 At 31 December 1999
--------------------- ---------------------
(in thousands U.S. $) (in thousands U.S. $)
<S> <C> <C>
Operating advisor fees............. $2,579 $2,384
Interest payable on Line of
Credit............................ 91 1,108
Interest payable on Convertible
Notes............................. 1,303 1,068
Custodian fees..................... 135 70
Acquisition of own shares.......... -- 239
Other.............................. 760 1,164
------ ------
$4,868 $6,033
====== ======
</TABLE>
NOTE 6--LINE OF CREDIT
On 30 December 1999, the $400 million unsecured line of credit of the
Company, which was guaranteed by HOLDINGS (the "Company Line"), was replaced
by the $350 million unsecured line of credit of HOLDINGS, which is guaranteed
by the Company (the "new HOLDINGS Line") (both lines referred to herein as the
"Lines of Credit").
In an effort to secure investment-grade credit ratings, on 8 December 1998,
the Company converted its $700 million secured line of credit of HOLDINGS (the
"old HOLDINGS Line"), into the Company Line from Commerzbank
Aktiengesellschaft and a consortium of international banks. The Company
received investment-grade ratings from each of Moody's Investor Service
(Baa3), Standard & Poor's Ratings Services (BBB-) and Duff & Phelps Credit
Rating Co. (BBB-). On 30 December 1999 the new HOLDINGS Line was extended for
an additional year and reduced to $350 million.
The earliest date on which the new HOLDINGS 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 new HOLDINGS
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
16
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commitment fee of 0.15% to 0.20% per annum (based on the amount of the line
which remains undrawn). All borrowings under the new HOLDINGS Line are subject
to covenants that SC-U.S. Realty must maintain at all times, including: (i)
unsecured liabilities may not exceed 40% of the market value of a borrowing
base of owned securities, (ii) shareholders' equity must exceed the sum of
$1.5 billion and 75% of the net proceeds of sales of equity securities
thereafter, (iii) a ratio of total liabilities to net worth of not more than
1:1, (iv) a fixed-charge coverage ratio of not less than 1.5:1, (v) an
interest-coverage ratio of not less than 2:1 and (vi) secured debt may not
exceed 10% of consolidated market net worth. As of 30 June 2000, SC-U.S.
Realty was in compliance with these covenants.
SC-U.S. Realty's total indebtedness under the new HOLDINGS Line as of 30
June 2000 and 31 December 1999, were $42.5 million and $239.0 million,
respectively.
Average daily borrowings under the new HOLDINGS Line were $132.5 million
for the six-month period ended 30 June 2000. Average daily borrowings under
the Lines of Credit were $297.9 million for the year ended 31 December 1999.
The weighted average interest rates for these same periods were 7.57% per
annum and 6.60% per annum, respectively.
NOTE 7--CONVERTIBLE NOTES
<TABLE>
<CAPTION>
At 30 June 2000 At 31 December 1999
--------------------- ---------------------
(in thousands U.S. $) (in thousands U.S. $)
<S> <C> <C>
Convertible Notes proceeds......... $360,554 $360,554
Accumulated accretion on Convert-
ible Notes........................ 34,160 25,603
-------- --------
$394,714 $386,157
======== ========
</TABLE>
During May 1998, the Company issued $450 million (aggregate principal
amount at maturity) of Convertible Notes. The Convertible Notes are
convertible at the option of the holder at any time prior to maturity at a
conversion rate equal to 26.39095 shares (giving effect to the one-for-two
reverse stock split which occurred on 18 June 1999) of the Company, each
having a par value of $4.00 (the "Shares"), per $1,000 aggregate principal
amount at maturity of the Convertible Notes. Interest is payable semi-annually
at the rate of 2.0% per annum on 22 May and 22 November of each year
commencing on 22 November 1998. Effective 1 January 1999, the interest rate
payable on the Convertible Notes was increased to 2.5% per annum. The 2.5% per
annum interest rate was in effect until the Company listed certain equity
securities on the NYSE and registered the Convertible Notes and related equity
securities for resale. The Company completed these steps on 30 July 1999 and
as of 1 August 1999, the interest rate on the Convertible Notes was reduced to
2.0% per annum. 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 the earlier to occur of (i) the registration
of the Convertible Notes and related equity securities for resale or (ii) 14
May 2000, and as of the close of business of 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 will accrete 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.
