<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
SECURITY CAPITAL GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 36-3692698
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
125 Lincoln Avenue
Santa Fe, New Mexico 87501
(Address of principal executive offices and zip code)
(505) 982-9292
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value per share
(Title of class)
<PAGE>
Item 1. Business
Incorporated by reference to "Business" beginning on page 10 of the
prospectus relating to the offering of shares of Class B Common Stock,
$.01 par value per share, of Security Capital Group Incorporated
("Security Capital") included as Exhibit 99.1 hereto (the "Prospectus").
Item 2. Financial Information
Selected Financial Data
Incorporated by reference to "Selected Financial Information"
on page 43 of the Prospectus.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated by reference to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 44
of the Prospectus.
Item 3. Properties
Incorporated by reference to "Business -- Properties" on page 29 of
the Prospectus.
Item 4. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to "Principal Shareholders" and
"Management -- Employment Contracts, Termination of Employment and
Change-In-Control Arrangements" beginning on pages 65 and 39,
respectively, of the Prospectus.
Item 5. Directors and Executive Officers
Incorporated by reference to "Management" beginning on page 31 of
the Prospectus.
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Item 6. Executive Compensation
Incorporated by reference to "Management -- Compensation of
Directors," "Management -- Executive Compensation," "Management --
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements," "Management -- Outside Directors Plan," "Management --
1995 Option Plan" and "Management -- Other Option Plans" beginning on
pages 36, 37, 39, 39, 40 and 41 of the Prospectus.
Item 7. Certain Relationships and Related Transactions
Incorporated by reference to "Relationships with Operating
Companies" and "Certain Relationships and Transactions" beginning on
pages 53 and 63 of the Prospectus.
Item 8. Legal Proceedings
Incorporated by reference to "Business -- Legal Proceedings" on page
29 of the Prospectus.
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters
There is no established public trading market for Security Capital's
Class A Common Stock, $.01 par value per share ("Class A Common Stock").
The Class A Common Stock is not listed or quoted on any securities
exchange, quotation system or over-the-counter market. As of April 2,
1997, there were 557 holders of record of the shares of Class A Common
Stock.
Security Capital has not paid dividends during the two most recent
fiscal years, and does not expect to declare or pay dividends on the
Class A Common Stock. Pursuant to a credit agreement dated as of August
19, 1996, to be filed as an exhibit to this Form 10 Registration
Statement, SC Realty Incorporated ("SC Realty"), a wholly owned
subsidiary of Security Capital through which Security Capital holds its
interests in Security Capital Industrial Trust, Security Capital Pacific
Trust, Security Capital Atlantic Incorporated, Homestead Village
Incorporated and Security Capital U.S. Realty, may not, in any four
quarter period, pay dividends to Security Capital in excess of 100% of SC
Realty's cash flow for such four quarter period. SC Realty is prohibited
from paying any dividends to Security
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<PAGE>
Capital during any period in which an event of default under such credit
agreement is continuing.
Information concerning outstanding securities convertible into or
exercisable for shares of Class A Common Stock is incorporated by
reference to "Shares Available for Future Sale" beginning on page 75 of
the Prospectus.
Item 10. Recent Sales of Unregistered Securities
In February and March 1994, the Registrant sold to accredited investors
approximately 285,136 of its Class A Shares for an aggregate purchase price of
approximately $425,138,832. In June 1994, the Registrant issued to an
accredited investor a warrant to acquire approximately 40,241 Class A Shares in
connection with the acquisition of a portfolio of properties by one of the
Registrant's consolidated operating companies. In August and September 1994,
the Registrant sold approximately 301,968 Class A Shares for an aggregate
purchase price of approximately $266,335,942 and an aggregate principal amount
of $43,996,000 of its 2014 Convertible Debentures (convertible into an
aggregate of approximately 42,061 Class A Shares) to accredited investors. On
January 1, 1995, the Registrant issued an aggregate of approximately 54,767
Class A Shares in connection with the merger of Security Capital Group
Incorporated, a Delaware corporation ("GROUP"), with and into the Registrant.
Pursuant to such transaction, each outstanding share of GROUP's common stock
was converted into 1.22 Class A Shares. Also on January 1, 1995, in connection
with the acquisition of GROUP the Registrant issued approximately 80,494 Class
A Shares and an aggregate principal amount of $70,178,000 of its 2014
Convertible Debentures (convertible into an aggregate of approximately 67,092
Class A Shares) for approximately $70,178,000 of GROUP's outstanding
convertible debentures. In addition, on January 1, 1995, the Registrant issued
43,494 Class A Shares and $32,497,000 of its 2014 Convertible Debentures
(convertible into an aggregate of approximately 31,068 Class A Shares) to
holders of $53,201,000 of convertible notes according to terms of an exchange
offer. During the period March 1996 through July 1996, the Registrant sold an
aggregate of approximately 307,950 Class A Shares and an aggregate principal
amount of $323,048,500 of its 2016 Convertible Debentures (convertible into an
aggregate of approximately 279,962 Class A Shares) to accredited investors. In
June 1996, the Registrant sold 139,000 shares of Series A Preferred Stock
(convertible into a maximum of 105,896 Class A Shares) to an accredited
investor. On April 21, 1997, the Registrant agreed to issue an aggregate of
19,938 Class A Shares in exchange for all of the capital stock of an entity
owned by the Chairman of the Registrant.
On June 9, 1995, the Registrant instituted an interest reinvestment plan with
respect to its 2014 Convertible Debentures, pursuant to which cash interest
paid on the 2014 Convertible Debentures may be reinvested into Class A Shares.
As of March 31, 1997, 7,969 Class A Shares have been issued pursuant to such
plan. On September 4, 1996, the Registrant instituted an interest reinvestment
plan with respect to its 2016 Convertible Debentures, pursuant to which cash
interest paid on the 2016 Convertible Debentures may be reinvested into Class A
Shares. As of March 31, 1997, 928 Class A Shares have been issued pursuant to
such plan.
Since January 1, 1994, the Registrant has granted options to purchase an
aggregate of 75,750 Class A Shares to directors and officers of the Registrant
and its subsidiaries. During 1996, options to purchase 5,353 Class A Shares
at an aggregate exercise price of approximately $1,161,600 and approximately
$2,659,600 of 2014 Convertible Debentures (convertible into approximately 2,542
Class A Shares) were exercised. Since January 1, 1994, the Registrant has
issued an aggregate of 71 Class A Shares to its directors as compensation for
serving in such capacity.
Each non-employee director is currently entitled to receive an annual retainer
of $35,000 in cash, or at the election of the director, Class A Shares.
Each of the foregoing transactions was effected without registration under the
Securities Act in reliance on the exemption from registration provided pursuant
to Section 4(2).
Item 11. Description of the Registrant's Securities to be Registered
Incorporated by reference to "Description of Capital Stock" and
"Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws" beginning on pages 68 and 73 of the Prospectus.
Item 12. Indemnification of Directors and Officers
Article EIGHTH of the Registrant's Charter provides as follows with respect to
the indemnification of directors and officers of the Registrant:
"The Corporation shall have the power, to the maximum extent permitted by
Maryland law in effect from time to time, to obligate itself to indemnify
and to pay or reimburse reasonable expenses in advance of final disposition
of a proceeding to (a) any individual who is a present or former director
or officer of the Corporation or (b) any individual who, while a director
or officer of the Corporation and at the request of the Corporation, serves
or has served as a director, officer, partner or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his
or her status as a present or former director or officer of the
Corporation. The Corporation shall have the power, with the approval of the
Board of Directors, to provide such indemnification and advancement of
expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above and to any employee or agent
of the Corporation or a predecessor of the Corporation."
Article NINTH of the Registrant's Charter provides as follows with respect to
limitation of liability of it directors and officers:
"To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a Maryland
corporation, no director or officer of the Corporation shall be liable to
the Corporation or its stockholders for money damages. Neither the
amendment nor repeal of this Article NINTH, nor the adoption or amendment
of any other provision of the charter or Bylaws of the Corporation
inconsistent with this Article NINTH, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act
or failure to act which occurred prior to such amendment, repeal or
adoption."
Article XIII of the Registrant's Bylaws provides as follows with respect to
indemnification of its directors and officers and advances for expenses:
"To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any individual who is a present or former director or
officer of the Corporation and who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Corporation and at the request of the Corporation, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his or her service in that capacity. The Corporation may, with the
approval of its Board of Directors, provide such indemnification and advance
for expenses to a person who served a predecessor of the Corporation in any of
the capacities described in (a) or (b) above and to any employee or agent of
the Corporation or a predecessor of the Corporation."
"Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the
Corporation inconsistent with this Article, shall apply to or affect in any
respect the applicability of the preceding paragraph with respect to any
act or failure to act which occurred prior to such amendment, repeal or
adoption."
The Registrant has entered into indemnity agreements with each of its officers
and directors which provide for reimbursement of all expenses and liabilities
of such officer or director, arising out of any lawsuit or claim against such
officer or director due to the fact that he or she was or is serving as an
officer or director, except for such liabilities and expenses (a) the payment
of which is judicially determined to be unlawful, (b) relating to claims under
Section 16(b) of the Securities Exchange Act of 1934 or (c) relating to
judicially determined criminal violations.
Item 13. Financial Statements and Supplementary Data
Incorporated by reference to the Security Capital consolidated
financial statements and notes thereto beginning on Page F-2 of the
Prospectus.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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Item 15. Financial Statements and Exhibits
(a) Financial Statements:
See Index to Financial Statements on page F-1 of the
Prospectus, which is incorporated herein by reference.
(b) Exhibits:
See Index to Exhibits, which is incorporated herein by
reference.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY CAPITAL GROUP INCORPORATED
Date: April 29, 1997 By: /s/ JEFFREY A. KLOPF
___________________________________________
Name: Jeffrey A. Klopf
Title: Senior Vice President and Secretary
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INDEX TO EXHIBITS
Document
Number Document Description
--------- --------------------
3.1 Security Capital Group Incorporated ("Security Capital")
Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 4.1 to the Security Capital
Registration Statement on Form S-1 (File No. 333-26037) (the
"Form S-1"))
3.2 Security Capital Amended and Restated Bylaws (incorporated by
reference to Exhibit 4.2 of the Form S-1)
4.1 Form of Rights Agreement, dated as of _____ __, 1997, between
Security Capital and The First National Bank of Boston, as
Rights Agent, including the form of Rights Certificate
(incorporated by reference to Exhibit 4.3 of the Form S-1)
4.2 Form of stock certificate for Class A Common Stock of
Security Capital (to be filed by amendment)
10.1 Investor Agreement, dated as of October 28, 1993, between
Security Capital Atlantic Incorporated ("ATLANTIC") and
Security Capital (incorporated by reference to Exhibit 10.4
to the ATLANTIC Registration Statement on Form S-4 (File No.
333-7071) (the "ATLANTIC Form S-11"))
10.2 Form of Amended and Restated Investor Agreement between
ATLANTIC and Security Capital (incorporated by reference to
Exhibit 10.1 to the ATLANTIC Current Report on Form 8-K filed
March 26, 1997 (File No. 1-12303) (the "ATLANTIC Form 8-K"))
10.3 Investor Agreement, dated as of October 17, 1996, by and
between Homestead Village Incorporated ("Homestead") and
Security Capital (incorporated by reference to Exhibit 10.2
to the Homestead Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 1-12269) (the
"Homestead Form 10-Q"))
10.4 Second Amended and Restated Investor Agreement, dated as of
July 11, 1994, by and between Property Trust of America
("PTA"), a predecessor to Security Capital Pacific Trust
("PTR"), and Security Capital Realty Incorporated, a
predecessor to Security Capital ("SCRI") (incorporated by
reference to Exhibit 10.1 to the PTR Current Report on Form
8-K dated July 19, 1994)
10.5 Form of Third Amended and Restated Investor Agreement between
PTR and Security Capital (incorporated by reference to
Exhibit 10.1 to PTR's Form 8-K filed March 26, 1997 (File No.
1-10272)(the "PTR Form 8-K"))
10.6 Supplemental Investment Agreement, dated as of October 1,
1991, by and between PTA and Southwest Realty Advisors
Incorporated, a predecessor to SCRI (incorporated by
reference to Exhibit 10.70 to PTR's Form S-11 (File No. 33-
43201))
10.7 Second Supplemental Investment Agreement, dated as of
December 7, 1993, by and between PTA and SCRI (incorporated
by reference to Exhibit 10.2 to PTR's Form 8-K dated May 3,
1994)
10.8 Third Supplemental Investment Agreement, dated as of December
6, 1994, by and between PTA and SCRI (incorporated by
reference to Exhibit 10.6 to PTR's Form 10-K for the year
ended December 31, 1994)
10.9 Second Amended and Restated Investor Agreement, dated as of
November 18, 1993, between SCI and SCRI (incorporated by
reference to Exhibit 10.14 to SCI's Form S-3 (File No. 33-
77382))
10.10 Form of Third Amended and Restated Investor Agreement between
SCI and Security Capital (incorporated by reference to
Exhibit 10.1 to SCI's Form 8-K filed March 26, 1997 (File No.
1-12846)(the "SCI Form 8-K"))
10.11 First Supplemental Investment Agreement, dated August 23,
1995, between SCI, Security Capital and SCRI (incorporated by
reference to Exhibit 10.11 to SCI's Form 10-K for the year
ended December 31, 1995)
10.12 Second Amended and Restated REIT Management Agreement, dated
as of June 30, 1996, between ATLANTIC and Security Capital
Realty Services Atlantic Incorporated (incorporated by
reference to Exhibit 10.3 to the ATLANTIC Form S-11)
10.13 Fifth Amended and Restated REIT Management Agreement, dated
as of May 21, 1996, between PTR and Security Capital Pacific
Incorporated (incorporated by reference to Exhibit 10.9 to
PTR's Form 10-K for the year ended December 31, 1996 (the
"PTR Form 10-K"))
10.14 Seventh Amended and Restated REIT Management Agreement, dated
June 30, 1996, between SCI and Security Capital Industrial
Incorporated (incorporated by reference to Exhibit 10 to
SCI's Form 8-K dated August 20, 1996)
10.15 Form of property management agreement for ATLANTIC's
communities (incorporated by reference to Exhibit 10.13 to
the ATLANTIC Form S-11)
10.16 Management Agreement, dated as of September 1, 1995, by and
between PTR and SCRI (incorporated by reference to Exhibit
10.7 to the PTR Form 10-K)
10.17 Administrative Services Agreement, dated as of October 17,
1996, between Homestead and Security Capital (incorporated by
reference to Exhibit 10.11 to the Homestead Form 10-Q)
10.18 Form of Administrative Services Agreement between ATLANTIC
and Security Capital (incorporated by reference to Exhibit
10.2 to the ATLANTIC Form 8-K)
10.19 Form of Administrative Services Agreement between PTR and
Security Capital (incorporated by reference to Exhibit 10.2
to the PTR Form 8-K)
10.20 Form of Administrative Services Agreement between SCI and
Security Capital (incorporated by reference to Exhibit 10.2
to the SCI Form 8-K)
10.21 Advisory Agreement dated July 5, 1995 between Security
Capital U.S. Realty, Security Capital Holdings, S.A. and
Security Capital (EU) Management S.A. (to be filed by
amendment)
10.22 Sub-Advisory Agreement dated July 5, 1995 between Security
Capital (EU) Management S.A. and Security Capital Investment
Research Incorporated (to be filed by amendment)
10.23 Amended and Restated Credit Agreement, dated as of August 19,
1996 between SC Realty Incorporated and Wells Fargo Realty
Advisors Funding, Incorporated, as agent for the financial
institutions identified therein, including form of Revolving
Credit Note (to be filed by amendment)
10.24 Amended and Restated Pledge Agreement, dated as of August 19,
1996, by and between SC Realty Incorporated and Wells Fargo
Realty Advisors, Incorporated (to be filed by amendment)
10.25 Amended and Restated Guaranty, dated as of August 19, 1996,
by Security Capital in favor of Wells Fargo Realty Advisors,
Incorporated (to be filed by amendment)
10.26 Form of Indemnification Agreement entered into between
Security Capital and each of its directors (to be filed by
amendment)
10.27 1996 Security Capital Outside Directors Plan (to be filed by
amendment)
10.28 Security Capital 1995 Option Plan (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.28 of the Form S-1)
10.29 Security Capital Deferred Fee Plan for Directors (to be filed
by amendment)
10.30 Security Capital 1991 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.30 of the Form S-1)
10.31 Security Capital 1991 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.31 of the Form S-1)
10.32 Security Capital 1992 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.32 of the Form S-1)
10.33 Security Capital 1992 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.33 of the Form S-1)
10.34 Security Capital Realty Investors 1991 Option Plan A (as
amended and restated effective December 3, 1996)
(incorporated by reference to Exhibit 10.34 of the Form S-1)
10.35 Security Capital Realty Investors 1991 Option Plan B (as
amended and restated effective December 3, 1996)
(incorporated by reference to Exhibit 10.35 of the Form S-1)
21 Subsidiaries of Security Capital (to be filed by amendment)
99.1 Prospectus relating to the initial public offering of Class B
Common Stock
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion
Dated April 29, 1997
Shares
LOGO
Class B Common Stock
(par value $.01 per share)
All of the shares of Class B Common Stock, par value $.01 per share (the "Class
B Shares"), of Security Capital Group Incorporated ("Security Capital" or the
"Company"), being offered hereby are being offered by Security Capital. Prior
to this offering (the "Offering"), there has been no public market for the
Class B Shares. It is currently anticipated that the initial public offering
price will be between $ and $ per Class B Share. See "Underwriting"
for further information regarding factors to be considered in determining the
initial public offering price.
Security Capital's authorized capital stock includes Class B Shares and Class A
Common Stock, par value $.01 per share (the "Class A Shares," and together with
the Class B Shares, the "Shares"). The rights of holders of Class A Shares and
Class B Shares differ as follows: the holders of Class A Shares are entitled to
one vote, while the holders of Class B Shares are entitled to one two-hundredth
( 1/200th) of a vote, for each share held of record on all matters submitted to
a vote of shareholders; and holders of Class B Shares are entitled to receive
dividends and distributions (including liquidating distributions) equal to one-
fiftieth ( 1/50th) of the amount per share declared by the Board of Directors
of Security Capital (the "Board") for each Class A Share. Upon completion of
the Offering, the holders of the Class A Shares will control approximately
% of the total voting power of Security Capital ( % if the Underwriters'
over-allotment option is exercised in full). Each Class A Share can be
converted into 50 Class B Shares beginning on January 1, 1998 at the option of
the holder thereof.
Application will be made for listing of the Class B Shares on the New York
Stock Exchange ("NYSE") under the symbol " ", although no assurance can be
given that such application will be granted.
Class B Shares are being reserved for sale to certain directors and employees
of the Company and its affiliates at the initial public offering price. See
"Underwriting." Such directors and employees are expected to purchase, in the
aggregate, not more than % of the Class B Shares offered in the Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) SECURITY CAPITAL (2)
- -------------------------------------------------------------
<S> <C> <C> <C>
Per Class B Share $ $ $
- -------------------------------------------------------------
Total (3) $ $ $
- -------------------------------------------------------------
</TABLE>
(1)Security Capital has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by Security Capital
estimated at $ .
(3)Security Capital has granted the Underwriters an option, exercisable within
30 days from the date of this Prospectus, to purchase up to
additional Class B Shares on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Security
Capital will be $ , $ and $ , respectively. See
"Underwriting."
The Class B Shares being offered by this Prospectus are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Davis
Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of
the Class B Shares offered hereby will be made against payment therefor on or
about , 1997, at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO.
, 1997
<PAGE>
No person is authorized to give any information or to make any representations
not contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or the Underwriters. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the Class B Shares in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that
information contained herein is correct as of any time subsequent to the date
hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Use of Proceeds..................... 13
Dividend Policy..................... 13
Capitalization...................... 14
Dilution............................ 15
Business............................ 16
Management.......................... 31
Selected Financial Information...... 43
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 44
Relationships with Operating
Companies.......................... 53
Certain Relationships and
Transactions....................... 63
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Principal Shareholders.............. 65
Description of Capital Stock........ 68
Certain Provisions of Maryland Law
and of Security Capital's Charter
and Bylaws......................... 73
Shares Available for Future Sale.... 75
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Class B Shares.................. 76
ERISA Matters....................... 79
Underwriting........................ 81
Experts............................. 82
Legal Matters....................... 83
Available Information............... 83
Index to Financial Statements....... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS B SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Security Capital intends to furnish its shareholders with annual reports
containing audited consolidated financial statements certified by an
independent public accounting firm and with quarterly reports containing
unaudited consolidated financial information for the first three quarters of
each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A SHARES OR
CLASS B SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION
WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, CLASS A SHARES OR CLASS B
SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by, and should be read in conjunction
with, the more detailed information and financial statements appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information
contained in this Prospectus assumes (i) an estimated initial public offering
price of $ per Class B Share (the midpoint of the range of estimated
initial public offering prices set forth on the cover page of this Prospectus),
(ii) no exercise of the Underwriters' over-allotment option and (iii) approval
by the shareholders of ATLANTIC, PTR and SCI (each as defined below) of the
proposed merger transactions described below (see "Business--The Proposed
Mergers").
SECURITY CAPITAL GROUP INCORPORATED
Security Capital is a real estate research, investment and management company.
Management has assembled a superior team of operating and investment
professionals to implement the firm's strategy. Prior to the Offering, Security
Capital was owned primarily by directors, officers, employees and 65 major
domestic and foreign institutional investors.
Security Capital's strategy is to create the optimal organization to lead and
profit from global real estate securitization. Security Capital will implement
this strategy by:
. Providing leadership in real estate research conducted on a global basis.
Security Capital's proprietary research, which is available to Security
Capital's affiliates, provides a strong foundation for its capital
deployment strategy.
. Continuing to invest its capital in fully integrated, value-added
operating companies that have strong prospects for sustained growth.
Security Capital plans to utilize the results of its research to identify
opportunities in which it can invest its capital in the start-up of
highly focused, private operating companies with the objective of
becoming publicly traded and having the prospect of dominating their
respective niches. In addition, Security Capital will continue to make
investments in public companies in which it can provide strategic and
operating guidance and capital and thereby enable the companies to pursue
an attractive growth strategy.
.Creating a global real estate securities management business.
Since its commencement of operations in 1991, Security Capital has continually
committed research and development capital to generate new start-up, fully
integrated real estate operating companies and new business services. Based on
such research and development activities, Security Capital has established a
range of real estate research, service and management businesses and made a
series of investments in Security Capital Pacific Trust ("PTR"), Security
Capital Industrial Trust ("SCI"), Security Capital Atlantic Incorporated
("ATLANTIC"), Security Capital U.S. Realty ("Security Capital USREALTY") and
Homestead Village Incorporated ("Homestead"), each of which is now publicly
traded. Through March 31, 1997, Security Capital has invested an aggregate of
approximately $2.0 billion in the common shares of PTR, SCI, ATLANTIC, Security
Capital USREALTY and Homestead and warrants of Homestead. Those securities had
an aggregate market value of approximately $2.9 billion (based on the closing
price of those securities on the principal exchange on which such securities
are listed on March 31, 1997). As of April 25, 1997, Security Capital owned
approximately 36% of PTR, 44% of SCI, 51% of ATLANTIC, 37% of Security Capital
USREALTY and 62% of Homestead and, pursuant to a series of investor agreements,
advisory agreements, board representation or other control rights, has
significant influence over the operations of each of these entities. As of
March 31, 1997, these five publicly traded real estate companies had a
collective equity market capitalization (assuming full conversion or exercise
of convertible securities, options and warrants) of approximately $7.8 billion.
Security Capital USREALTY has made strategic investments in three publicly
traded companies, CarrAmerica Realty Corporation ("CarrAmerica"), Storage USA,
Inc. ("Storage USA") and Regency Realty Corporation ("REGENCY"), and one
private company, Pacific Retail Trust ("PACIFIC RETAIL"), which had a
collective equity market capitalization of approximately $3.8 billion as of
March 31, 1997 (assuming contractual equity commitments by investors have been
funded, and full conversion or exercise of convertible securities, options and
warrants). For further information on the Company's relationship to these
publicly traded companies, see "Business--Operating Strategy," "--Operating
Companies Market Price Information and Financial Performance" and
"Relationships with Operating Companies."
3
<PAGE>
Security Capital has several new business initiatives which are in varying
stages of research and development. Security Capital USREALTY also has several
new business initiatives expected to be operational by the end of 1997. See
"Business--Future Strategy." Security Capital believes that an important
component of its future growth will come from new business initiatives and the
implementation of new business strategies, although there can be no assurance
that current new business initiatives will be continued or prove successful.
Security Capital's and its affiliates' principal business activities are
carried out in offices located in Atlanta, Brussels, Chicago, Denver, El Paso,
London, Luxembourg, New York and Santa Fe.
THE PROPOSED MERGER TRANSACTIONS
Security Capital, through its affiliates, currently provides real estate
investment trust ("REIT") management and property management services to each
of ATLANTIC, PTR and SCI. In December 1996, management of Security Capital
proposed to its Board that Security Capital exchange its REIT management
companies and property management companies for common shares of ATLANTIC, PTR
and SCI, respectively. In January 1997, based upon the direction of the Board,
Security Capital proposed to the Board of Directors of ATLANTIC, and the Board
of Trustees of each of PTR and SCI, that each of ATLANTIC, PTR and SCI become
internally managed. On March 24, 1997, Security Capital and each of ATLANTIC,
PTR and SCI entered into Merger and Issuance Agreements (collectively, the
"Merger Agreements"), pursuant to which Security Capital will cause its
affiliates providing REIT management and property management services to each
of ATLANTIC, PTR and SCI to be merged into newly formed subsidiaries of such
respective entities (the "Mergers") with the result that all personnel employed
in the REIT management and property management businesses would become officers
and employees of ATLANTIC, PTR and SCI, respectively. In exchange for the
transfer of those businesses, Security Capital will receive $54,608,549 of
ATLANTIC's shares of common stock, $75,838,457 of PTR's common shares of
beneficial interest and $81,870,626 of SCI's common shares of beneficial
interest. The number of shares of each entity issuable to Security Capital will
depend on the value of such shares on the record date for determining
shareholders entitled to vote at the meetings of shareholders to be held to
consider the respective Mergers, subject to a maximum and minimum number of
shares being issued by each of ATLANTIC, PTR and SCI. Each Merger is subject to
approval of the shareholders of each of ATLANTIC, PTR and SCI, respectively,
and to various customary closing conditions.
In order to allow the common shareholders of ATLANTIC, PTR and SCI,
respectively, to maintain their relative percentage ownership interests in each
of their companies, concurrently with proxy solicitations seeking approval of
the Mergers, each of ATLANTIC, PTR and SCI will conduct a rights offering
entitling its common shareholders (other than Security Capital) to purchase
additional common shares. The rights offering price for each company is
expected to be the same basis at which common shares will be issued to Security
Capital pursuant to the respective Merger Agreements. In addition, as part of
the transactions contemplated by the Merger Agreements, and to permit the
shareholders of ATLANTIC, PTR and SCI to benefit from the Mergers on the same
terms as Security Capital equity holders, Security Capital will issue warrants
to purchase an aggregate of $250 million of Class B Shares ("Warrants") to the
common equity holders (and holders of certain securities convertible into
common shares) of each of ATLANTIC, PTR and SCI (other than Security Capital)
after the closing of the Mergers (the "Warrant Issuance"). The exercise price
of the Warrants will be based on the market price of the Class B Shares on a
date to be established following completion of the Offering, and the Warrants
will have a term of one year.
RISK FACTORS
An investment in the Class B Shares involves certain risks including the
following: (i) recent underlying favorable conditions in the real estate
industry may not continue and Security Capital may not continue to grow at
rates similar to those which it has achieved in the past; (ii) there can be no
assurance that Security Capital will be successful in creating new businesses;
(iii) Security Capital is dependent on dividends, capital gains and management
and service fees from its operating companies to meet its operating needs and
to pay principal and interest on debt; (iv) Security Capital is subject to
general real estate investment risks; (v) there are limitations on the
shareholders' ability to change control of Security Capital; (vi) there has
been no prior market for the Class B Shares; and (vii) investors in the
Offering will experience immediate dilution of net tangible book value of the
Class B Shares. See "Risk Factors."
4
<PAGE>
THE OFFERING
CLASS B COMMON STOCK OFFERED......
COMMON STOCK OUTSTANDING:
<TABLE>
<CAPTION>
Before the
Offering After the Offering
------------------ ------------------
Number Number
(1) Voting % (1) Voting %
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Class A Common Stock (1)................ 1,301,010 100 (2) 1,301,010 (2)
Class B Common Stock (3)................ -- -- (2)
</TABLE>
USE OF PROCEEDS................... The Offering is intended to provide
funds to be used for general corporate
purposes, which may include the
allocation of capital to new
businesses and the partial repayment
of outstanding indebtedness of
Security Capital. See "Use of
Proceeds."
VOTING RIGHTS..................... Generally, the holders of the Class A
Shares and the Class B Shares vote
together as a single class on all
matters submitted to a vote of
shareholders, with each Class A Share
entitled to one vote and each Class B
Share entitled to one two-hundredth
(1/200th) of a vote for each share
held of record. See "Description of
Capital Stock--Common Stock."
DIVIDEND RIGHTS................... Holders of Class B Shares are entitled
to receive dividends and distributions
(including liquidating distributions)
equal to one-fiftieth (1/50th) of the
amount per share declared by the Board
for each Class A Share. Security
Capital does not anticipate paying
cash dividends on the Class A Shares
or the Class B Shares in the
foreseeable future. See "Description
of Capital Stock--Common Stock" and
"Dividend Policy."
CONVERTIBILITY OF CLASS A COMMON Commencing January 1, 1998, each Class
STOCK............................. A Share may be converted into fifty
(50) Class B Shares at the holder's
option. Class B Shares are not
convertible into Class A Shares or any
other security. See "Description of
Capital Stock--Common Stock."
PROPOSED NYSE SYMBOLS:
Class A Common Stock...........
" "
Class B Common Stock...........
" "
- -------
(1) As of March 31, 1997; excludes (i) 191,689 Class A Shares reserved for
issuance upon exercise of options and conversion of the Convertible
Subordinated Debentures due June 30, 2014 (the "2014 Convertible Debentures")
issuable upon exercise of options under Security Capital's employee benefit
plans, (ii) 105,896 Class A Shares reserved for issuance upon conversion of the
Series A Cumulative Convertible Redeemable Voting Preferred Stock (the "Series
A Preferred Stock"), (iii) 682,293 Class A Shares reserved for issuance upon
conversion of outstanding 2014 Convertible Debentures, (iv) 279,949 Class A
Shares reserved for issuance upon conversion of outstanding Convertible
Subordinated Debentures due March 29, 2016 (the "2016 Convertible Debentures"
and together with the 2014 Convertible Debentures, the "Convertible
Debentures") and (v) 69,383 Class A Shares reserved for issuance upon the
exercise of outstanding warrants and conversion of 2014 Convertible Debentures
issuable upon exercise of outstanding warrants.
(2) Does not include voting rights of the holders of the outstanding shares of
Series A Preferred Stock. See "Description of Capital Stock--Preferred Stock."
(3) Excludes an aggregate of $250 million of Class B Shares reserved for
issuance upon the exercise of Warrants to be issued pursuant to the Merger
Agreements and 131,511,000 Class B Shares reserved for issuance upon conversion
of outstanding Class A Shares and Class A Shares issuable upon exercise of
securities convertible or exercisable into Class A Shares in the manner
described in Note (1) above. See "Shares Available for Future Sale."
5
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth summary selected financial information for
Security Capital as of and for the years ended December 31, 1996, 1995, 1994,
1993, 1992 and 1991. The following summary selected financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Company's
consolidated financial statements and notes thereto included in this
Prospectus.
-----------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Dollars in thousands, 1996 1995 (1) 1994 1993 1992 1991
except per share data ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Equity in earnings $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues 145,907 103,634 146,545 10,916 1,592 -
Services Division
revenues (2) 77,512 49,404 - - - -
Total revenues 398,122 200,534 156,855 17,503 3,534 467
Rental expenses 54,050 37,948 23,052 1,428 292 -
General and
administrative (2) 116,122 79,100 18,755 2,555 679 205
Interest expense:
Security Capital:
Convertible
Debentures/notes (3) 93,912 78,785 29,647 1,228 180 -
Line of credit 6,256 5,977 6,424 2,196 960 88
Majority-owned
subsidiaries (4) 17,056 19,042 17,718 362 - -
---------- --------- --------- --------- --------- ---------
Total interest expense 117,224 103,804 53,789 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares (5) $ 24,145 $ (51,112) $ (7,685) $ 5,155 $ 1,014 $ 141
-----------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 (1) 1994 1993 1992 1991
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Series A Preferred Stock
dividends $ 56.25 - - - - -
Net earnings (loss)
attributable to
Class A Shares $ 21.30 $ (57.00) $ (16.74) $ 39.12 $ 21.61 $ 3.96
Class A Share
distributions paid (6) - - $ 33.50 $ 60.00 $ 55.00 $ 24.95
Weighted-average Class A
Shares outstanding 1,133,711 896,681 458,945 131,776 46,913 35,565
-----------------------------------------------------
<CAPTION>
AS OF DECEMBER 31,
1996 1995 (1) 1994 1993 1992 1991
Dollars in thousands ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Investments, at equity $1,438,937 $ 930,043 $ 230,756 $ 161,270 $ 68,160 $ 24,911
Real estate, net of
accumulated
depreciation (1) 1,365,373 865,367 2,005,937 478,630 41,577 -
Total assets 3,071,884 2,005,578 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3) 940,197 718,611 514,383 48,970 6,532 -
Majority-owned
subsidiaries (4) 257,099 118,524 301,787 47,988 - -
Minority interests 394,537 159,339 554,752 157,545 4,884 -
Total shareholders'
equity $1,061,302 $ 679,061 $ 359,859 $ 293,821 $ 57,847 $ 16,314
</TABLE>
- -------
(1) Prior to 1995, Security Capital consolidated the accounts of SCI and
Security Capital Pacific Incorporated ("PACIFIC"). During 1995, Security
Capital's ownership of SCI decreased to less than 50% and PACIFIC was merged
into PTR. Accordingly, these entities were deconsolidated effective January 1,
1995.
(2) Security Capital resulted from the merger of two affiliated, but not
commonly controlled, entities on January 1, 1995 (the "1995 Merger"). See Note
1 to the Company's consolidated financial statements included in this
Prospectus for more information concerning the 1995 Merger and the predecessor
entity.
(3) During 1994, Security Capital made a $757.50 per share distribution of the
2014 Convertible Debentures resulting in a total increase of $417.2 million in
outstanding 2014 Convertible Debentures.
(4) Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies.
(5) On April 17, 1997, shareholders approved an amended and restated charter
which created Class A Shares and Class B Shares. All outstanding common shares
as of April 18, 1997 automatically became Class A Shares and all securities
convertible into or exchangeable for common shares became convertible into or
exchangeable for Class A Shares.
(6) For the years ended December 31, 1994, 1993 and 1992, Security Capital
elected to be taxed as a REIT and made cash distributions to its shareholders.
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Class B Shares offered hereby should consider
carefully the information set forth below, as well as the other information set
forth in this Prospectus. This Prospectus contains, in addition to historical
information, forward looking statements that involve risks and uncertainties.
Those statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company,
its Board or its officers with respect to (i) future revenues, (ii) future
performance of the Company's businesses and (iii) future business initiatives
of the Company. The Company's actual results could differ materially from those
anticipated in the forward looking statements as a result of certain factors,
including those discussed below and elsewhere in this Prospectus.
PAST GROWTH RATE NOT INDICATIVE OF FUTURE RESULTS
Security Capital was started in 1991 and its early stages of development
occurred when it was an optimal time to purchase real estate. Over the five-
year period ended December 31, 1996, Security Capital's book value per share
(after payment of convertible debt interest and preferred stock dividends)
increased at a compounded average growth rate of 10.99% per year. There can be
no assurance that underlying favorable conditions in the real estate industry
will continue or that, in the future, the stock price of the Class A Shares or
Class B Shares will increase, or the book value per share will continue to
grow, at rates similar to those which Security Capital has achieved in the
past.
CREATION OF NEW BUSINESSES
Since its inception, Security Capital has continually devoted substantial
resources to the creation of new businesses. Security Capital currently has
several new business initiatives which are in varying stages of research and
development and Security Capital USREALTY also has several new business
initiatives that are expected to be operational by the end of 1997. These new
business initiatives, to the extent they are developed into new businesses,
will be subject to all risks generally associated with new business activities.
In addition, there can be no assurance that these new business initiatives will
be completed, or if completed, prove to be successful or viable. See
"Business--Future Strategy."
DEPENDENCE ON KEY PERSONNEL
Security Capital's success depends upon attracting and retaining the services
of executive officers, including C. Ronald Blankenship, William D. Sanders and
Thomas G. Wattles, who are members of the Operating Committee, as well as
several key senior officers, consisting of the Managing Directors of its
operating companies and service businesses, including Jeffrey A. Cozad, W.
Joseph Houlihan, Anthony R. Manno, Jr., Caroline S. McBride, Daniel F. Miranda,
Mary Lou Rogers and Paul E. Szurek. Security Capital has experienced
individuals who manage its operating companies, including R. Scot Sellers and
Patrick R. Whelan, Managing Directors of PTR, K. Dane Brooksher and Irving F.
Lyons, III, Co-Chairmen of SCI, Constance B. Moore and James C. Potts, Co-
Chairmen of ATLANTIC, and Michael D. Cryan and David C. Dressler Jr., Co-
Chairmen of Homestead. Security Capital's success will depend, among other
things, on its ability to retain each of the foregoing individuals. Security
Capital's success also depends upon the ability of Security Capital's operating
companies and any new entities it creates to continue to recruit experienced
management. There is substantial competition for qualified personnel in the
real estate industry. Security Capital believes it has an effective succession
plan in place and that several of its officers could serve as Security
Capital's senior executive officers and continue Security Capital's
performance. Senior executives have significant beneficial ownership in
Security Capital which, combined with Security Capital's incentive compensation
programs, enhances Security Capital's ability to retain these persons. The loss
of any of these key personnel could have an adverse effect on Security Capital.
RELIANCE ON DIVIDENDS AND TRANSFERS FROM OPERATING COMPANIES
Security Capital conducts all of its operations through its operating companies
and service businesses. As such, Security Capital is dependent on dividends and
fees from such entities to meet its operating expense needs and to pay
principal and interest on debt, including borrowings under the revolving line
of credit of SC Realty Incorporated ("SC Realty"), a wholly owned subsidiary of
Security Capital which holds the Company's shares of PTR, SCI, ATLANTIC,
Security Capital USREALTY and Homestead and warrants to purchase shares of
Homestead. This revolving line of credit is secured by such securities and is
guaranteed by Security Capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Investing and Financing
Activities--Line of Credit." Although many of the Company's operating companies
are REITs, others are not and the Company's ability to obtain dividends, fees
or other funds from such operating companies depends on the economic
performance of such operating companies, the prior claims of creditors or
holders of preferred
7
<PAGE>
stock of such operating companies and the Company's ability to control or cause
such operating companies to make distributions or such other payments.
LACK OF DIVIDENDS
Security Capital is not a REIT and is not required to make distributions to its
common shareholders. Security Capital does not intend to pay dividends on Class
A Shares or Class B Shares in the foreseeable future.
SUBSTANTIAL LEVERAGE
Security Capital has a substantial amount of leverage and will continue to have
a substantial amount of leverage after the Offering. As of December 31, 1996,
Security Capital had approximately $1.2 billion of consolidated outstanding
long-term indebtedness (of which $257 million represented indebtedness of
Security Capital's consolidated operating companies) and $262 million of
consolidated outstanding short-term indebtedness (of which $228 million
represented indebtedness of Security Capital's consolidated operating
companies). Of such long-term indebtedness, approximately $982 million
consisted of Convertible Debentures (including $42 million of accrued interest
on the Convertible Debentures), which are convertible at the option of the
holders into Class A Shares one year after the Offering or upon redemption of
the Convertible Debentures. The current conversion prices for the Convertible
Debentures are below the Company's estimate of its net asset value per Class A
Share, which is the price at which Class A Shares have been sold in the past.