Conversion of the Convertible Notes would be anti-dilutive for the six-
month periods ended 30 June 2000 and 1999.
NOTE 8--ADVISORY AGREEMENT
SC-U.S. Realty has an advisory agreement with Security Capital U.S. Realty
Management Holdings S.A. (the "Operating Advisor"), a wholly owned subsidiary
of Security Capital Group. This agreement requires the Operating Advisor to
provide SC-U.S. Realty with advice with respect to strategy, investments,
financing and certain other administrative matters affecting SC-U.S. Realty.
The Operating Advisor has agreed to identify tangible capital deployment
opportunities in U.S. real estate companies and evaluate such companies'
17
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
competitive positions, management expertise, strategic direction, financial
strength and prospects for long-term sustainable per share cash flow growth.
The Operating Advisor also advises SC-U.S. Realty on obtaining board and
committee representation and management rights from strategic investees. The
agreement automatically renews for successive two-year periods unless either
party gives notice it will not renew. The Operating Advisor subcontracts for
certain services through affiliates based in London, United Kingdom and
Chicago, Illinois, United States. The Operating Advisor is entitled to an
advisory fee, payable monthly in arrears, at an annual rate of 1.25% of the
average monthly value of invested assets (excluding investments in Security
Capital Group securities and investments of short-term cash and cash
equivalents). SC-U.S. Realty pays its own third-party operating and
administrative expenses and transaction costs, although the Operating
Advisor's fee will be reduced to the extent that third-party operating and
administrative expenses (but not transaction costs) exceed 0.25% per annum of
the average monthly value of invested assets (excluding investments in
Security Capital Group securities and investments of short-term cash and cash
equivalents). Such third party operating and administrative costs as a ratio
of the average monthly value of assets were 0.04% and 0.02% for the six months
ended 30 June 2000 and 1999, respectively.
SC-U.S. Realty pays fees to (i) Banque Internationale a Luxembourg as
Administrative Agent, Corporate Agent and Paying Agent, (ii) First European
Transfer Agent S.A. as Registrar and Transfer Agent, and (iii) Security
Capital European Services S.A. as Domiciliary Agent and Service Agent, in
accordance with usual practice in Luxembourg. Such fees are payable quarterly
and are based on SC-U.S. Realty's gross assets.
NOTE 9--TAXATION
The Company, as separate from HOLDINGS, is not liable for any Luxembourg
tax on income. The Company is liable in Luxembourg for a capital tax of 0.06%
per annum of its net asset value. Cash dividends and interest received by the
Company or HOLDINGS on their investments may be subject to non-recoverable
withholding or other taxes in the countries of origin. U.S. withholding tax
rates of 15% were generally in effect for dividends received for all periods
presented.
Under the current United States-Luxembourg tax treaty, the Company believes
that HOLDINGS qualifies for a 15% rate of withholding tax on dividends of
operating income from the REIT investments currently held by HOLDINGS and from
its future REIT investments (if any). The Company also believes that HOLDINGS
will qualify for a 15% rate of withholding tax under the proposed United
States-Luxembourg tax treaty 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.
HOLDINGS, an ordinary corporate taxpayer under Luxembourg law, owns all of
the consolidated group's interests in REITs and other U.S. real estate
companies. Corporations which are resident Luxembourg taxpayers are taxed on
their worldwide net income, determined on the basis of gross income less costs
incurred. Certain items of income and capital gains are excluded from the
calculation of income received for tax purposes, including income and capital
gains from certain investments which meet certain holding period (generally
one calendar year) and size requirements. HOLDINGS operates so as to have the
highest possible percentage of its investments qualify for the exclusion.