If the Convertible Debentures were converted, the outstanding long-term
indebtedness would be reduced to approximately $257 million (all of which would
be indebtedness of Security Capital's consolidated operating companies).
Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies. In addition, Security Capital's operating
companies have a substantial amount of indebtedness and, in certain cases, have
issued preferred stock to third parties.
In 1993, Security Capital, through SC Realty, entered into an $85 million
revolving line of credit with Wells Fargo Realty Advisers, Incorporated ("Wells
Fargo"), as agent for a syndicate of banks. Subsequently, this line of credit
was amended and the size of the facility was increased to $250 million and $300
million in 1994 and 1995, respectively. The facility, which is provided by a
group of 11 banks, is effective through November 15, 1998 and had an
outstanding balance of $22 million as of April 25, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Investing and Financing Activities--Line of Credit."
Based on Security Capital's current level of operations and anticipated growth
as a result of pending new business initiatives, Security Capital expects that
cash flows from operations (including dividends and fees received from its
operating companies), the proceeds of the Offering and funds currently
available under its $300 million revolving line of credit will be sufficient to
enable Security Capital to satisfy its anticipated requirements for operating
and investing activities for the next twelve months. Security Capital intends
to finance its long-term business activities (including investments in new
business initiatives) through the proceeds of the Offering, borrowings under an
expanded line of credit and the exercise of the Warrants to be issued as
described herein. In addition, the Company anticipates that its operating
companies will separately finance their activities through cash flow from
operations, sales of equity and debt securities and the incurrence of mortgage
debt or line of credit borrowings. The degree to which Security Capital is
leveraged and to which it is able to meet its financial obligations could
affect its ability to obtain additional financing in the future for refinancing
indebtedness, working capital, capital expenditures, acquisitions, investments
in new businesses, general corporate purposes or other purposes.
LIMITATIONS ON ACQUISITION OF SHARES AND CHANGE IN CONTROL
Ownership Limit
Security Capital's 9.8% ownership limit, as well as the ability of Security
Capital to issue additional Class A Shares, Class B Shares or other classes or
series of stock (which may have rights and preferences senior to the Class B
Shares), may have the effect of delaying or preventing a change in control of
Security Capital without the consent of the Board even if a change in control
were in the shareholders' interests and may also (i) deter tender offers for
Class A Shares or Class B Shares, which offers may be advantageous to
shareholders and (ii) limit the opportunity for shareholders to receive a
premium for their Class A Shares or Class B Shares that might otherwise exist
if an investor were attempting to assemble a block of Class A Shares or Class B
Shares in excess of 9.8% or otherwise effect a change in control of Security
Capital. See "Description of Capital Stock--Restriction on Size of Holdings of
Shares."
Shareholder Purchase Rights
On April 21, 1997, the Board declared a dividend of one preferred share
purchase right (a "Purchase Right") for each Share outstanding. Each Purchase
Right entitles the holder, under certain circumstances, to purchase from
8
<PAGE>
Security Capital, in the event the underlying share is a Class A Share, one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.01 per share (the "Participating Preferred Shares"), at a price of
$6,000 per one one-hundredth of a Participating Preferred Share, subject to
adjustment. In the event the underlying share is a Class B Share, the Purchase
Right entitles the registered holder, under certain circumstances, to purchase
from Security Capital one five-thousandth of a Participating Preferred Share of
Security Capital at a price of $120 per one five-thousandth of a Participating
Preferred Share. Purchase Rights are exercisable when a person or group of
persons (other than Security Capital USREALTY and other affiliates of Security
Capital) acquires 20% or more of the voting power of the voting equity
securities of Security Capital or announces a tender offer for 25% or more of
the voting power of the voting equity securities of Security Capital. Under
certain circumstances, each Purchase Right entitles the holder to purchase, at
the Purchase Right's then current exercise price, a number of Class A Shares or
Class B Shares, as the case may be, having a market value of twice the Purchase
Right's exercise price. The acquisition of Security Capital pursuant to certain
mergers or other business transactions would entitle each holder to purchase,
at the Purchase Right's then current exercise price, a number of the acquiring
company's common shares having a market value at that time equal to twice the
Purchase Right's exercise price. The Purchase Rights held by the triggering 20%
shareholders (other than Security Capital USREALTY or other affiliates of
Security Capital) would not be exercisable.
The Purchase Rights may have the effect of delaying or preventing a change in
control of Security Capital without the consent of the Board even if a change
in control were in the shareholders' interests and may also adversely affect
the voting and other rights of shareholders. See "Description of Capital
Stock--Purchase Rights."
Classified Board; Preferred Stock; Advance Notice Provisions
The Board has been divided into three classes of directors. The terms of the
classes will expire in 1998, 1999 and 2000, respectively. As the term of a
class expires, directors for that class will be elected for a three-year term
and the directors in the other two classes will continue in office. See
"Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws--Classification of the Board."
Security Capital's amended and restated articles of incorporation (the
"Charter") authorizes the Board to reclassify any unissued shares of Security
Capital's stock from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. See
"Description of Capital Stock--General" and "--Preferred Stock."
For nominations or other business to be properly brought before an annual
meeting of shareholders by a shareholder, Security Capital's amended and
restated bylaws (the "Bylaws") require such shareholder to deliver a notice to
the Secretary, absent specified circumstances, not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting setting forth: (i) as to each person whom the shareholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
the election of directors pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); (ii) as to any other business
that the shareholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the shareholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such shareholder as it appears on Security
Capital's books and of such beneficial owner and (y) the number of Shares which
are owned beneficially and of record by such shareholder and such beneficial
owner, if any.
The classified Board, the issuance of preferred stock and the advance notice
provisions discussed in the preceding paragraphs each could have the effect of
delaying or preventing a change in control of Security Capital even if a change
in control were in the shareholders' interests.
POSSIBLE ADVERSE CONSEQUENCE OF LIMITS ON OWNERSHIP OF SHARES
As noted above under "--Limitations on Acquisition of Shares and Change in
Control," the Charter restricts ownership of more than 9.8% of the number or
value of the outstanding Class A Shares or Class B Shares by any single
shareholder except Security Capital USREALTY. The Board, in its sole
discretion, may waive this restriction. Shares acquired in breach of the
limitation may be redeemed by Security Capital at the average daily
9
<PAGE>
closing sales price per Class A Share or Class B Share, as applicable, during
the 30-day period ending on the business day prior to the redemption date. A
transfer of such Shares to a person who, as a result of the transfer, violates
the ownership limit may be void under some circumstances. See "Description of
Capital Stock--Restriction on Size of Holdings of Shares" for additional
information regarding the ownership limit.
CERTAIN RISKS RELATING TO THE INVESTMENT COMPANY ACT
Security Capital is not registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), in reliance on an exemption set forth
in the rules promulgated thereunder. Security Capital is not required to
register as an investment company because it is principally engaged in the real
estate business through companies that it primarily controls. As of April 25,
1997, Security Capital owned approximately 36% of PTR, 44% of SCI, 51% of
ATLANTIC, 37% of Security Capital USREALTY and 62% of Homestead which, together
with certain investor agreements, advisory agreements, board representation or
other control rights, allows Security Capital to exert significant influence
over the operations of each of these entities. Security Capital currently
intends to exert similar influence over any other operating company through
which it makes future investments. However, to the extent Security Capital does
not elect to participate in future equity offerings by its operating companies,
its ownership interest in and control over such companies could diminish, and
the Company could potentially be required to register as an investment company
under the Investment Company Act. Security Capital would be materially
adversely affected if it were required to register as an investment company
under the Investment Company Act.
CERTAIN TAX RISKS RELATING TO STATUS OF SECURITY CAPITAL USREALTY
Security Capital USREALTY was organized in 1995 principally to own significant
strategic positions in leading value-added real estate operating companies
based in the United States. The Company has been advised by Security Capital
USREALTY that Security Capital USREALTY is not currently, and intends to
operate so as not to become, a Passive Foreign Investment Company ("PFIC") or
be subject to the accumulated earnings tax for United States income tax
purposes. Characterization of Security Capital USREALTY as a PFIC could
potentially subject the Company to income tax on its pro rata share of the
undistributed income of Security Capital USREALTY. In addition, application of
the accumulated earnings tax to Security Capital USREALTY could potentially
subject Security Capital USREALTY to a 39.6% tax rate on its "accumulated
taxable income" for United States income tax purposes.
GENERAL REAL ESTATE INVESTMENT RISKS
Although Security Capital owns no real estate, its operating companies, and
companies in which its affiliates may invest, own real estate. Real property
investments are subject to varying degrees of risk. Real estate cash flows and
values are affected by a number of factors, including changes in the general
economic climate, local conditions (such as an oversupply of properties or a
reduction in rental demand in an area), the quality and philosophy of
management, competition from other available properties and the ability of the
owner to provide adequate maintenance and insurance and to control operating
costs. Real estate cash flows and values are also affected by such factors as
government regulations, including zoning and tax laws, interest rate levels,
the availability of financing and potential liability under, and changes in,
environmental and other laws. Since a significant portion of Security Capital's
operating companies' income is derived from rental income from real property,
their respective income and distributable cash flow would be adversely affected
if a significant number of tenants were unable to meet their obligations, or if
such operating companies were unable to lease properties on economically
favorable terms.
Equity real estate investments are relatively illiquid and therefore may tend
to limit the ability of Security Capital's operating companies to react
promptly to changes in economic or other conditions. In addition, certain
significant expenditures associated with equity investments (such as mortgage
payments, real estate taxes and maintenance costs) are generally not reduced
when circumstances cause a reduction in income from the investments.
In addition, the market price of the Class B Shares may be affected by the
market prices of shares of Security Capital's real estate operating companies,
which in turn may be affected by risks generally associated with investments in
real estate, including risks associated with acquisition and disposition of
real estate assets, development or redevelopment of properties and, in certain
cases, risks generally associated with investments in REITs.
10
<PAGE>
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate, including those that operate in the regions in which
Security Capital's operating companies' properties are located, that compete
with Security Capital's operating companies in seeking land for development,
properties for acquisition and disposition and tenants for properties. All of
the operating companies' properties are located in developed areas that include
other similar properties. The number of competitive properties in a particular
area could have a material adverse effect on the operating companies' ability
to lease units and on the rents charged. In addition, other forms of properties
provide alternatives to tenants of the operating companies' properties (for
example, single family residential housing may be an alternative to multifamily
housing).
The global real estate securities management business of Security Capital will
compete for capital and investment opportunities with a large number of
investment management firms as well as certain insurance companies, commercial
banks and other financial institutions, some of which may have greater access
to capital and other resources and which may offer a wider range of services
than Security Capital. Real estate investment management firms can be formed
with relatively small amounts of capital and depend most significantly on the
continued involvement of their professional staff. The Company believes that
competition among real estate investment management firms is affected
principally by investment performance, development and implementation of
investment strategies, information technologies and databases and client
service performance.
NO PRIOR MARKET FOR CLASS B SHARES
Prior to the Offering, there has been no public market for the Class B Shares.
Although application will be made to list the Class B Shares on the NYSE, there
can be no assurance the Class B Shares will be so listed or that an active
trading market will develop. From time to time, the stock market experiences
significant price and volume volatility, which may affect the market price of
the Class B Shares for reasons unrelated to Security Capital's performance. In
addition, the initial public offering price may not accurately reflect the
market price of the Class B Shares.
EFFECT ON CLASS B SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Class B Shares, or the perception that such
sales could occur, could adversely affect the prevailing market price for Class
B Shares. Upon completion of the Offering, Security Capital will have Class B
Shares outstanding. All such shares may be sold by non-affiliates in the public
markets without limitation. In addition, upon completion of the Offering,
Security Capital expects to have 1,301,010 Class A Shares outstanding, which
will be convertible beginning January 1, 1998 into a total of 65,050,500 Class
B Shares, and 139,000 shares of Series A Preferred Stock outstanding,
convertible into a maximum of 105,896 Class A Shares. As of March 31, 1997,
Security Capital also had outstanding (i) approximately $714 million principal
amount of its 2014 Convertible Debentures, convertible into an aggregate of
682,293 Class A Shares, (ii) approximately $323 million principal amount of its
2016 Convertible Debentures, convertible into an aggregate of 279,949 Class A
Shares, (iii) warrants to purchase 40,241 Class A Shares and approximately $30
million principal amount of 2014 Convertible Debentures (convertible into
29,142 Class A Shares) and (iv) options to purchase 138,521 Class A Shares and
approximately $56 million principal amount of 2014 Convertible Debentures
(convertible into 53,168 Class A Shares) under Security Capital's employee
benefit plans. All such Class A Shares, and the Class B Shares into which they
may be converted, may be sold in the public markets in the future pursuant to
registration rights or available exemptions from registration. In addition,
after consummation of the Mergers, Security Capital is expected to issue
Warrants to purchase a total of $250 million of Class B Shares (the number of
which shares will be based on the price of the Class B Shares on a date to be
established following completion of the Offering), which underlying Class B
Shares may be sold by non-affiliates in the public markets without limitation.
See "Shares Available for Future Sale." No prediction can be made regarding the
effect of future sales of Class B Shares or Class A Shares, or the conversion
of Class A Shares into Class B Shares, on the market price of Class B Shares.
ENVIRONMENTAL
Security Capital, through certain of its operating companies, is subject to
environmental and health and safety laws and regulations related to the
ownership, operation, development and acquisition of real estate. Under such
laws and regulations, Security Capital may be liable for, among other things,
the costs of removal or remediation of certain hazardous substances, including
asbestos-related liability. Such laws and regulations often impose liability
without regard to fault.
11
<PAGE>
As part of its due diligence procedures, Security Capital's operating companies
have conducted Phase I environmental assessments on each of their respective
properties prior to their acquisition; however, there can be no assurance that
such assessments have revealed all potential environmental liabilities.
Security Capital is not aware of any environmental condition on any of its
operating companies' properties which is likely to have a material adverse
effect on Security Capital's financial position or results of operations;
however, there can be no assurance that any such condition does not exist or
may not arise in the future.
DILUTION
The pro forma net tangible book value per Class B Share of Security Capital's
assets after the Offering will be lower than the initial public offering price
per Class B Share in the Offering. Accordingly, persons acquiring Class B
Shares in the Offering will experience immediate dilution of $ per Class B
Share (or $ per Class B Share assuming conversion of the outstanding
Convertible Debentures) in the net tangible book value of Class B Shares
acquired in the Offering. See "Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to Security Capital from the sale of the Class B Shares
offered hereby, after payment of all expenses of the Offering, are expected to
be approximately $ million. The net proceeds will be used for general
corporate purposes, which may include the allocation of capital to new
businesses and the partial repayment of outstanding indebtedness. If the
Underwriters' over-allotment option to purchase Class B Shares is exercised in
full, the additional net proceeds of approximately $ million will be used
for the same purposes. At April 25, 1997, SC Realty, a wholly owned subsidiary
of Security Capital, had $22 million in outstanding borrowings under its $300
million revolving line of credit with Wells Fargo and outstanding borrowings
under such line of credit are expected to be approximately $ million at the
time of the closing of the Offering. Borrowings under the line of credit bear
interest, at SC Realty's option, at either (i) LIBOR plus a margin of 1.50% or
(ii) the higher of the federal funds rate plus a margin of .50% or Wells
Fargo's prime rate, with interest payable monthly in arrears. The line of
credit is guaranteed by Security Capital and is secured by its shares in PTR,
SCI, ATLANTIC, Security Capital USREALTY and Homestead, as well as its warrants
to acquire shares of Homestead. At March 31, 1997, the aggregate market value
of the securities pledged pursuant to the line of credit was approximately $2.9
billion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Investing and Financing Activities--Line of Credit."
DIVIDEND POLICY
Security Capital is not a REIT and is not required to make distributions to its
common shareholders. The declaration and payment of dividends by Security
Capital is subject to the discretion of the Board. Any determination as to the
payment of dividends will depend upon the results of operations, capital
requirements and financial condition of Security Capital and such other factors
as the Board deems relevant. The Company believes that there currently are
substantial investment opportunities available to Security Capital and, as a
result, the Board intends to follow a policy of retaining earnings to finance
Security Capital's growth and for general corporate purposes. Therefore,
Security Capital does not anticipate paying any cash dividends on the Class A
Shares or the Class B Shares in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Security Capital as of
December 31, 1996 and as adjusted to give effect to (i) the Offering ($ in
net proceeds based on a Class B Share price equal to the mid-point of the range
set forth on the cover hereof), (ii) the collection subsequent to December 31,
1996 of subscriptions receivable for 2016 Convertible Debentures ($96,522,500)
and Class A Shares ($96,522,500), which subscriptions were received prior to
March 31, 1997 and (iii) the application of the proceeds therefrom. The table
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
---------------------
DECEMBER 31, 1996
AS
HISTORICAL ADJUSTED
---------- ---------
<S> <C> <C>
Dollars in thousands
Long-term debt:
Security Capital
2014 Convertible Debentures (1) $ 713,677 $ 713,677
2016 Convertible Debentures (2) 226,520 323,042
Majority-owned subsidiaries (3)
Mortgage notes payable 257,099 257,099
---------- ---------
Total long-term debt 1,197,296 1,293,818
---------- ---------
Minority interests 394,537
Shareholders' equity:
Class A Shares, par value $.01 per share; 20,000,000
shares
authorized; 1,209,009 shares issued (4); 1,301,010
shares issued as
adjusted (4); Class B Shares, par value $.01 per
share; 229,861,000 shares authorized;
shares issued as adjusted (5) 12
Series A Preferred Stock, par value $.01 per share;
139,000 shares issued and outstanding; stated
liquidation preference of $1,000 per share (6) 139,000 139,000
Additional paid-in capital 985,392
Accumulated deficit (63,102)
---------- ---------
Total shareholders' equity 1,061,302
---------- ---------
Total capitalization $2,653,135 $
========== =========
</TABLE>
- --------
(1) Convertible into 682,293 Class A Shares. Does not include $87,221,762
principal amount of 2014 Convertible Debentures issuable upon exercise of
outstanding options and warrants convertible into 83,422 Class A Shares.
(2) Convertible into 196,308 (historical) and 279,949 (as adjusted) Class A
Shares, respectively.
(3) Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies.
(4) Does not include an aggregate of 1,248,473 (historical) and 1,329,210 (as
adjusted) Class A Shares, respectively, reserved for issuance upon exercise of
outstanding options or warrants or upon conversion of the 2014 Convertible
Debentures, the 2016 Convertible Debentures or the Series A Preferred Stock.
(5) Does not include an aggregate of 65,050,500 Class B Shares reserved for
issuance upon conversion of Class A Shares or $250 million aggregate amount of
Class B Shares issuable upon exercise of Warrants to be issued in connection
with the Mergers.
(6) Convertible into a maximum of 105,896 Class A Shares.
14
<PAGE>
DILUTION
At December 31, 1996, Security Capital had a net tangible book value of $779.7
million, or $12.90 per Class B Share based on 60,450,450 outstanding Class B
Shares (assuming conversion of all Class A Shares outstanding on such date into
Class B Shares). Net tangible book value per Class B Share is defined as the
book value of the Company's tangible assets, less all liabilities, divided by
the number of Class B Shares outstanding.
After giving effect to the sale by Security Capital of Class B Shares
in the Offering at an assumed initial public offering price of $ per
share (after deducting the underwriting discount and the estimated expenses
associated with the Offering payable by the Company), Security Capital's pro
forma net tangible book value as of December 31, 1996 would have been $
million or $ per Class B Share (assuming conversion of all Class A Shares
outstanding on such date into Class B Shares), representing an immediate
increase in net tangible book value of $ per Class B Share to the existing
shareholders, and an immediate dilution to new investors of $ per Class B
Share.
The following table illustrates this per share dilution:
------------------
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Class B Share $
Net tangible book value per Class B Share at December
31, 1996 (1) $ 12.90
Increase in net tangible book value per Class B Share
attributable to new investors (1) $
Pro forma net tangible book value per Class B Share
after the Offering (1) $
Dilution per Class B Share to new investors $
=========
</TABLE>
- --------
(1) Assumes conversion of all Class A Shares outstanding on December 31, 1996
into Class B Shares.
The following table sets forth, as of December 31, 1996, (i) the number of
Class B Shares purchased from the Company, assuming conversion of all Class A
Shares outstanding on such date into Class B Shares, (ii) the total
consideration paid and (iii) the average price per share paid by the existing
shareholders, as compared with (x) the number of Class B Shares to be purchased
from the Company, (y) the total consideration to be paid and (z) the average
price per share to be paid by new investors:
---------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
--------------------- ----------------------- PER CLASS B
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders 60,450,450 % $842,845,000 % $13.94 (1)
New investors % $ % $
---------- --------- ------------ ---------
Total 100.00% $ 100.00%
========== ========= ============ =========
</TABLE>
- --------
(1) All existing shareholders have either purchased the Class A Shares as a
unit including Convertible Debentures or received a $757.50 per share
distribution of the 2014 Convertible Debentures during 1994. On a fully
converted basis, existing shareholders have paid an average price of $17.66 per
share.
The foregoing dilution information assumes no conversion of outstanding Series
A Preferred Stock, 2014 Convertible Debentures or 2016 Convertible Debentures
and no exercise of warrants and options, all of which are convertible into, or
exercisable for, Class A Shares or 2014 Convertible Debentures. If all such
convertible securities were converted into, or exercised for, Class A Shares,
an additional 1,248,473 Class A Shares (convertible into 62,423,650 Class B
Shares) would have been outstanding as of December 31, 1996 and the Company
would have reduced its liabilities by $982.6 million and increased its
shareholders' equity by $1,188.1 million as of such date. As a consequence,
based on a pro forma net tangible book value of $ per Class B Share after
the Offering and an assumed initial public offering price of $ per
Class B Share, dilution to investors would have been $ per Class B Share if
all such convertible securities were issued and converted into, or exercised
for, Class B Shares.
Based on the assumptions set forth in the immediately preceding paragraph, the
comparison of consideration paid by existing shareholders to new investors
would be as follows as of December 31, 1996:
---------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
---------------------- ------------------------- PER CLASS B
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders 122,874,100 % $2,169,973,000 % $17.66
New investors % $ % $
----------- --------- -------------- ---------
Total 100.00% $ 100.00%
=========== ========= ============== =========
</TABLE>
15
<PAGE>
BUSINESS
OVERVIEW AND STRATEGY
Security Capital is a real estate research, investment and management company.
Management has assembled a superior team of operating and investment
professionals to implement the firm's strategy. Prior to the Offering, Security
Capital was owned primarily by directors, officers, employees and 65 major
domestic and foreign institutional investors.
Security Capital's strategy is to create the optimal organization to lead and
profit from global real estate securitization. Security Capital will implement
this strategy by:
. Providing leadership in real estate research conducted on a global basis.
Security Capital's proprietary research, which is available to Security
Capital's affiliates, provides a strong foundation for its capital
deployment strategy.
. Continuing to invest its capital in fully integrated, value-added
operating companies that have strong prospects for sustained growth.
Security Capital plans to utilize the results of its research to identify
opportunities in which it can invest its capital in the start-up of
highly focused, private operating companies with the objective of
becoming publicly traded and having the prospect of dominating their
respective niches. In addition, Security Capital will continue to make
investments in public companies in which it can provide strategic and
operating guidance and capital and thereby enable the companies to pursue
an attractive growth strategy.
. Creating a global real estate securities management business.
The global real estate industry is in the early stages of a dramatic transition
from ownership in "passive hands" to becoming a securitized industry with a
more rational approach to capital allocation and operating management. As
public real estate investment enterprises become more prevalent, a greater
percentage of the industry's new capital is moving to publicly traded, fully
integrated, value-added operating companies. Securitized holdings offer
significant benefits to institutional and retail investors, including enhanced
liquidity, real-time pricing and the opportunity for optimal growth and
sustainable competitive rates of return.
Security Capital will deploy its capital (both its corporate and third-party
managed capital) in enterprises that emulate the operating characteristics of
the leading value-added operating companies in other highly competitive global
industries. As the shift toward securitization of real estate ownership leads
to a more rational system for deploying capital, the Company believes leading
real estate companies will commit significant dollars to research and
development to create value-added operating systems for application in
carefully selected, focused target markets. The Company believes leading real
estate companies will devote significant capital and energy to management
development programs, creating a strong corporate culture with succession plans
in place. The Company also believes leading real estate companies will consider
capital as a precious resource to be deployed utilizing evaluation processes
based on Economic Value-Added (EVA) or similar strategies. The shift toward
securitization creates unprecedented opportunities for Security Capital and its
operating companies. By building talented management teams, creating fully
integrated operating systems and implementing highly focused strategies, the
Company believes leading real estate companies can achieve sustainable
annualized rates of return which are very competitive with other growth
industries.
Through March 31, 1997, Security Capital has invested an aggregate of
approximately $2.0 billion in the common shares of PTR, SCI, ATLANTIC, Security
Capital USREALTY and Homestead and in the warrants of Homestead. Those
securities had an aggregate market value of approximately $2.9 billion (based
on the closing price of those securities on the principal exchange on which the
securities are listed on March 31, 1997).
Security Capital is a Maryland corporation. Security Capital's and its
affiliates' principal business activities are carried out in offices located in
Atlanta, Brussels, Chicago, Denver, El Paso, London, Luxembourg, New York and
Santa Fe.
16
<PAGE>
OPERATING STRATEGY
Security Capital executes its strategy through the four functional groups shown
on the following organization chart. The Real Estate Research Group ("RERG")
conducts proprietary real estate research and provides analyses of long-term
market conditions and short-term trends to the companies and funds in which
Security Capital has invested. The Investment Research Group ("IRG") manages or
advises capital invested in real estate securities funds with an intermediate-
term investment focus. The Strategic Group ("SG") provides overall business
strategy and investment oversight to the companies in which Security Capital
has direct and indirect ownership positions, either directly or through
consulting agreements. The Financial Services Group ("FSG") provides
administrative and capital markets services to Security Capital's client
companies.
SECURITY CAPITAL OPERATING ORGANIZATION CHART
AS OF THE SECOND QUARTER 1997
SECURITY CAPITAL GROUP
INCORPORATED
REAL ESTATE RESEARCH,
INVESTMENT AND MANAGEMENT
$3.25 BILLION (1)
-------------------------------------------------------------
REAL ESTATE INVESTMENT STRATEGIC GROUP FINANCIAL
RESEARCH GROUP RESEARCH GROUP (SG) SERVICES GROUP
(RERG) (IRG) (FSG)
BUSINESS STRATEGY
AND
REAL ESTATE REAL ESTATE ADMINISTRATIVE
RESEARCH SECURITIES CAPITAL AND CAPITAL
MANAGEMENT DEPLOYMENT MARKETS SERVICES
OVERSIGHT
Chicago-Santa Fe (Intermediate
Term)
Chicago-El Paso-
London-
Brussels-Chicago-
Brussels-Chicago London- Luxembourg-New
Luxembourg-New York-Santa Fe
York-Santa Fe
CLIENTS CLIENTS CLIENTS CLIENTS
Special
Opportunity
Investments
(Security Capital U.S. Realty) (2)
Security Capital Limited to
Investment Pacific Trust Direct/Indirect
Research Group Affiliates
Security Capital
Strategic Group Atlantic
Incorporated
Security Capital
Employee REIT
Fund (3)
Homestead Village
Incorporated
Security Capital
Preferred Growth Security Capital
Incorporated (3) Industrial Trust
Strategic Hotel
Capital
Incorporated
(3)
Security Capital
U.S. Realty (2)
CarrAmerica
Realty
Corporation
(4)
Storage USA,
Inc. (4)
Regency Realty Corporation (4)
Pacific Retail
Trust (4)
- --------
(1) Pre-Offering, equity market capitalization on a fully converted basis as of
March 31, 1997, which assumes all convertible instruments have been converted
into, and options and warrants have been exercised for, Class A Shares and is
based on the Company's estimate of net asset value per Class A Share of $1,236
on such date.
(2) The European management and Board of Directors of Security Capital USREALTY
receive operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from its
affiliates IRG and SG.
(3) Italics represents new business initiatives.
(4) This company is an investee of Security Capital USREALTY through its
subsidiary and is not directly advised by SG.
17
<PAGE>
REAL ESTATE SECURITY
RESEARCH GROUP CAPITAL
(RERG)
------------------------------------------
REAL ESTATE
RESEARCH
RERG
Chicago-Santa Fe
Security Capital Real Estate Research Group (RERG)
RERG produces real estate research for both the Investment Research Group and
Strategic Group. Research plays a key role in the process of deploying capital
through the long- and short-term evaluation of supply and demand for each real
estate property type in targeted geographic markets. The evaluations are based
on economic, demographic and market factors as well as proprietary demand and
supply models.
RERG conducts an economic base analysis for every major metropolitan market in
the United States. Economic base analysis identifies the key industry sectors
which drive a market's economy by exporting goods or services outside the area.
By examining the stability and growth potential of these industries, as well as
the diversity of their mix, RERG assesses the risks and long-term growth
prospects for that particular market. The demand models created by RERG for
each property type incorporate demographic factors such as population,
household income, age, education, employment and housing characteristics for an
area as small as one-sixteenth of a square mile in certain markets. The
economic and demographic analyses are translated into an overall evaluation of
the demand prospects for each property type in each market.
On a short-term basis, RERG monitors real estate market conditions such as
occupancy and rent growth to forecast the near-term (one to two years)
demand/supply balance of each property type in the market.
18
<PAGE>
INVESTMENT SECURITY
RESEARCH GROUP CAPITAL
(IRG)
------------------------------------------
REAL ESTATE
SECURITIES
MANAGEMENT
(INTERMEDIATE IRG
TERM)
Brussels-Chicago
Security Capital Investment Research Group (IRG)
IRG manages or advises capital invested in focused funds that seek to maximize
total return over an intermediate time horizon of up to 42 months. IRG's
principal focus is on publicly traded real estate companies that it believes
should outperform the market due to factors such as an emerging new strategy or
opportunity, imminent changes in supply and demand that would affect asset
performance, market inefficiencies that result in mispriced securities or
consolidation opportunities. IRG, through its focused funds, will also commit
capital to private start-up companies that have significant prospects for
sustained growth, that can utilize both strategic and operating consulting and
capital, and that have the prospect of becoming public companies. IRG will
generally take ownership positions ranging from .5% to 4.99% of the equity
securities of its investees, except with respect to Security Capital Preferred
Growth Incorporated ("SC-PG"), in which case IRG may take larger ownership
positions.
IRG currently provides investment research and advice to Security Capital (EU)
Management S.A., the advisor to Security Capital USREALTY, in connection with
certain investments in publicly traded companies. In addition, IRG currently
manages Security Capital Employee REIT Fund ("SC-ERF") and SC-PG.
. Security Capital U.S. Realty: Special Opportunity Investments Portfolio.
Security Capital USREALTY identifies publicly traded companies with solid
growth prospects and invests, through a wholly owned subsidiary, to realize
attractive total returns through dividends and share price appreciation. As of
March 31, 1997, the Security Capital USREALTY Special Opportunity Investments
Portfolio had a fair market value of $264 million. For the period from December
31, 1995 to March 31, 1997, the Security Capital USREALTY Special Opportunity
Investment Portfolio achieved a compound annual return of approximately 57.9%,
as measured in the manner required by the Securities and Exchange Commission
(the "Commission") for U.S. mutual funds, after the deduction of fees and
expenses. Compound annual return has been calculated based on the following
principal assumptions: (i) investments were made on the dates Security Capital
USREALTY Special Opportunity Investments Portfolio made its investments, (ii)
dividends or other distributions, if any, were immediately reinvested and (iii)
the per share value of the investments on March 31, 1997 is represented by the
closing sales price of the shares on such date on the principal stock exchange
on which such shares are listed. There can be no assurance that a comparable
rate of return may be obtained in the future.
. Security Capital Employee REIT Fund (SC-ERF). As a matter of policy, Security
Capital employees are not permitted to invest in non-Security Capital related
real estate securities. Security Capital has committed to invest up to $100
million into a fund known as SC-ERF that will invest in real estate securities.
SC-ERF, which registered with the Commission in January 1997, provides a
vehicle through which employees, directors and trustees of Security Capital and
its affiliates, their families and approved 401(k) plans of Security Capital
and its affiliates can invest in real estate securities. SC-ERF's long-term
objective is to achieve top-quartile returns as compared with other mutual
funds that invest in securities of publicly traded real estate companies in the
United States.
. Security Capital Preferred Growth Incorporated (SC-PG). SC-PG is a private
real estate company formed in January 1997. SC-PG's objective is to make
intermediate-term investments in undervalued, high-potential real estate
operating companies primarily through convertible securities. These companies
would typically be in the second through fourth quartile of performance among
real estate operating companies. SC-PG seeks to provide these companies with an
opportunity for repositioning and growth by furnishing them with operating
guidance and access to capital. The management of SC-PG believes that these
types of investments will offer SC-PG an attractive dividend return and the
opportunity to participate in the value creation that may occur as the
companies in which it invests experience growth in cash flows and increases in
share prices. Security Capital has initially committed to purchase $50 million
of common stock of SC-PG.
19
<PAGE>
STRATEGIC GROUP
(SG) SECURITY
CAPITAL
BUSINESS STRATEGY
AND
------------------------------------------
CAPITAL
DEPLOYMENT
OVERSIGHT
Brussels-Chicago-
London- SG
Luxembourg-New
York- Santa Fe
Security Capital Strategic Group (SG)
SG provides overall business strategy and investment oversight (either directly
or through advisory agreements) to companies in which Security Capital has a
direct or indirect ownership position. Security Capital plans to pursue
investments in private companies that have highly focused business strategies
that management believes have prospects for sustained growth and may become
publicly traded. Security Capital expects to benefit as these companies
experience growth in cash flows and increases in share prices consistent with
similar direct investments that Security Capital has made since 1991 in PTR,
SCI, ATLANTIC, Homestead and Security Capital USREALTY and indirect investments
made by Security Capital USREALTY. No assurance can be given that Security
Capital will achieve similar results on future strategic investments.
<TABLE>
<CAPTION>
DIRECT/INDIRECT EQUITY MARKET
CLIENTS OWNERSHIP (1)(2) CAPITALIZATION (1)
------- ---------------- ------------------
<S> <C> <C>
Security Capital Pacific Trust 32% $2,058 Million
Security Capital Atlantic
Incorporated 57% $ 843 Million
Homestead Village Incorporated (3) 29% $ 949 Million
Security Capital Industrial Trust 38% $2,365 Million
Security Capital U.S. Realty (4) 37% $1,593 Million
CarrAmerica Realty Corporation (5) 37% $1,726 Million
Storage USA, Inc. (5) 35% $1,073 Million
Regency Realty Corporation (5) 39% $ 592 Million
Pacific Retail Trust (5) 67% $ 433 Million
</TABLE>
- --------
(1) Ownership and market capitalization are as of March 31, 1997, and assume
contractual equity commitments by investors have been funded, convertible
instruments have been converted into common shares, and options and warrants
for common shares have been exercised. The resulting number of common shares is
multiplied by the closing price of the common shares on such date for those
companies listed on an exchange or, in the case of PACIFIC RETAIL, the last
private equity offering price. See "--Operating Companies Market Price
Information and Financial Performance."
(2) As of April 25, 1997, Security Capital's percentage ownerships in its
investees, based on common shares outstanding on such date, were 36% of PTR,
51% of ATLANTIC, 62% of Homestead, 44% of SCI and 37% of Security Capital
USREALTY.
(3) Ownership of Homestead assumes that all convertible mortgages have been
funded and converted into shares of Homestead common stock and that all
warrants to purchase shares of Homestead common stock have been exercised.
Ownership of Homestead does not include any ownership Security Capital may
obtain in Homestead upon conversion of convertible mortgages owned by PTR and
ATLANTIC through funding commitment agreements. See "Relationships with
Operating Companies--Homestead--Homestead Transaction."
(4) The European management and Board of Directors of Security Capital USREALTY
receive operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from its
affiliates IRG and SG.
(5) This company is an investee of Security Capital USREALTY through its
subsidiary and is not directly advised by Security Capital. The ownership
percentage reflected is that of Security Capital USREALTY.
For further information with respect to (i) Security Capital's direct ownership
interests in PTR, ATLANTIC, Homestead, SCI and Security Capital USREALTY, (ii)
the historical high and low sale prices of the common shares for such
companies, as well as the cash dividends declared by such companies, (iii) the
average annual shareholder returns on investments in such companies, and
Security Capital's unrealized appreciation in its investment in the securities
of such companies, see "--Operating Companies Market Price Information and
Financial Performance" and "Relationships with Operating Companies."
20
<PAGE>
For purposes of the following discussion, references to "compound annual
returns" for PTR, ATLANTIC, SCI and Security Capital USREALTY have been
calculated based on the following principal assumptions: (i) the beginning date
of the measurement period is the date on which Security Capital made its first
investment, (ii) the calculation includes only Security Capital's initial
investment, (iii) dividends received, if any, were immediately reinvested in
common shares and (iv) the per share value of the investment on March 31, 1997
is represented by the closing sales price of the shares on such date on the
principal stock exchange on which the shares are listed. There can be no
assurance that comparable rates of return may be obtained in the future by
Security Capital or other investors. In addition, references to "equity market
capitalization" for each of the companies listed below assumes contractual
equity commitments by investors have been funded, convertible instruments have
been converted into common shares and options and warrants for common shares
have been exercised. The resulting number of common shares is multiplied by the
closing price on such date of the common shares on the principal exchange on
which the shares are listed.
. Security Capital Pacific Trust (NYSE: PTR). PTR's objective is to be the
preeminent real estate operating company focused on the development,
acquisition, operation and long-term ownership of multifamily communities in
the growing markets of the western United States. PTR is focused on generating
long-term, sustainable growth in per share cash flow. PTR expects to achieve
long-term cash flow growth by maximizing the operating performance of its core
assets through value-added asset management and by executing a research-based
investment strategy that allows PTR to redeploy capital from existing assets
with limited growth prospects into targeted developments with optimal prospects
for growth. As of February 28, 1997, PTR's portfolio of multifamily communities
included 42,556 operating units, 5,671 units under construction and an
estimated 6,232 units in planning. In addition, PTR owns land for future
development of an expected 4,492 additional units. PTR has committed to fund
certain mortgage loans for Homestead which are convertible into Homestead
common stock. Upon full funding of those mortgages, PTR will have $221.3
million in principal amount of convertible mortgages which will be convertible
into a total of 19,246,402 shares of Homestead common stock, which would
represent approximately 34% of the fully converted common shares of Homestead.
Since February 1991, when Security Capital took its initial position in PTR,
through March 31, 1997, PTR's equity market capitalization has increased from
$33 million to $2,157 million. From February 1991 through March 31, 1997, the
compound annual return for PTR was 33.6%.
. Security Capital Atlantic Incorporated (NYSE: SCA). ATLANTIC's objective is
to be the preeminent real estate operating company for the development,
acquisition, operation and long-term ownership of multifamily communities in
its 12-state southeastern target market. ATLANTIC is focused on generating
long-term, sustainable growth in per share cash flow. ATLANTIC is building its
portfolio by implementing a research-driven investment strategy that includes
opportunistic acquisitions of existing properties and the development of
carefully planned moderate income multifamily communities. As of February 28,
1997, ATLANTIC's portfolio included 19,241 operating multifamily units, 5,095
units under construction and an estimated 3,068 units in planning. ATLANTIC has
committed to fund certain mortgage loans for Homestead which are convertible
into Homestead common stock. Upon full funding of those mortgages, ATLANTIC
will have $98.0 million in principal amount of convertible mortgages which will
be convertible into a total of 8,524,215 shares of Homestead common stock,
which would represent approximately 15% of the fully converted common shares of
Homestead. At March 31, 1997, ATLANTIC had an equity market capitalization of
$843 million. Since its inception in December 1993 through March 31, 1997, the
compound annual return for ATLANTIC was 14.7%.
. Homestead Village Incorporated (American Stock Exchange: HSD). Homestead's
objective is to become the preeminent developer, owner and operator of moderate
priced, extended-stay lodging properties throughout the United States.