Interest accrued on advances from the Company to HOLDINGS is deducted in
determining HOLDINGS' taxable income.
Income paid from HOLDINGS to the Company is subject to various levels of
tax, including withholding taxes. Gross cash (but not accrued) interest
payments from HOLDINGS to the Company are subject to withholding tax at a rate
of 3.75%. No dividends were paid to the Company during the reporting periods.
18
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the six
months ended 30
June
---------------
2000 1999
------- -------
(in thousands
U.S. $)
<S> <C> <C>
Gross cash interest payments................................... $34,932 $16,507
======= =======
Capital tax.................................................... $ 591 $ 1,470
Withholding tax................................................ 1,310 619
------- -------
$ 1,901 $ 2,089
======= =======
</TABLE>
NOTE 10--DIRECTORS' SHARE OPTION EQUIVALENTS
Each of the Company's independent directors has received share option
equivalents ("SOE") of 25,000 Shares 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 ADRs 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 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 (reduction)/charges were $(69,000)
and $0 for the six months ended 30 June 2000 and 1999, respectively. At 30
June 2000, there were 137,500 SOEs granted at a weighted average exercise
price of $17.13, of which 87,500 were vested at a weighted average exercise
price of $17.27.
NOTE 11--COMMITMENTS
SC-U.S. Realty's existing and committed fundings at cost as of 30 June 2000
were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount to
Amount (Amount be
Committed Funded)(/1/) Funded(/1/)
---------- ------------ -----------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE)..................... $ 699,905 $ 699,905 $ --
City Center Retail (Private)................ 175,758 175,758 --
CWS Communities (Private)................... 300,330 253,739 46,591
Regency (NYSE: REG)(/2/).................... 759,807 759,807 --
Storage USA (NYSE: SUS)..................... 394,362 394,362 --
Urban Growth Property (Private)............. 201,082 201,082 --
Private investment positions................ 40,544 40,544 --
---------- ---------- -------
Total..................................... $2,571,788 $2,525,197 $46,591
========== ========== =======
</TABLE>
--------
(1) Included in Total Amount Committed.
(2) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements.
(3) In addition to the shares held at fair value of $188.6 million, there is
an advance of $12.5 million to Urban Growth Property.
19
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SC-U.S. Realty's existing and committed fundings at cost as of 31 December
1999 were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount to
Amount (Amount be
Committed Funded)(/1/) Funded(/1/)
---------- ------------ -----------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE)..................... $ 699,905 $ 699,905 $ --
City Center Retail (Private)................ 350,232 304,132 46,100
CWS Communities (Private)................... 300,329 236,488 63,841
Regency (NYSE: REG)(/2/).................... 759,807 759,807 --
Storage USA (NYSE: SUS)..................... 394,362 394,362 --
Urban Growth Property (Private)............. 188,582 188,582 --
Security Capital Group (NYSE: SCZ).......... 165,000 165,000 --
Private investment positions................ 42,019 42,019 --
---------- ---------- --------
Total..................................... $2,900,236 $2,790,295 $109,941
========== ========== ========
</TABLE>
--------
(1) Included in Total Amount Committed.
(2) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements.
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.
NOTE 12--LEGAL RESERVE
According to Luxembourg law, an annual transfer of 5% of the net profit to
a legal reserve is required until this reserve equals 10% of the value of the
issued Share capital. 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 13--REVERSE STOCK SPLIT
On 17 May 1999, the Company's shareholders approved a one-for-two reverse
stock split. The effective date of the reverse stock split was 18 June 1999,
when every two shares of the Company were automatically converted into one
share. All share and per share amounts have been restated to reflect the
reverse stock split.
NOTE 14--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 to $250 million. As of 30 June 2000, the Company had repurchased
11,684,751 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. The Net Asset Value per share as of 30 June 2000 has
been calculated on 74,877,121 shares outstanding.
20