Homestead was created in 1992 through extensive research and development and
became a public company in October 1996. Homestead seeks to achieve long-term
growth in cash flow by focusing on infill locations in major employment centers
with strong demographics. As of March 31, 1997, Homestead had developed, owned
and operated 34 properties representing in the aggregate 4,297 units and had 41
properties under construction totaling 5,059 units. At March 31, 1997,
Homestead had an equity market capitalization of $949 million. From its spin-
out in October 1996 through March 31, 1997, Homestead had a simple unannualized
return of 17.9%. The simple unannualized return has been calculated based on
the following principal assumptions: (i) the investment was made on October 17,
1996 (and recorded at the cost of the assets contributed by PTR, ATLANTIC and
Security Capital), and (ii) the per share value of the investment on March 31,
1997 is represented by the closing sales price on such date of the shares on
the American Stock Exchange. There can be no assurance that a comparable rate
of return may be obtained in the future by Security Capital or other investors.
21
<PAGE>
. Security Capital Industrial Trust (NYSE: SCN). SCI, a highly focused Denver-
based real estate operating company, is the largest publicly held owner and
operator of distribution properties in the United States based on equity market
capitalization. SCI's primary objective is to achieve long-term, sustainable
growth in per share cash flow. SCI expects to achieve this objective through
The SCI National Operating System(R) which is committed to creating shareholder
value by targeting the Fortune 1,000 companies and providing exceptional
customer service at the national, regional and local levels. SCI's investment
strategy is to acquire generic distribution facilities and develop full-
service, master-planned distribution parks in metropolitan areas that
demonstrate strong demographic growth and excellent distribution real estate
fundamentals. SCI recently announced transactions in Mexico and the
acquisition, through an entity controlled by SCI, of the refrigerated
warehousing and distribution operations of Christian Salvesen, Inc. in the
United States and Canada. At February 28, 1997, SCI had distribution properties
operating or under development in 36 target markets, totaling 88.99 million
square feet. At March 31, 1997, SCI had an equity market capitalization of
$2,365 million. Since its inception in December 1992 through March 31, 1997,
the compound annual return for SCI was 25.6%.
. Strategic Hotel Capital Incorporated ("SHC"). SHC was recently formed and is
focused on becoming the preeminent owner of upscale hotel properties on a
global basis. SHC was created in March 1997 and, ultimately as a public entity,
will seek to achieve a 15% to 20% compound annual total rate of return over the
long-term. Management of SHC is principally focused on maximizing the value of
its investments by providing active and intensive oversight to its select
operators in targeted growth markets throughout the world. Security Capital and
another major institutional investor have each committed to invest $200 million
of capital on an equal basis in SHC.
. Security Capital U.S. Realty (Amsterdam Stock Exchange: SCUSR). Security
Capital USREALTY's objective is to become Europe's preeminent real estate
operating company owning, through a wholly owned subsidiary, significant
strategic positions in leading value-added real estate operating companies
based in the United States. Through a proactive ownership role, appropriate
board representation and ongoing consultation, Security Capital USREALTY
expects to influence the business strategies of the companies in which it
invests to increase per share cash flow. The European management and Board of
Directors of Security Capital USREALTY receive operating and investment advice
from Security Capital (EU) Management S.A., which subcontracts certain research
and advisory activities from its affiliates IRG and SG. Security Capital has
advised Security Capital USREALTY that it does not intend to make its own
direct strategic investments in equity-oriented REITs in the future, other than
those in which Security Capital currently owns a strategic ownership position.
At March 31, 1997, Security Capital USREALTY had an equity market
capitalization of $1,593 million. Since its inception in October 1995 through
March 31, 1997, the compound annual return for Security Capital USREALTY was
33.9%.
Security Capital USREALTY seeks to have 65% to 85% of its assets deployed in
long-term strategic ownership positions in real estate operating companies
organized as REITs and real estate operating companies which are expected in
due course to become REITs.
Security Capital USREALTY also seeks to acquire up to 10% (but generally less
than 5%) of the shares of publicly traded real estate companies and to hold
such positions for an intermediate term of 12 to 18 months (or sooner if the
targeted returns are realized more quickly) with the objective of obtaining
attractive total returns through dividends and share price appreciation.
Security Capital USREALTY seeks to have 10% to 25% of its assets deployed in
such publicly traded positions and, as of March 31, 1997, Security Capital
USREALTY had $264 million (market value) of publicly traded positions in 24
companies. See "--Security Capital Investment Research Group--Security Capital
USREALTY: Special Opportunity Investments Portfolio."
Security Capital USREALTY also seeks to invest up to 10% of its assets in
securities of the Company to enhance the diversification of its asset base and
to enable European investors in Security Capital USREALTY to participate in the
full activities of Security Capital. As of March 31, 1997, Security Capital
USREALTY owned 52,431 Class A Shares and $55 million principal amount of 2016
Convertible Debentures. Security Capital USREALTY purchases securities of the
Company at arm's-length prices.
22
<PAGE>
Security Capital USREALTY's Strategic Investees:
. CarrAmerica Realty Corporation (NYSE: CRE). CarrAmerica is focused on
becoming the leading owner, operator and developer of value-driven office
properties in key growth markets throughout the United States. Management seeks
to achieve these objectives by offering corporate customers exceptional
customer service on a national basis. At March 31, 1997, CarrAmerica had an
equity market capitalization of $1,726 million.
. Storage USA, Inc. (NYSE: SUS). Storage USA is well positioned to become the
preeminent owner, operator and developer of self-storage facilities in the
United States. Storage USA's strategy is to maximize rents, occupancy and
profitability at each of its facilities by offering outstanding value and
customer service in this highly fragmented industrial real estate niche. At
March 31, 1997, Storage USA had an equity market capitalization of $1,073
million.
. Regency Realty Corporation (NYSE: REG). REGENCY is focused on becoming the
preeminent owner and operator of grocery-and-drug-store-anchored neighborhood
infill shopping centers in selected growth markets of the southeastern United
States. REGENCY is utilizing the equity from Security Capital USREALTY's
investment to take advantage of attractive acquisition and development
opportunities in its target market. At March 31, 1997, REGENCY had an equity
market capitalization of $592 million.
. Pacific Retail Trust (PACIFIC RETAIL). PACIFIC RETAIL is building a portfolio
and implementing a business strategy that is designed to make it the leading
owner, operator and developer of grocery-and-drug-store-anchored neighborhood
infill shopping centers in the western United States. A fully integrated
operating company, PACIFIC RETAIL plans to go public in late 1997 or early
1998, after it reaches critical mass in several key growth markets. At March
31, 1997, PACIFIC RETAIL had a private equity market capitalization of $433
million, based on the per share sales price obtained in PACIFIC RETAIL's most
recent private offering of its common shares.
23
<PAGE>
FINANCIAL SECURITY
SERVICES GROUP CAPITAL
(FSG)
------------------------------------------
ADMININISTRATIVE
AND CAPITAL
MARKET SERVICES
Chicago-El Paso- FSG
London-
Luxembourg-New
York-Santa Fe
Security Capital Financial Services Group (FSG)
. SCGroup Incorporated ("SCGroup"). SCGroup provides operational support,
accounting services, human resources and benefits administration, and technical
support to the companies in which Security Capital has direct investments. As a
result, Security Capital's operating companies realize the benefits of
economies of scale by consolidating several management activities in a
centralized operations center.
. Security Capital Markets Group Incorporated ("Security Capital Markets
Group"). Security Capital Markets Group is focused on efficiently accessing
institutional capital through private placements for certain private and public
companies within the Security Capital organization. This gives institutional
investors the early opportunity to invest in Security Capital's real estate
operating companies that Security Capital believes will ultimately achieve
preeminent positions in their respective market niches. Equally importantly,
the professionals in the Security Capital Markets Group maintain open lines of
communication with institutional investors that have taken ownership positions
in Security Capital's private and public companies.
FUTURE STRATEGY
Since its inception, Security Capital has committed capital to research and
development in order to identify opportunities where it can invest in the
start-up of new businesses or new investment services with the objective that
they will ultimately become publicly traded companies. Once opportunities are
identified and thoroughly researched, Security Capital commits substantial
additional capital to the development of operating systems and human capital.
By pursuing a strategy of making a significant investment in advance of the
start-up company's initial operations, as well as making ongoing investments in
operating and people systems as the company grows, Security Capital seeks to
ensure that the start-up company can successfully implement an attractive
growth strategy.
In 1993, initial research began on an investment strategy which was referred to
as SCG Box X and which was announced in 1995 as Security Capital USREALTY. As
of March 31, 1997, Security Capital USREALTY had an equity market
capitalization of $1,593 million.
After four years of research and development, Security Capital announced the
formation of Homestead (previously known as SCG Box X-1) in 1996. As of March
31, 1997, approximately $368 million of value had been created for the
shareholders of PTR, ATLANTIC and Security Capital as a result of the formation
and spin-off of Homestead as measured by (i) the equity market capitalization
of Homestead securities held by PTR and ATLANTIC (or their respective
shareholders) and Security Capital less (ii) the aggregate cost basis of the
assets contributed by PTR, ATLANTIC and Security Capital to Homestead in the
spin-off transaction on October 17, 1996, the cost basis of the Homestead
convertible mortgages to be funded by PTR and ATLANTIC and the cost basis of
the Homestead warrants to purchase common shares distributed to Security
Capital and the shareholders of PTR and ATLANTIC. As of March 31, 1997,
Homestead had an equity market capitalization of $949 million.
During 1995, Security Capital began the implementation of its research on two
new investments: SCG Box X-3 and Strategic Hotel Capital Incorporated
(previously known as SCG Box X-5). In addition, Security Capital USREALTY has
announced that its board has approved investment levels of $150 million in the
niches of high-density urban retail, urban properties and parking, which are
new businesses expected to be operational in 1997.
In 1996, Security Capital committed to make an initial $50 million investment
in SC-PG (previously known as SCG Box X-4), committed to make a $100 million
investment in SC-ERF (previously known as SCG Box X-2) and continued its
research and development activities with respect to its additional new
investments. The Company's policy is to announce new business initiatives
following extensive research and development and after the Company has
committed to make investments in excess of $25 million in the new business.
An important new component of Security Capital's future growth will come from
new business initiatives which are in varying stages of research and
development. No assurance can be given that these initiatives will be
successful.
24
<PAGE>
SECURITY CAPITAL OPERATING ORGANIZATION CHART
AS OF THE FOURTH QUARTER 1997
SECURITY CAPITAL GROUP
INCORPORATED
REAL ESTATE RESEARCH,
INVESTMENT AND MANAGEMENT
-------------------------------------------------------------
REAL ESTATE INVESTMENT STRATEGIC GROUP FINANCIAL
RESEARCH GROUP RESEARCH GROUP (SG) SERVICES GROUP
(RERG) (IRG) (FSG)
BUSINESS STRATEGY
AND
REAL ESTATE REAL ESTATE ADMINISTRATIVE
RESEARCH SECURITIES CAPITAL AND CAPITAL
MANAGEMENT DEPLOYMENT MARKETS SERVICES
OVERSIGHT
Brussels-Chicago- (Intermediate
Santa Fe Term)
Chicago-El Paso-
London-
Brussels-Chicago-
Brussels-Chicago London- Luxembourg-New
York-Santa Fe
Luxembourg-New
York-Santa Fe
CLIENTS CLIENTS CLIENTS CLIENTS
Investment Special Security Capital Limited to
Research Group Opportunity Pacific Trust Direct/Indirect
Investments Affiliates
(Security
Capital U.S.
Realty) (1)
Strategic Group Security Capital
Atlantic
Incorporated
Security Capital Homestead Village
Employee REIT Incorporated
Fund
Security Capital
Security Capital Industrial Trust
Preferred Growth
Incorporated
Strategic Hotel
Capital
Incorporated
SCG Box X-3
(2)(3)
Security Capital
U.S. Realty (1)
CarrAmerica
Realty
Corporation
(4)
Storage USA,
Inc. (4)
Regency Realty
Corporation (4)
Pacific Retail
Trust (4)
National
Parking
Corporation--
national
parking
operator
(2)(4)(5)
Urban Growth
Property Trust
--national
urban property
(2)(4)(5)
City Center
Retail Trust
--urban
- -------- retail (2)(4)(5)
(1) The European management and Board of Directors of Security Capital USREALTY
receive operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from its
affiliates IRG and SG.
(2) Italics represents new business initiatives.
(3) SCG Box X-3 is in the early stages of research and development. Security
Capital's policy is to announce new business initiatives following extensive
research and development and after the Company has committed to make
investments in excess of $25 million in the new business.
(4) This company is an investee of Security Capital USREALTY through its
subsidiary and is not directly advised by SG.
(5) New private businesses in formation and in which capital investment and
strategy have been approved by the Board of Directors of Security Capital
USREALTY.
25
<PAGE>
FINANCIAL STRUCTURE AND STRATEGY
Security Capital's objectives are to maximize its return on investment and its
operating cash flows after tax. As a consequence, Security Capital views its
structure as consisting of two divisions: the Capital Division, which generates
dividends and capital gains, and the Services Division, which generates service
and management fees. In order to achieve its financial objectives, Security
Capital plans to balance its investments between growth-oriented companies that
do not pay a dividend and dividend-paying real estate entities. Security
Capital plans to prudently utilize leverage which will be serviced by the
dividends received from the Capital Division and service and management fees
received from the Services Division. Borrowings will be deployed into the
highest return opportunities in either the Capital Division or Services
Division. Security Capital expects to achieve its financial objectives by
continuing to be one of the leading creators of fully integrated, value-added
public real estate companies and by becoming the leading global investment
research/investment manager in superior public real estate companies not
affiliated with Security Capital.
The financial structure and strategy of Security Capital is illustrated in the
following diagram:
SECURITY CAPITAL'S OBJECTIVE IS TO ALLOCATE CAPITAL TO THE
HIGHEST LONG-TERM RETURN INVESTMENTS
LOGO
Security Capital SCGroup
Pacific Trust Incorporated (1)
Security Capital Security Capital
Atlantic Incorporated Markets Group
Incorporated (1)
Homestead Village
Incorporated Security Capital
Real Estate
Research Group
Incorporated (1)
Security Capital
Industrial Trust
Security Capital U.S. Security Capital
Realty (2) (EU) Investment
Research Group
S.A. (1)
Security Capital
Employee REIT
Fund (3)
Security Capital
(US) Investment
Research
Incorporated (1)(3)
Security Capital
Preferred Growth
Incorporated (3)
Strategic Hotel
Capital
Incorporated (3)
SCG Box X-3 (3)
- -------
(1) The activities of the entities that comprise the Services Division are
carried out in the following operating groups: Security Capital Real Estate
Research Group, Security Capital Investment Research Group and Security Capital
Financial Services Group and, prior to the Mergers, the REIT management and
property management companies.
(2) The European management and Board of Directors of Security Capital USREALTY
receive operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from its
affiliates IRG and SG.
(3) Italics represent new business initiatives.
26
<PAGE>
OPERATING COMPANIES MARKET PRICE INFORMATION AND FINANCIAL PERFORMANCE
The following table sets forth, for the periods indicated, the high and low
closing sales prices of the common shares of SCI, ATLANTIC, PTR, Homestead and
Security Capital USREALTY on the NYSE (in respect of SCI, ATLANTIC and PTR),
the American Stock Exchange (in respect of Homestead) and the Amsterdam Stock
Exchange (in respect of Security Capital USREALTY) and the cash dividends
declared by such companies per outstanding common share:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SCI ATLANTIC PTR
--- ------------------------ ---------------------
CASH CASH CASH
DIVIDEND DIVIDEND DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED HIGH LOW DECLARED
---- ----- -------- ---- ------- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
$15 $ 16
First Quarter $17 3/4 1/4 $0.23375 - - $0.40 $18 3/8 3/8 $0.2875
14 16
Second Quarter 17 1/2 1/2 0.23375 - - 0.40 18 1/8 5/8 0.2875
Third Quarter 16 1/2 15 0.23375 - - 0.40 19 1/4 17 0.2875
17
Fourth Quarter 17 5/8 16 0.23375 - - 0.40 20 1/2 1/4 0.2875
1996
16 19
First Quarter 18 7/8 1/2 0.2525 - - 0.42 22 1/4 1/4 0.31
16 20
Second Quarter 18 7/8 0.2525 - - 0.42 22 3/8 1/2 0.31
16 20
Third Quarter 18 1/4 7/8 0.2525 - - 0.42 22 5/8 1/4 0.31
17
Fourth Quarter 22 1/2 7/8 0.2525 $24 5/8 $20 7/8 0.39 23 5/8 19 0.31
1997
19
First Quarter 22 1/2 7/8 0.2675 26 1/2 22 0.39 25 1/8 21 0.325
18 22
Second Quarter (through April 25) 20 3/4 7/8 - 22 3/8 20 3/4 - 24 1/4 3/8 -
<CAPTION>
------------------------------------------------
SECURITY CAPITAL
HOMESTEAD USREALTY
--------- ------------------------
CASH CASH
DIVIDEND DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED
---- ----- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
First Quarter - - - - - -
Second Quarter - - - - - -
Third Quarter - - - $11.50 $10.40 -
Fourth Quarter $19 $15 - 12.60 10.80 -
1997
16
First Quarter 20 7/8 5/8 - 14.50 12.50 -
15
Second Quarter (through April 25) 17 5/8 7/8 - 16.00 13.40 -
</TABLE>
On April 25, 1997, the last reported sale price of a common share of (i) SCI
was $20 1/8, (ii) ATLANTIC was $21 1/2, (iii) PTR was $22 3/4, (iv) Homestead
was $16 1/4 and (v) Security Capital USREALTY was $15.20. On April 25, 1997,
the Company owned (i) 43,086,724 common shares of SCI, (ii) 21,545,670 shares
of common stock of ATLANTIC, (iii) 27,389,833 common shares of PTR, (iv)
13,144,401 shares of common stock of Homestead and (v) 42,015,299 shares of
common stock of Security Capital USREALTY. For a description of certain
transactions which may affect the number of shares of common stock of such
companies owned by the Company, see "Business--The Proposed Mergers" and
"Relationships with Operating Companies--Homestead--Homestead Transaction."
Security Capital has announced that it may over time reduce its beneficial
ownership in ATLANTIC and Homestead to below 50%.
The following table presents the average annual return for all common share
investors in PTR, ATLANTIC, SCI and Security Capital USREALTY for the periods
indicated through March 31, 1997, based on the following principal assumptions:
(i) the beginning date of the measurement period is the date on which Security
Capital made its first investment in the applicable company, (ii) the
calculation includes all common share offerings at the time proceeds were
received by the applicable company since the beginning date of the measurement
period, (iii) dividends received, if any, were immediately reinvested in common
shares and (iv) the per share value of the investment on March 31, 1997 is
represented by the closing sales price of the common shares on such date on the
principal exchange on which the shares are listed. There can be no assurance
that comparable rates of return on investments will be obtained by Security
Capital or other investors in these companies in the future.
27
<PAGE>
<TABLE>
<CAPTION>
-------------------
BEGINNING
DATE OF AVERAGE
MEASUREMENT ANNUAL
PERIOD RETURN
----------- -------
<S> <C> <C>
PTR 02/28/91 26.4%
ATLANTIC 12/31/93 15.0%
SCI 12/31/92 24.9%
Security Capital USREALTY 10/31/95 40.8%
</TABLE>
The following table presents Security Capital's total cost for its investments
in the following companies' securities, the closing price of those securities
on March 31, 1997 on the principal exchange on which the securities are listed,
the aggregate market valuation of those securities based on such closing prices
and the unrealized appreciation on those investments at March 31, 1997:
<TABLE>
-----------------------------------------------------------------------------------------
<CAPTION>
SECURITY
MARKET VALUE TOTAL CAPITAL'S
TOTAL PER SHARE OR MARKET VALUE UNREALIZED
OPERATING COMPANY AND SECURITY COST BASIS WARRANT (1) (2) APPRECIATION
------------------------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
SCI Common Shares $ 582,798,700 $20.875 $ 899,435,369 $316,636,668
PTR Common Shares 381,382,878 24.375 667,627,179 286,244,301
ATLANTIC Common Shares 417,712,317 22.250 479,391,158 61,678,841
Security Capital
USREALTY Common Shares 468,037,299 14.000 588,214,189 120,176,890
Homestead Common Shares 108,300,413 16.875 221,811,767 113,511,354
Homestead Warrants 15,976,286 7.250 21,030,235 5,053,949
-------------- -------------- ------------
Total at March 31, 1997 $1,974,207,893 $2,877,509,896 $903,302,003
============== ============== ============
</TABLE>
- --------
(1) Represents the closing price of the common shares and warrants on March 31,
1997 on the principal exchange on which the shares and warrants are listed.
(2) Represents the number of common shares and warrants owned by Security
Capital multiplied by the closing price for the common shares and warrants
on the principal exchange on which the shares and warrants are listed.
EMPLOYEES
After giving effect to the Mergers, it is expected that Security Capital will
have approximately 250 employees. Security Capital believes its relations with
its employees to be good.
COMPETITION
There are numerous developers, operators, real estate companies and other
owners of real estate that compete with Security Capital's operating companies
in seeking land for development on which to operate their respective
businesses. All of the properties of Security Capital's operating companies are
located in developed areas that include various competitors. The number of
competitive properties could have a material adverse effect on Security
Capital's operating companies and on the rents charged by them. Security
Capital's operating companies may be competing with others that have greater
resources and whose officers and directors have more experience than the
officers, directors and trustees of the Company's operating companies.
The global real estate securities management business of Security Capital will
compete for capital and investment opportunities with a large number of
investment management firms as well as certain insurance companies, commercial
banks and other financial institutions, some of which may have greater access
to capital and other resources and which may offer a wider range of services
than Security Capital. Real estate investment management firms can be formed
with relatively small amounts of capital and depend most significantly on the
continued
28
<PAGE>
involvement of their professional staff. The Company believes that competition
among real estate investment management firms is affected principally by
investment performance, development and implementation of investment
strategies, information technologies and databases and client service
performance.
TRADEMARKS AND SERVICE MARKS
The Company uses a number of trademarks, including "Security Capital" and
variants thereof. All trademarks, service marks and copyright registrations
associated with the business of the Company are registered in the name of the
Company and expire over various periods of time. Certain variants of the name
Security Capital will be licensed to ATLANTIC, PTR and SCI upon completion of
the Mergers. See "Relationships with Operating Companies" for a description of
the license agreements. The Company intends to defend vigorously against
infringement of its trademarks, service marks and copyrights.
PROPERTIES
The principal offices of Security Capital are located at 125 Lincoln Avenue in
Santa Fe, New Mexico and its telephone number is (505) 982-9292. Security
Capital's affiliate also has an administrative office at 7777 Market Center
Avenue in El Paso, Texas. The Santa Fe office is leased from an unaffiliated
third party and the El Paso office is leased from SCI at an annual rental of
$235,438. Security Capital and its affiliates operate out of other offices in
the United States (Atlanta, Chicago, Denver and New York) and Europe (Brussels,
London and Luxembourg). Although SCI, PTR, ATLANTIC and Homestead own an
extensive number of properties, no single property is materially important to
Security Capital and its subsidiaries.
LEGAL PROCEEDINGS
Security Capital and its subsidiaries are parties to certain legal proceedings
arising in the ordinary course of their business, none of which are expected to
have a material adverse impact on Security Capital.
THE PROPOSED MERGERS
In December 1996, management of Security Capital proposed to its Board that
Security Capital exchange its REIT management companies and property management
companies for common shares of ATLANTIC, PTR and SCI, respectively. In January
1997, based on the direction of its Board, Security Capital proposed to the
Board of Directors of ATLANTIC and the Board of Trustees of each of PTR and
SCI, that each of ATLANTIC, PTR and SCI become internally managed. On March 24,
1997, Security Capital and each of ATLANTIC, PTR and SCI entered into the
Merger Agreements. Pursuant to the Merger Agreements, Security Capital will
cause its affiliates providing REIT management and property management services
to each of ATLANTIC, PTR and SCI, respectively, to be merged into a newly
formed subsidiary of each such entity with the result that all personnel
employed in the REIT management and property management businesses would become
officers and employees of the REITs, respectively, as follows:
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital (Atlantic) Incorporated and SCG Realty
Services Atlantic Incorporated (which provide Security Capital's REIT
management and property management services to ATLANTIC), to a newly
formed subsidiary of ATLANTIC in exchange for shares of ATLANTIC's
common stock valued at $54,608,549.
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital Pacific Incorporated and SCG Realty
Services Incorporated (which provide Security Capital's REIT management
and property management services to PTR), to a newly formed subsidiary
of PTR in exchange for common shares of PTR valued at $75,838,457.
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital Industrial Incorporated and SCI Client
Services Incorporated (which provide Security Capital's REIT management
and property management services to SCI), to a newly formed subsidiary
of SCI in exchange for common shares of SCI valued at $81,870,626.
. Security Capital will license to each of ATLANTIC, PTR and SCI the
trademarks and tradenames used in their respective businesses.
29
<PAGE>
. The shareholders of each of Security Capital, ATLANTIC, PTR and SCI must
approve the respective Merger Agreements. The shareholders of Security
Capital approved each Merger Agreement on April 17, 1997. It is
currently expected that the shareholder votes of ATLANTIC, PTR and SCI
will occur in the third quarter of 1997 and, if approved, the Mergers
are expected to close in that same quarter. The Mergers are also subject
to customary closing conditions.
. The number of shares of ATLANTIC common stock and common shares of PTR
and SCI to be issued to Security Capital will be based on the public
market value of the shares on the five-day period prior to the record
date for mailing proxy statements seeking shareholder approval for the
transactions, subject to the price being within an 11.24% range of the
closing price of the shares on March 14, 1997 ($23 1/4, $24 3/8 and $22
1/4 for ATLANTIC, PTR and SCI, respectively). If the price of the shares
falls outside of the range, then the number of shares issuable to
Security Capital will be based on the high or low end of the range, as
the case may be.
. In order to allow the common shareholders to maintain their relative
percentage ownership in ATLANTIC, PTR and SCI, respectively,
concurrently with the proxy solicitation seeking approval of the
Mergers, each of ATLANTIC, PTR and SCI will conduct a rights offering
entitling its common shareholders, other than Security Capital, to
purchase additional common shares. The rights offering price will be the
same price at which shares will be issued to Security Capital under the
respective Merger Agreements if the price of the shares falls within the
range described above. If the market price of the shares at the record
date for the rights offering is below the minimum price of the range,
the rights offering will be conducted at such market price, and if the
market price of the shares is above the maximum price of the range, the
rights offering will be conducted at the maximum price at which shares
will be issued to Security Capital pursuant to the transaction.
. As part of the transactions contemplated by the Merger Agreements, and
to permit the REIT shareholders to benefit from the Mergers on the same
basis as Security Capital equity holders, Security Capital will issue,
pro rata, Warrants to the common equity holders (e.g., holders of common
shares, convertible preferred shares and, in the case of SCI, units) of
each of ATLANTIC, PTR and SCI, other than Security Capital, after the
closing of the Mergers. If all the Mergers are approved by their
respective shareholders, Security Capital will issue, pro rata, Warrants
to acquire an aggregate of $250 million of its Class B Shares. The
number of Class B Shares subject to the Warrants will be based on the
market price of the Class B Shares on a date within approximately 60
days following the closing of the Mergers. The Warrants will each be
exercisable at an exercise price based on the price of the Class B
Shares on a date to be established following the completion of the
Offering. It is expected that application will be made to list the
Warrants on the NYSE, although there can be no assurance that the
Warrants will be listed. The Warrants will expire one year after
issuance and will contain customary anti-dilution provisions.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are Security Capital's directors and executive officers of
Security Capital or certain affiliates:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
Samuel W. Bodman 58 Director 2000
Hermann Buerger 53 Director 2000
John P. Frazee, Jr. 52 Director 2000
Cyrus F. Freidheim, Jr. 61 Director 1998
H. Laurance Fuller 58 Director 1998
Ray L. Hunt 54 Director 1998
John T. Kelley III 56 Director 1999
William D. Sanders* 55 Chairman, Chief Executive 1999
Officer and Director
Peter S. Willmott 59 Director 1999
C. Ronald Blankenship* 47 Managing Director, Security -
Capital
Jeffrey A. Cozad 32 Managing Director, Security -
Capital USREALTY
C. Robert Heaton 51 Senior Vice President, Security -
Capital
W. Joseph Houlihan 46 Managing Director, Security -
Capital (EU) Investment
Research Group
Jeffrey A. Klopf 48 Senior Vice President and -
Secretary, Security Capital
Anthony R. Manno, Jr. 45 Managing Director, Security -
Capital Investment Research
Group
Caroline S. McBride 43 Managing Director, Security -
Capital Strategic Group
Daniel F. Miranda 43 Managing Director, Security -
Capital Investment Research
Group
Mary Lou Rogers 45 Managing Director, Security -
Capital Strategic Group
Paul E. Szurek 36 Managing Director, Security -
Capital USREALTY
Thomas G. Wattles* 45 Managing Director, Security -
Capital
</TABLE>
- --------
*Member of the Operating Committee
SAMUEL W. BODMAN. Chairman and Chief Executive Officer of Cabot Corporation
since 1988, a company with business in energy and specialty chemicals and
materials. Prior thereto, Mr. Bodman was President and Chief Operating Officer
of FMR Corporation, the holding company overseeing all activities of Fidelity
Investments. Prior thereto, Mr. Bodman was an Associate Professor at the
Massachusetts Institute of Technology ("M.I.T.") and Technical Director of
American Research and Development Corporation. Mr. Bodman is a director of
Cabot Corporation, Cabot Oil & Gas Corporation, John Hancock Mutual Life
Insurance Company and Westvaco, Inc. He is also a member of the Executive
Committee of the Board of Trustees of M.I.T., a member of the American Academy
of Arts and Sciences, a trustee of Isabella Stewart Gardner Museum, a trustee
of the New England Aquarium and a trustee of The French Library and Cultural
Center.
HERMANN BUERGER. Executive Vice President of Commerzbank AG in New York, a
position he has held since 1989. Mr. Buerger is also Co-Chairman of the
Business Advisory Committee of the American Council on Germany, a trustee of
the Virginia Tech Foundation and is a director of United Dominion Industries.
Mr. Buerger was previously Vice Chairman of the Institute of International
Bankers.
JOHN P. FRAZEE, JR. Formerly President and Chief Operating Officer of Sprint
Corporation and, prior to the March 1993 merger with Sprint, the Chairman and
Chief Executive Officer of Centel Corporation, a major telecommunications
company he joined in 1972. Mr. Frazee is a director of Cable Satellite Public
Affairs Network ("C-SPAN"), Nalco Chemical Company, Dean Foods Company,
Homestead and Paging Network, Inc. Mr. Frazee is also a member of the board of
trustees of the Foundation for Independent Higher Education and a trustee of
Rush-Presbyterian-St. Luke's Medical Center, The Newberry Library and Florida
State University.
CYRUS F. FREIDHEIM, JR. Vice Chairman of Booz . Allen & Hamilton, Inc., an
international management consulting firm, which he joined in 1966. Previously,
he was with Ford Motor Company and Price Waterhouse. Mr. Freidheim is a
director of Household International Inc. and LaSalle Street Fund. He is also a
trustee of Rush-Presbyterian-St. Luke's Medical Center and The Orchestral
Association (the Chicago Symphony Orchestra). He is also a member of the
America-China Society, the Council on Foreign Relations and the U.S. Japan
Business Council.
31
<PAGE>
H. LAURANCE FULLER. Chairman and Chief Executive Officer of Amoco Corporation,
a company he joined in 1961. Mr. Fuller is a director of Abbott Laboratories,
the Chase Manhattan Corporation, the Chase Manhattan Bank, N.A., Motorola
Corporation, the American Petroleum Institute and the Rehabilitation Institute
of Chicago. Mr. Fuller is also a trustee of The Orchestral Association (the
Chicago Symphony Orchestra) and a member of the University Council of Cornell
University.
RAY L. HUNT. President of Hunt Consolidated, Inc. since April 1981, where he
has also been Chief Executive Officer since November 1984 and Chairman since
June 1986. Chief Executive Officer of Hunt Oil Company since April 1985 and
Chairman since June 1986. Mr. Hunt is a director of Electronic Data Systems
Corporation, Dresser Industries, Inc., Pepsico, Inc. and Ergo Science
Corporation and is a member of the advisory board of Texas Commerce Bank, N.A.
Mr. Hunt serves as a member of the board of trustees of Southern Methodist
University, is a trustee of the Center for Strategic and International Studies,
serves on the board of directors of the Texas Research League and the
Southwestern Legal Foundation, is the chairman of Texas Medical Resource and a
member of the executive committee of the Southwestern Medical Foundation in
Dallas.
JOHN T. KELLEY III. Founding officer of SCI, trustee of PTR since January 1988,
an advisory trustee of SCI since December 1993 and Chairman of PACIFIC RETAIL.
From 1987 to 1991, Mr. Kelley was Chairman of the Board of Kelley-Harris
Company, Inc., El Paso, a real estate investment company and from 1968 to 1987,
Managing Director of LaSalle Partners Limited, specializing in corporate real
estate services. Mr. Kelley is a director of Tri State Media.
WILLIAM D. SANDERS. Founder, Chairman and Chief Executive Officer of Security
Capital. Previously, Mr. Sanders was Chairman and Chief Executive Officer of
LaSalle Partners Limited from 1968 through 1989. Mr. Sanders currently serves
as a director of CarrAmerica, R.R. Donnelley & Sons Company, Security Capital
USREALTY and Storage USA. He is also an advisory director of REGENCY. He is a
member of the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT"). He was previously a director of Continental Bank
Corporation, King Ranch, Inc., and Lone Star Technologies. He has also served
as a trustee of the University of Chicago and a trustee fellow of Cornell
University.
PETER S. WILLMOTT. President and Chief Executive Officer of Zenith Electronics
Corporation since July 1996, and Chairman and Chief Executive Officer of
Willmott Services, Inc. since 1989. Prior to that, Mr. Willmott was Chairman,
President and Chief Executive Officer of Carson Pirie Scott & Co. and, prior
thereto, President and Chief Operating Officer of Federal Express Corporation.
Mr. Willmott is a director of Federal Express Corporation and Zenith
Electronics Corporation. He is also Chairman of the Executive Committee of
Williams College.
C. RONALD BLANKENSHIP. Managing Director of Security Capital since March 1991
and Chairman of PTR since June 1991. After PTR's 1997 annual meeting of
shareholders, Mr. Blankenship will become the Non-Executive Chairman of PTR.
Mr. Blankenship is a director of Strategic Hotel Capital Incorporated and an
advisory director of ATLANTIC and Homestead. From July 1988 until June 1991,
Mr. Blankenship was a regional partner with Trammell Crow Residential in
Chicago, a multifamily real estate development and property management firm.
Prior thereto, Mr. Blankenship was Executive Vice-President and Chief Financial
Officer of the Mischer Corporation in Houston, a multi-business holding company
with investments primarily in real estate.
JEFFREY A. COZAD. Managing Director of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management Limited
since June 1996 and located in London, where he is responsible for investment
oversight, capital markets and investor relations. Previously, he was a Senior
Vice President of Security Capital Markets Group in its New York office where
he was a co-head of capital markets activities and where he provided capital
markets services for affiliates of Security Capital since 1991. Mr. Cozad is a
general securities principal registered with the National Association of
Securities Dealers, Inc. (the "NASD").
C. ROBERT HEATON. Senior Vice President for Human Capital for Security Capital
since March 1996 where he is responsible for the recruitment, performance
measurement, compensation and development of the firm's employees. Prior
thereto, Senior Vice President with Right Management Consultants, Inc., a
worldwide career management and human resources consulting firm from March 1994
to February 1996. Prior thereto, Managing Director and Member of the Executive
Committee, LaSalle Partners Limited, from June 1976 to February 1994.
W. JOSEPH HOULIHAN. Managing Director of Security Capital (EU) Investment
Research Group S.A. since April 1997 and located in Brussels, where he is
responsible for global investment research and strategic investments;
32
<PAGE>
former Director of Security Capital USREALTY from July 1995 to April 1997.
Prior thereto, he was Executive Vice President and Director of Institutional
Management Group at GIM Algemeen Vermogensbeheer ("GIM"), a Netherlands-based
investment management company where he specialized in publicly traded real
estate investments since joining GIM in 1977.
JEFFREY A. KLOPF. Senior Vice President and Secretary of Security Capital since
January 1996; from January 1988 to December 1995, Partner with Mayer, Brown &
Platt, where he practiced corporate and securities law. Mr. Klopf provides
securities offering and corporate acquisitions services and legal services to
Security Capital and its operating companies.
ANTHONY R. MANNO, JR. Managing Director of the Investment Research Group since
March 1997, where he is responsible for overseeing all investment and capital
allocation matters for Investment Research Group's public market securities
activities and also responsible for company and industry analysis, market
strategy and trading and reporting; from January 1995 to March 1997, he was
Managing Director of Security Capital Investment Research Group Incorporated,
where he performed the same functions. Mr. Manno was a member of Security
Capital's Investment Committee from March 1994 to June 1996. Prior to joining
Security Capital, Mr. Manno was a Managing Director of LaSalle Partners Limited
from March 1980 to March 1994.
CAROLINE S. MCBRIDE. Managing Director of the Strategic Group since March 1997;
Managing Director of Security Capital Investment Research Incorporated where
she is responsible for investment oversight of strategic investments in public
and private U.S. real estate operating companies. Prior to joining Security
Capital Investment Research Incorporated in June 1996, Mrs. McBride was with
IBM from July 1978 to May 1996. From 1994 to 1996 she was director of private
market investments for the IBM Retirement Fund where she was responsible for a
$3.7 billion real estate portfolio. Prior thereto, Mrs. McBride was director of
Finance, Investments and Asset Management for IBM's corporate real estate
division. Mrs. McBride is on the Board of Directors of the Pension Real Estate
Association (PREA), the Real Estate Research Institute and CarrAmerica.
DANIEL F. MIRANDA. Managing Director of the Investment Research Group since
March 1997; from September 1996 to March 1997 Managing Director of Security
Capital Investment Research Group Incorporated where he is responsible for
operating oversight of various investments relating to public and private U.S.
real estate operating companies. Prior thereto, Mr. Miranda was regional vice
president and later a managing director of General Electric Capital Real Estate
Finance and Services from September 1991 to September 1996, where he was
responsible for a real estate portfolio in the fourteen-state Midwest region.
MARY LOU ROGERS. Managing Director of the Strategic Group since March 31, 1997,
where she is responsible for the development of retail operating systems for
all of Security Capital's retailing-related initiatives. Prior thereto, she was
Senior Vice President and Director of Stores - New England for Macy's
East/Federated Department Stores, where she was responsible for 19 Macy's
stores in five states from November 1995 to March 1997; Senior Vice President
and Director of Stores--Atlanta for Macy's East/Federated Department Stores
from October 1994 to November 1995; Senior Vice President and Director of
Stores for Henri Bendel from November 1993 to October 1994 and Senior Vice
President and Regional Director of stores for Burdines Division/Federated
Department Stores from January 1986 to November 1993.
PAUL E. SZUREK. Managing Director of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management Limited
since January 1996 and located in London, where he is responsible for
operations, corporate finance and mergers and acquisitions. Prior thereto, Mr.
Szurek was Senior Vice President of Security Capital from June 1993 to January
1996 where he supervised corporate finance and corporate acquisitions and
oversaw legal services for affiliates of the Company. Mr. Szurek was Vice
President of Security Capital from April 1991 to June 1993.
THOMAS G. WATTLES. Managing Director of Security Capital since March 1991 and a
trustee of SCI since January 1993; he was a director of SCI's predecessor since
its formation in June 1991 and has been Non-Executive Chairman of SCI since
March 1997; prior thereto, a Co-Chairman and Chief Investment Officer of SCI
and the SCI REIT Manager (as defined below) since November 1993; Managing
Director of SCI and the SCI REIT Manager from January 1993 to November 1993,
and Director of the SCI REIT Manager since June 1991. From January 1991 to
December 1992, Mr. Wattles served as Managing Director of the PTR REIT Manager
(as defined below); from July 1989 to December 1990, Managing Partner of
Stanwich Advisors Incorporated, a real estate advisory and development services
company; from July 1985 to June 1989, Senior Vice President--Property Finance
Group of LaSalle Partners Limited, a corporate real estate services entity.
33
<PAGE>
SENIOR OFFICERS OF SECURITY CAPITAL AND CERTAIN AFFILIATES AFTER THE MERGERS
ARIEL AMIR--37--Vice President of Security Capital since June 1994 where he
provides securities offering and corporate acquisition services for affiliates
of the Company. Prior to joining Security Capital, Mr. Amir was an associate
attorney with the law firm of Weil, Gotshal & Manges in New York from September
1985 to April 1994 where he practiced securities and corporate law.
DARCY B. BORIS--34--Vice President of the Real Estate Research Group where she
conducts strategic market analyses for affiliates of Security Capital. Prior
thereto, Vice President of Security Capital Investment Research Incorporated
from June 1995 until March 1997, and an associate from December 1994 to June
1995. Prior thereto, Ms. Boris was with Security Capital Markets Group from
August 1993 to November 1994, where she provided capital markets services for
affiliates of the Company. Prior to joining Security Capital Markets Group, Ms.
Boris was associated with Summerhill Development Company, the multifamily
development subsidiary of Marcus & Millichap, Incorporated, from January 1987
to September 1991 where she managed the development of multifamily housing.
K. SCOTT CANON--35--Vice President of Security Capital Markets Group since
March 1997 and from August 1993 to January 1996, President of Security Capital
Markets Group from January 1996 to March 1997 and a member of Security Capital
Markets Group since March 1992, where he participates in capital markets and
institutional investor relations. Mr. Canon is a general securities principal
registered with the NASD.
MARK J. CHAPMAN--39--President of the Real Estate Research Group where he is
director of the group and conducts strategic market analyses for affiliates of
Security Capital. Prior thereto, Vice President of Security Capital Investment
Research Incorporated from November 1995 until March 1997. From November 1994
to November 1995, Mr. Chapman was a Vice President of PTR with asset management
responsibilities in five major markets. From July 1989 to November 1994, Mr.
Chapman was a Vice President at Copley Real Estate Advisors, Inc. where he
directed asset management for Copley assets located from Connecticut to
Virginia.
JAYSON C. CYR--48--Vice President of SCGroup since October 1994, where he
supervises accounting and financial reporting. Prior to joining Security
Capital, Mr. Cyr was controller for Lincoln Property Company from June 1990 to
June 1994.
ROBERT H. FIPPINGER--53--Vice President of Security Capital Markets Group since
June 1995, where he directs corporate communications services for affiliates of
Security Capital. Prior thereto, Mr. Fippinger headed corporate communication
services for affiliates of Security Capital from October 1994 to June 1995.
Prior to joining Security Capital, Mr. Fippinger was with Grubb & Ellis, in San
Francisco, California from November 1991 to October 1994, where he represented
corporate clients and provided tenant advisory services.
JEFFREY S. GOTTLIEB--38--Vice President of SCGroup since October 1994 where he
directs tax consulting and compliance services for affiliates of Security
Capital. Prior thereto, Mr. Gottlieb was Vice President of Security Capital
from October 1993 to October 1994. Prior to joining Security Capital, Mr.
Gottlieb was a senior tax manager with Coopers & Lybrand in Orlando, from
January 1991 to October 1993, where he was responsible for its central Florida
real estate practice.
GERARD DE GUNZBURG--49--Senior Vice President of Security Capital Markets Group
in its New York office since January 1997 where he provides capital markets
services for affiliates of Security Capital. Prior thereto, Mr. de Gunzburg was
Vice President of Security Capital Markets Group from January 1993 to January
1997. From June 1988 to December 1992, Mr. de Gunzburg was a consultant for
American and European companies. Mr. de Gunzburg is a general securities
principal registered with the NASD.
ALISON C. HEFELE--37--Vice President of Security Capital Markets Group in its
New York office since February 1994 where she provides capital markets services
for affiliates of Security Capital. Ms. Hefele is registered with the NASD.
Prior to joining Security Capital Markets Group, Ms. Hefele was a vice
president of Prudential Real Estate Investors from January 1990 to February
1994. She is a general securities representative registered with the NASD.
GARRET C. HOUSE--32--Vice President of Security Capital Markets Group since
September 1996 where he assists with financing activities for affiliates of the
Company. From May 1994 to August 1996, he assisted with financing activities
for affiliates of Security Capital and prior thereto, Mr. House was a member of
Security Capital's
34
<PAGE>
Management Development Program from May 1993 to May 1994. He is a general
securities representative registered with the NASD.
G. RONALD LESTER--39--Vice President of SCGroup since December 1993 where he
directs internal audit activities for affiliates of the Company. Prior to
joining Security Capital, Mr. Lester was a corporate audit manager for El Paso
Natural Gas Co. from April 1989 to December 1993 where he was responsible for
conducting financial, operational and electronic data processing audits for all
functions and subsidiaries of the corporation.
ROBERT I.S. MEYER--37--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management Limited
since April 1997 and located in London, where he is a member of the corporate
finance team. Prior thereto, he was Vice President of J.P. Morgan Securities
Limited from June 1993 to March 1997, where he was responsible for capital
markets origination among German financial institutions and corporations; from
June 1992 to May 1993, Mr. Meyer was with J.P. Morgan's venture/private equity
investment division.
GERALD R. MORGAN, JR.--34--Vice President of Security Capital since March 1995
where he is involved in treasury and corporate finance for affiliates of the
Company. Prior thereto, Mr. Morgan was in Security Capital's management
development program since July 1993.
JAMES H. POLK III--54--President of Security Capital Markets Group since March
1997 where he provides capital markets services for affiliates of the Company;
prior thereto, Managing Director of Security Capital Markets Group from August
1992 to March 1997. Mr. Polk is also a Trustee of PTR. Prior to joining
Security Capital Markets Group, Mr. Polk was President of PTR for 16 years and
past president and member of the Board of Governors of NAREIT. Mr. Polk is a
general securities principal registered with the NASD.
DAVID A. ROTH--30--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management Limited
since April 1997 and located in London, where he is responsible for mergers and
acquisitions. From October 1995 to March 1997, Mr. Roth was Vice President of
Investment Research Group, where he was responsible for researching corporate
and portfolio acquisitions. Prior thereto, he was an associate attorney with
the law firm of Wachtell, Lipton, Rosen and Katz in New York from December 1993
to October 1995, where he practiced securities and corporate law.
GERIOS ROVERS--34--Vice President of Security Capital (EU) Investment Research
Group S.A. since April 1997 and located in Brussels, where he participates in
global investment research; prior thereto, from July 1988 to March 1997, he was
an associate director of GIM Algemeen Vermogensbeheer responsible for client
servicing, client acquisition, portfolio management and research of publicly
traded real estate securities worldwide.
KENNETH D. STATZ--38--Senior Vice President of the Investment Research Group
since March 1997; Senior Vice President of Security Capital Investment Research
Incorporated since July 1996 where he is responsible for the development and
implementation of portfolio investment strategy. Prior thereto, Vice President
from May 1995 to June 1996. Prior to joining Security Capital, Mr. Statz was a
Vice President in the investment research department of Goldman, Sachs & Co.,
from February 1993 to January 1995, concentrating on research and underwriting
for the REIT industry. Prior thereto, Mr. Statz was a real estate stock
portfolio manager and a managing director of Chancellor Capital Management from
August 1982 to February 1992.
DONALD E. SUTER--40--Senior Vice President of Security Capital Markets Group
since May 1996 where he provides capital markets services for affiliates of
Security Capital; from October 1995 to April 1996, Mr. Suter was President and
Chief Operating Officer for Cullinan Properties Limited in Peoria, Illinois;
from July 1984 to October 1995, Mr. Suter was with LaSalle Partners Limited in
Chicago, Illinois where his last position held was Senior Vice President,
Corporate Finance Group. Mr. Suter is a general securities principal registered
with the NASD.
ROBERT S. UNDERHILL--41--Senior Vice President of the Strategic Group since
March 1997 and Senior Vice President of Security Capital Investment Research
Incorporated where he is responsible for researching corporate and portfolio
acquisitions. Mr. Underhill was a consultant for affiliates of Security Capital
from November 1994 to February 1995. Prior to joining Security Capital, Mr.
Underhill was a Senior Vice President of LaSalle Partners Limited from
September 1984 to October 1994 where he was responsible for the investment
management of a portfolio of office and retail properties.
35
<PAGE>
ANDREW N. WALKER--34--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management Limited
since March 1997 and located in London, where he is a member of the corporate
finance team. Prior thereto, from February 1995 to February 1997, he was a
European property analyst for Paribas Capital Markets; from May 1991 to January
1995, he was a managing director of Institutional Property Forecasting Services
in the U.K., a privately-held real estate research firm in England; and from
February 1991 to May 1991, he was a property analyst with S.G. Warburg
Securities (Japan) Ltd.
CLASSIFICATION OF DIRECTORS
Pursuant to the terms of the Charter, the directors are divided into three
classes. One class will hold office for a term expiring at the annual meeting
of shareholders to be held in 1998 (consisting of Messrs. Freidheim, Fuller and
Hunt), a second class will hold office for a term expiring at the annual
meeting of shareholders to be held in 1999 (consisting of Messrs. Kelley,
Sanders and Willmott), and a third class will hold office for a term expiring
at the annual meeting of shareholders to be held in 2000 (consisting of Messrs.
Bodman, Buerger and Frazee). Each director will hold office for the term to
which he or she is elected and until his or her successor is duly elected and
qualified. At each annual meeting of shareholders of Security Capital, the
successors to the class of directors whose terms expire at such meeting will be
elected to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election. See
"Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws."
COMMITTEES OF THE BOARD
The Board has established an Audit Committee consisting of Messrs. Fuller
(Chairman), Buerger, Freidheim and Willmott, each an independent director. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants, reviews the plans and results of the audit engagement with
the independent public accountants, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of Security Capital's internal accounting controls.
The Board has established a Management Development and Compensation Committee
(the "Compensation Committee") consisting of Messrs. Bodman (Chairman), Kelley
and Frazee, each an independent director. The Compensation Committee reviews
and approves compensation arrangements and plans of Security Capital and it
administers the various option plans of Security Capital described below.
The Board has established an Executive Committee consisting of Messrs. Sanders
(Chairman), Hunt and Frazee. The Executive Committee has full authority to act
on behalf of the Board between regular meetings of the Board, except with
respect to securities offerings.
COMPENSATION OF DIRECTORS
Security Capital pays an annual retainer of $35,000 to directors who are not
officers or employees of Security Capital or its affiliates; such amount is
paid quarterly to the directors in cash or, at the election of the director,
Class A Shares based on the then current fair market value of the Class A
Shares. Non-employee chairpersons of Board committees receive an additional
annual retainer of $3,000 payable in cash. Officers of Security Capital or its
affiliates who are directors are not paid any director fees.
In addition, pursuant to the Outside Directors Plan (as defined below), each
director who is not an employee of Security Capital or its affiliates is
entitled to receive, on January 1 of each year, an option to purchase 150 Class
A Shares at a price per Class A Share equal to the fair market value (as
defined) of one Class A Share on such date. See "--Outside Directors Plan."
Directors are reimbursed for any out-of-town travel expenses incurred in
connection with attendance at Board meetings.
INDEMNIFICATION
See "Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws--Director Liability Limitation and Indemnification" for a description of
the applicable indemnification provisions.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table presents the compensation for 1996 paid to the Chief
Executive Officer and the four other most highly compensated executive officers
of Security Capital and certain affiliates (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
----------------------------------------------------------
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ------------------------
SECURITIES
UNDERLYING
RESTRICTED STOCK
OTHER ANNUAL STOCK OPTIONS ALL OTHER
NAME AND POSITION SALARY BONUS COMPENSATION AWARDS (#) COMPENSATION
- ----------------- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William D. Sanders--
Chairman and Chief
Executive Officer $210,000 $404,000 - - - -
C. Ronald Blankenship--
Managing Director of
Security Capital and
Chairman of PTR 203,000 397,000 - - - -
Thomas G. Wattles--
Managing Director of
Security Capital and
Co-Chairman of SCI 197,000 353,000 - - - -
K. Dane Brooksher--
Co-Chairman and Chief
Operating Officer of
SCI 207,000 268,000 - - - -
David C. Dressler, Jr.--
Co-Chairman, President
and Chief Investment
Officer of Homestead 195,000 285,000 - - (1) - -
</TABLE>
- --------
(1) Does not include 25,000 restricted shares of Homestead common stock
purchased, and options to purchase 60,000 shares of Homestead common stock
granted, in October 1996.
37
<PAGE>
Option Grants
During 1996, options for 47,982 Class A Shares were granted by the Compensation
Committee to 224 key employees and officers of Security Capital and its
subsidiaries at exercise prices equal to $1,139 per Class A Share for 43,314
shares and from between $985 and $1,126 per Class A Share for 4,668 shares. The
following table sets forth certain information with respect to individual
grants of options to each of the Named Executive Officers.
---------------------------------------------
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF
CLASS A SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION DATE PRESENT
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE (1)
- ---- -------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
William D. Sanders 1,097.5 2.29% $1,139 12/3/06 $497,705
C. Ronald Blankenship 1,031.6 2.15 1,139 12/3/06 467,843
Thomas G. Wattles 921.9 1.92 1,139 12/3/06 418,072
K. Dane Brooksher 658.5 1.37 1,139 12/3/06 298,623
David C. Dressler,
Jr.(2) 439.0 .91 1,139 12/3/06 199,082
</TABLE>
- --------
(1) The amounts shown are based on the Black-Scholes option pricing model. The
material assumptions incorporated in the Black-Scholes model for estimating the
value of the options include the following: exercise prices of $1,139 equal to
the estimated fair market value of the Class A Shares on the date of grant;
average expected option term of seven years; interest rate of 6.32% which
represents the interest rate on the date of grant on a U.S. Treasury security
with a maturity date corresponding to the option term; expected volatility of
20% calculated based on (i) the annualized weekly volatility of Berkshire
Hathaway Class B shares over the period of May 1996 to February 1997, (ii)
monthly Class A Shares estimated fair market values for 1995 and 1996, (iii)
consideration of the volatility of various publicly traded REITs and (iv) an
estimate of Security Capital's weighted-average volatility; and dividends at
the rate of $0 per Class A Share. The actual value, if any, an option holder
will realize upon exercise of an option will depend on the excess of the market
value of the Company's Class A Shares over the exercise price on the date the
option is exercised. There is no assurance the value realized by an option
holder will be at or near the value estimated by the Black-Scholes model.
(2) Does not include options to purchase 60,000 shares of Homestead common
stock at $10 per share which were granted on October 15, 1996, and which expire
on October 15, 2006.
Aggregated Option Exercises in 1996 and Year-End Option Values
The following table sets forth certain information concerning the year-end
value on a fully converted basis of unexercised options owned by such executive
officers.
--------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER/AMOUNT OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT YEAR-END
--------------------------------------------------- VALUE OF UNEXERCISED
CLASS A CLASS A 2014 CONVERTIBLE IN-THE-MONEY OPTIONS AT
SHARES SHARE OPTIONS (#) DEBENTURE OPTIONS DECEMBER 31, 1996 (1)
ACQUIRED ON VALUE ------------------------- ------------------------- -------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William D.
Sanders(2) - - 3,816.8 1,694.0 $2,160,243 $ 409,500 $4,300,573 $ 356,110
C. Ronald
Blankenship - - 3,558.8 2,955.4 2,014,341 1,071,792 4,010,002 1,868,414
Thomas G. Wattles - - 2,918.5 1,564.1 1,651,728 874,547 3,288,369 1,491,834
K. Dane Brooksher - - 854.6 2,583.3 426,000 1,362,449 960,971 2,687,823
David C. Dressler, Jr.(3) - - 1,330.3 2,101.2 752,979 998,776 2,536,038 3,239,374
</TABLE>
- --------
(1) Based on a December 31, 1996 estimate of net asset value of $1,237 per
Class A Share.
(2) Mr. Sanders also had exercisable warrants for 17,993 Class A Shares and
$10,179,812 of 2014 Convertible Debentures on December 31, 1996. See "Certain
Relationships and Transactions."
(3) Does not include options to purchase 60,000 shares of Homestead common
stock at $10 per share. The closing price of Homestead common stock on December
31, 1996 was $18 per share. None of these options were exercisable at December
31, 1996.
38
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Security Capital has no employment contracts with any executive officer and no
plans or arrangements by which any such executive officer will be compensated
as a result of his resignation or retirement or any other termination of his
employment with Security Capital and its subsidiaries or, except as described
below under "--1995 Option Plan," in connection with a change in control of
Security Capital.
OUTSIDE DIRECTORS PLAN
On September 17, 1996, the Board approved the Security Capital Group
Incorporated Outside Directors Plan (the "Outside Directors Plan"). The Outside
Directors Plan has been filed as an exhibit to the registration statement of
which this Prospectus forms a part and the following summary of the material
terms of the Outside Directors Plan is qualified in its entirety by reference
to the actual terms thereof.
The purpose of the Outside Directors Plan is to enable the directors of
Security Capital who are not employees or officers of Security Capital or any
of its affiliates ("Outside Directors") to increase their ownership of Security
Capital and thereby further the identity of their interests with those of
Security Capital's other shareholders. To achieve the foregoing objective, the
Outside Directors Plan provides for grants of options ("Options") to purchase
Class A Shares. The Secretary of Security Capital (the "Administrator")
administers the Outside Directors Plan with a view to Security Capital's best
interests and the Outside Directors Plan's objectives. The Administrator has
authority to adopt administrative guidelines, rules and regulations relating to
the Outside Directors Plan and to make all determinations necessary or
advisable for the implementation and administration of the Outside Directors
Plan.
The number of Class A Shares reserved for issuance upon exercise of Options
granted under the Outside Directors Plan is 7,000. The Class A Shares subject
to the Outside Directors Plan may be currently authorized but unissued Class A
Shares or treasury Class A Shares held or subsequently purchased by Security
Capital, including Class A Shares purchased in the open market or in private
transactions. If Security Capital shall effect any subdivision or consolidation
of Class A Shares, payment of a stock dividend, stock split, combination of
Class A Shares or recapitalization or other increase or reduction of the number
of Class A Shares outstanding without receiving compensation therefor in money,
services or property, then the Administrator shall adjust: (i) the number of
Class A Shares available under the Outside Directors Plan; (ii) the number of
Class A Shares available under any Outside Directors Plan limits; (iii) the
number of Class A Shares subject to any outstanding Options; (iv) the number of
Class A Shares subject to future grant; and (v) the per share exercise price
under any outstanding Option.
On September 17, 1996, each Outside Director was granted an option to purchase
150 Class A Shares at an exercise price of $1,066 per share, except a recently
appointed Outside Director who was granted options to purchase 75 Class A
Shares at an exercise price of $1,066 per share, the fair market value of the
Class A Shares on the date of the grant. On January 1, 1997, each Outside
Director was granted an Option to purchase 150 Class A Shares at an exercise
price of $1,237 per share, the fair market value of the Class A Shares on such
date. On January 1 of each year, an Outside Director serving on such date will
be granted an Option to purchase 150 Class A Shares at an exercise price equal
to the fair market value of the Class A Shares on such date. In the event an
Outside Director is appointed during the year, such person will receive an
award reduced to reflect the portion of the year such person will serve as an
Outside Director.
Each Option becomes exercisable one year from the date of grant, or earlier in
the event of death or disability of the director. Each Option shall expire on
the earlier of: (i) the ten-year anniversary of the date of grant; (ii) the
three-month anniversary of the director's termination for any reason other than
death, disability or retirement; or (iii) the one-year anniversary of the
director's termination by death, disability or retirement. Options are not
transferable prior to exercise, except as designated by the director by will or
by the laws of descent and distribution. Notwithstanding the previous sentence,
the Administrator may permit Options under the Outside Directors Plan to be
transferred to or for the benefit of the director's family.
If Security Capital is reorganized, merged or consolidated or is party to a
plan or exchange with another corporation, pursuant to which reorganization,
merger, consolidation or plan of exchange the shareholders of Security Capital
receive any shares of stock or other securities or property, or Security
Capital shall distribute securities of another corporation to its shareholders,
there shall be substituted for the Class A Shares subject to outstanding
Options an appropriate number of shares of each class of stock or amount of
other securities or property which were distributed to the shareholders of
Security Capital in respect of such Class A Shares; provided that, upon the
occurrence of a reorganization of Security Capital or any other event described
in this paragraph, any successor to Security Capital shall be substituted for
Security Capital.
39
<PAGE>
The Outside Directors Plan was approved by the shareholders of Security Capital
at a special meeting of shareholders in April 1997 and may be amended or
terminated at any time by the Board.
1995 OPTION PLAN
The following description of certain provisions of the Security Capital Group
Incorporated 1995 Option Plan (the "1995 Option Plan") is qualified in its
entirety by reference to the 1995 Option Plan, a copy of which is filed as an
exhibit to this registration statement.
General
With respect to Options granted prior to December 3, 1996, the 1995 Option Plan
provided for the granting of Options to purchase Class A Shares in tandem with
Options to purchase 2014 Convertible Debentures. The Options must be exercised
in tandem and must be in a unit. With respect to Options granted on or after
December 3, 1996, the 1995 Option Plan provides for the granting of Options to
purchase only Class A Shares. The Compensation Committee administers the 1995
Option Plan. The Compensation Committee determines the key and emerging key
employees of Security Capital or its subsidiaries or affiliates to whom awards
under the 1995 Option Plan will be granted ("Participants") and the terms and
conditions of such awards. Each member of the Compensation Committee must be a
"non-employee" as such term is defined in Rule 16b-3 promulgated under Section
16 of the Exchange Act.
Options
An Option may be granted so as to qualify for treatment as an incentive stock
option (an "Incentive Option") pursuant to Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or so as not to so qualify (a "Non-
Qualified Option"). The exercise price (the "Option Price") for each Option
shall be determined by the Compensation Committee and shall not be less than
the greater of the fair market value of the underlying Class A Shares on the
date of the grant of the Option or the par value of the underlying shares. The
full purchase price of each Class A Share and 2014 Convertible Debentures
purchased upon the exercise of any Option shall be paid at the time of
exercise. The Option Price shall be payable in cash. In addition, Participants
who own Class A Shares and 2014 Convertible Debentures for at least six months
may surrender such shares or debentures (valued at fair market value as of the
day such shares or debentures are tendered) for all or a portion of the Option
Price. No Option may be exercised unless cash or previously purchased Security
Capital securities are paid for the Option Price.
Subject to certain adjustments described below, Options for up to 139,716
shares of Class A Shares (representing 5.4% of the outstanding Class A Shares
on a fully diluted basis) may be granted. Class A Shares issuable on conversion
of the 2014 Convertible Debentures are included in such maximum number of
shares for which Options may be granted. Class A Shares issued upon exercise of
Options granted under the 1995 Option Plan may be either authorized and
unissued shares or shares issued and thereafter acquired by Security Capital.
Class A Shares allocated to an Option which expires or terminates without the
issuance of Class A Shares may be allocated to new Options granted under the
1995 Option Plan.
If Security Capital shall effect any subdivision or consolidation of Class A
Shares or other capital readjustment, payment of stock dividend, stock split,
combination of Class A Shares or recapitalization or other increase or
reduction of the number of Class A Shares outstanding without receiving
compensation therefor, then the Compensation Committee shall adjust (i) the
number of Class A Shares available under the 1995 Option Plan, (ii) the number
of Class A Shares subject to outstanding Options, and (iii) the per share price
under any outstanding Option. If Security Capital is reorganized, merged or
consolidated or is party to a plan of exchange with another corporation,
pursuant to which reorganization, merger, consolidation or plan of exchange,
the shareholders of Security Capital receive any shares of stock or other
securities or property, or Security Capital shall distribute securities of
another corporation to its shareholders, there shall be substituted for the
Class A Shares subject to outstanding Options an appropriate number of shares
of each class of stock or amount of other securities or property which were
distributed to the shareholders of Security Capital in respect of such Class A
Shares, subject to the following: (i) if the Compensation Committee determines
that the substitution described in this sentence would not be fully consistent
with the purposes of the 1995 Option Plan or the purposes of the outstanding
Options under the 1995 Option Plan, the Compensation Committee may make such
other adjustments to the Options to the extent that the Compensation Committee
determines such adjustments are consistent with the purposes of the 1995 Option
Plan and of the affected Options, (ii) all or any of the Options may be
cancelled by the Compensation Committee on or
40
<PAGE>
immediately prior to the effective date of the applicable transaction, but only
if the Compensation Committee gives reasonable advance notice of the
cancellation to each affected Participant, and only if either (A) the
Participant is permitted to exercise the Option in full for a reasonable period
prior to the effective date of the cancellation or (B) the Participant receives
payment or other benefits that the Compensation Committee determines to be
reasonable compensation for the value of the cancelled Options, and (iii) upon
the occurrence of a reorganization of Security Capital or any other event
described in this sentence, any successor to Security Capital shall be
substituted for Security Capital to the extent that Security Capital and the
successor agree to such substitution. Finally, upon the sale to, or exchange
with, a third party unrelated to Security Capital of all or substantially all
of the assets of Security Capital, all Options shall be cancelled. If Options
are cancelled, then, with respect to any affected Participant, either (i) the
Participant shall be provided with reasonable advance notice of the
cancellation, and the Participant shall be permitted to exercise the Option in
full for a reasonable period prior to the effective date of the cancellation,
or (ii) the Participant shall receive payment or other benefits that the
Compensation Committee determines to be reasonable compensation for the value
of the cancelled Options.
Subject to earlier termination as described below, the expiration date for each
Option shall be determined by the Compensation Committee, but the expiration
date with respect to any Option shall be no later than the earliest to occur
of: (i) the ten-year anniversary of the date on which the Option is granted;
(ii) if the Participant's termination occurs by reason of death, disability or
retirement, the one-year anniversary of the date of termination, except in the
event of termination due to death or disability, all Options become immediately
exercisable; (iii) if the Participant's termination occurs for reasons other
than death, disability, retirement or cause, the three-month anniversary of
such date of termination; and (iv) if the Participant's termination occurs for
cause, the date of termination.
In the event that (i) a Participant's employment is terminated by Security
Capital or a successor to Security Capital or an affiliated entity which is his
or her employer for reasons other than cause following a Change in Control (as
defined in the 1995 Option Plan) of Security Capital or (ii) the 1995 Option
Plan is terminated by the Company or its successor following a Change in
Control without provision for the continuation of outstanding Options, all
Options which have not otherwise expired shall become immediately exercisable.
Options granted under the 1995 Option Plan are not transferable other than by
will, by the laws of descent and distribution or, to the extent provided by the
Compensation Committee, pursuant to a qualified domestic relations order. To
the extent that the Participant who receives an Option under the 1995 Option
Plan has the right to exercise such Option, the Option may be exercised during
the lifetime of the Participant only by the Participant. Notwithstanding the
foregoing, the Compensation Committee may permit Options under the 1995 Option
Plan to be transferred to or for the benefit of the Participant's family,
subject to such limits as the Compensation Committee may establish. However, in
no event shall an Incentive Option be transferable to the extent that such
transferability would violate the requirements applicable to such Option under
Section 422 of the Code.
The Compensation Committee may provide the Participant with the right to
receive a replacement Option, in Class A Shares only, for the number of Class A
Shares and 2014 Convertible Debentures used to satisfy the Participant's
minimum tax obligations upon exercise of the original Option. In order to
receive the replacement Option, the original Option must be exercised prior to
termination of the Participant's employment. A replacement Option shall be
granted on the date of exercise of the original Option to which it relates with
an Option Price equal to the fair market value on the date of the grant of the
replacement Option. Additionally, a replacement Option shall have the same
expiration date as the original Option to which it relates and shall be
exercisable no earlier than six months after its grant date.
Amendment and Termination
The 1995 Option Plan may, at any time, be amended or terminated by the Board,
provided that, subject to the provision relating the adjustment of Class A
Shares, no amendment or termination may materially adversely affect the rights
of any Participant or beneficiary under any Option granted under the 1995
Option Plan prior to the date such amendment is adopted by the Board.
OTHER OPTION PLANS
Security Capital's predecessors also adopted the Security Capital Realty
Investors Incorporated Option Plans A and B (each a "Realty Option Plan") and
the Security Capital Group Incorporated 1991 and 1992 Option Plans A and the
1991 and 1992 Option Plans B (each a "Group Option Plan"). The Realty Option
Plans provide for the grant of
41
<PAGE>
options to purchase Class A Shares. In 1994, to reflect a distribution of debt
securities to shareholders, all of the outstanding options under the Realty
Option Plans were adjusted to add a tandem right to purchase 2014 Convertible
Debentures. Each of the Group Option Plans provides for the grant of tandem
options to purchase Class A Shares and 2014 Convertible Debentures. Generally,
all of the plans contain terms substantially similar to the 1995 Option Plan
except that the Group 1991 and 1992 Option Plans A and B provide for the
automatic grant of options to purchase Class A Shares in tandem with 2014
Convertible Debentures. Each Class A Share under an option must be exercised in
tandem with a specified face amount of 2014 Convertible Debentures (referred to
as a "Unit"). The number of Class A Shares reserved for issuance pursuant to
options under the Realty Option Plans A and B and the Group 1991 and 1992
Option Plans A and the 1991 and 1992 Option Plans B (including Class A Shares
issuable upon the conversion of the 2014 Convertible Debentures) are 16,366,
3,845, 9,982, 29,946, 7,010 and 21,031, respectively. Of such shares, 313, 0,
0, 0, 0 and 0, respectively, remain available for the granting of Options
thereunder.
42
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for Security
Capital as of and for the years ended December 31, 1996, 1995, 1994, 1993, 1992
and 1991. The Company's consolidated financial information included below has
been derived from the Company's consolidated financial statements, which have
been audited by Arthur Andersen LLP, independent accountants. Their report on
the consolidated financial statements for the years ended December 31, 1996,
1995 and 1994, and the audited financial statements for those years, are
included in this Prospectus beginning on Page F-2. The following selected
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements and notes thereto included in this
Prospectus.
<TABLE>
----------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
Dollars in thousands, 1996 1995 (1) 1994 1993 1992 1991
except per share data ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Equity in earnings $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues 145,907 103,634 146,545 10,916 1,592 -
Services Division
revenues (2) 77,512 49,404 - - - -
Total revenues 398,122 200,534 156,855 17,503 3,534 467
Rental expenses 54,050 37,948 23,052 1,428 292 -
General and
administrative (2) 116,122 79,100 18,755 2,555 679 205
Interest expense:
Security Capital:
Convertible Debentures/
notes (3) 93,912 78,785 29,647 1,228 180 -
Line of credit 6,256 5,977 6,424 2,196 960 88
Majority-owned
subsidiaries (4) 17,056 19,042 17,718 362 - -
---------- ---------- ---------- --------- --------- ---------
Total interest expense 117,224 103,804 53,789 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares $ 24,145 $ (51,112) $ (7,685) $ 5,155 $ 1,014 $ 141
----------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 (1) 1994 1993 1992 1991
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Series A Preferred Stock
dividends $ 56.25 - - - - -
Net earnings (loss)
attributable to Class A
Shares $ 21.30 $ (57.00) $ (16.74) $ 39.12 $ 21.61 $ 3.96
Class A Shares
distributions paid (5) - - $ 33.50 $ 60.00 $ 55.00 $ 24.95
Weighted average Class A
Shares outstanding 1,133,711 896,681 458,945 131,776 46,913 35,565
----------------------------------------------------------------------
<CAPTION>
AS OF DECEMBER 31,
1996 1995 (1) 1994 1993 1992 1991
Dollars in thousands ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments, at equity $1,438,937 $ 930,043 $ 230,756 $ 161,270 $ 68,160 $ 24,911
Real estate, net of
accumulated
depreciation (1) 1,365,373 865,367 2,005,937 478,630 41,577 -
Total assets 3,071,884 2,005,578 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3) 940,197 718,611 514,383 48,970 6,532 -
Majority-owned
subsidiaries (4) 257,099 118,524 301,787 47,988 - -
Minority interests 394,537 159,339 554,752 157,545 4,884 -
Total shareholders' equity $1,061,302 $ 679,061 $ 359,859 $ 293,821 $ 57,847 $ 16,314
</TABLE>
- -------
(1) Prior to 1995, Security Capital consolidated the accounts of SCI and
PACIFIC. During 1995, Security Capital's ownership of SCI decreased to less
than 50% and PACIFIC was merged into PTR. Accordingly, these entities were
deconsolidated effective January 1, 1995.
(2) Security Capital resulted from the 1995 Merger. See Note 1 to the Company's
consolidated financial statements included in this Prospectus for more
information concerning the 1995 Merger and the predecessor entity.
(3) During 1994, Security Capital made a $757.50 per share distribution of the
2014 Convertible Debentures resulting in a total increase of $417.2 million in
outstanding 2014 Convertible Debentures.
(4) Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies.
(5) For the years ended December 31, 1994, 1993 and 1992, Security Capital
elected to be taxed as a REIT and made cash distributions to its shareholders.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information" and the financial statements included elsewhere in this
Prospectus. Historical results and percentage relationships set forth in
"Selected Financial Information" and the consolidated financial statements of
Security Capital are not indicative of the future operations of Security
Capital.
OVERVIEW
Security Capital has obtained its income historically from two sources: (1)
Security Capital's share of earnings in ATLANTIC, PTR, SCI, Security Capital
USREALTY and Homestead, some of which Security Capital accounts for by the
equity method where it owns less than a 50% controlling interest (PTR, SCI and
Security Capital USREALTY) and others of which are consolidated in Security
Capital's consolidated financial statements (ATLANTIC and Homestead) and (2)
financial services revenues earned by the Real Estate Research Group, the
Investment Research Group and the Financial Services Group and, prior to the
Mergers, the REIT management and property management companies. Revenues from
the Services Division are only reflected in Security Capital's consolidated
financial statements if they were earned from investees accounted for by the
equity method. Services Division revenues earned from consolidated investees
are eliminated in the Company's consolidated financial statements. Services
Division revenues earned from PTR and SCI have historically been based upon a
percentage of the cash flow from operations or a percentage of revenues, as
defined in the applicable REIT management and property management agreements,
respectively. See "Relationships with Operating Companies--PTR--PTR REIT
Management Agreement," "--PTR Property Management," "--SCI--SCI REIT Management
Agreement" and "--SCI Property Management."
Security Capital USREALTY, in accordance with generally accepted accounting
principles, accounts for its investments at market value or estimated fair
value (depending on whether the investment is publicly traded) and reflects
changes in such values in its statement of income pursuant to fair value
accounting principles. The Company accounts for its investment in Security
Capital USREALTY using the equity method and, as a consequence, the Company's
results of operations are affected by changes in the fair value of Security
Capital USREALTY's investments. Security Capital USREALTY values its
investments in publicly traded companies at market determined by using closing
market prices as of the relevant balance sheet date. Security Capital USREALTY
values its investments in private companies at fair value, generally determined
at cost, or an appropriate lower value if the investment is not performing as
expected. If substantial additional capital is raised by an investee from
independent third parties in a private placement, Security Capital USREALTY
values its investment at the price at which that capital was raised when a
substantial percentage of the new subscriptions have been funded. In addition,
through an advisory relationship with Security Capital USREALTY, the Services
Division also earns advisory fee revenues based on a percentage of the fair
value of Security Capital USREALTY's investments (not including short-term
investments and investments in Security Capital). See "Relationships with
Operating Companies--Security Capital USREALTY--Advisory Agreement" and "--Sub-
Advisory Agreement."
Effective January 1, 1995, the predecessor of Security Capital, Security
Capital Realty Incorporated, acquired Security Capital Group Incorporated.
Subsequently, the merged entity was renamed Security Capital Group
Incorporated. As part of the 1995 Merger, Security Capital acquired the
Services Division. See Note 1 to the Company's consolidated financial
statements included herein. From 1992 until the 1995 Merger, Security Capital
Realty Incorporated elected to be taxed as a REIT and, accordingly, made cash
distributions to its shareholders. On March 23, 1995, the merger of PACIFIC
with and into PTR (the "PTR Merger") was completed. See "Relationships with
Operating Companies--PTR--Merger and Public Offerings" and Note 3 to the
Company's consolidated financial statements included herein. On October 17,
1996, Security Capital, ATLANTIC and PTR spun-off their respective extended-
stay lodging assets to Homestead. See "Relationship with Operating Companies--
Homestead--Homestead Transaction" and Note 3 to the Company's consolidated
financial statements included herein.
If the proposed Mergers involving ATLANTIC, PTR and SCI are consummated,
Security Capital will exchange its interests in the applicable REIT management
companies and property management companies for common shares of ATLANTIC, PTR
and SCI, respectively. Although the effects of completion of the proposed
Mergers on the
44
<PAGE>
Company's future consolidated results of operations are complex, the Company
expects reductions in Services Division revenues relating to the sale of the
REIT management and property management companies for PTR and SCI to be
substantially offset by decreases in Company-level personnel and other costs
attributable to the operation of such companies and increases in capital
investments revenues attributable to its ownership of additional common shares
of PTR and SCI.
Please refer to the Index to Financial Statements for the audited financial
statements of PTR, SCI and Security Capital USREALTY, Security Capital's
unconsolidated affiliates that are accounted for by the equity method.
1996 COMPARED TO 1995
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $19.0 million, or 21%, from
$89.6 million in 1995 to $108.6 million in 1996.
Equity in earnings of less than 50% owned investees
Security Capital's share of SCI's earnings increased 21% from $21.0 million in
1995 to $25.4 million in 1996. This increase was primarily attributable to an
increase in the amount of distribution space owned and leased by SCI (80.6
million square feet at December 31, 1996 compared to 58.5 million square feet
at December 31, 1995) and increased rental rates on renewal leases for
previously occupied space, and was partly offset by a small decrease in SCI's
average occupancy levels (93.4% in 1996 compared to 95.4% in 1995). At December
31, 1996 and 1995, Security Capital's ownership interest in the outstanding
common shares of SCI was 46% and 48%, respectively.
Security Capital's share of PTR's earnings increased 62% from $24.6 million in
1995 to $39.8 million in 1996. This increase was primarily attributable to a
substantial increase in the number of multifamily properties owned by PTR
(42,702 operating units at December 31, 1996 compared to 38,737 operating units
at December 31, 1995), and significant gains ($37.5 million) on sales of
properties in 1996. At December 31, 1996 and 1995, Security Capital's ownership
interest in the outstanding common shares of PTR was 36% and 38%, respectively.
Security Capital's share of Security Capital USREALTY's earnings increased
substantially from $0.1 million in 1995 to $103.2 million in 1996. Security
Capital USREALTY effectively commenced its investment activities in 1996, and
at December 31, 1996, Security Capital USREALTY had investments at cost of
$1.18 billion with a fair market value of $1.43 billion, resulting in
unrealized appreciation of $250 million which is accounted for by Security
Capital USREALTY pursuant to fair value accounting principles. In addition,
Security Capital USREALTY recorded net investment income (defined as dividends
and other investment income net of administration expenses, advisor fees, taxes
and interest) of $16.4 million in 1996. At December 31, 1996 and 1995, Security
Capital's ownership interest in the outstanding common stock of Security
Capital USREALTY was 39% and 32%, respectively.
Rental Operations--from greater than 50% owned consolidated investees
Rental Revenues
Rental revenues increased $42.3 million, or 41%, from $103.6 million in 1995 to
$145.9 million in 1996. This increase was primarily attributable to an increase
in the number of multifamily units owned and operated by ATLANTIC (19,241
operating units at December 31, 1996 compared to 15,823 operating units at
December 31, 1995), coupled with stable occupancies (approximately 95%) in both
1996 and 1995. Also accounting for part of the increase in rental revenues is
the consolidation of Homestead after the spin-out transaction completed on
October 17, 1996 by Security Capital, ATLANTIC and PTR of their extended-stay
lodging assets. Homestead generated $8.2 million in revenues for the two and
one-half month period ended December 31, 1996.
Other Income, Net
Other income consists of interest and miscellaneous income of $3.4 million and
$1.8 million in 1996 and 1995, respectively, and in 1996 includes miscellaneous
gains on sales of ATLANTIC properties.
Rental Expenses
Rental expenses increased by $16.1 million, or 42%, to $54.0 million in 1996
from $37.9 million in 1995. The increase was primarily attributable to the
increase in the number of ATLANTIC's operating multifamily communities
discussed previously. ATLANTIC's rental expenses increased $12.0 million
(excluding REIT and property management fees) in 1996 compared to 1995.
Homestead's rental expenses were $4.1 million for the period from October 17,
1996 to December 31, 1996.
45
<PAGE>
Depreciation and Amortization
Total depreciation and amortization for Security Capital was $34.5 million and
$26.0 million in 1996 and 1995, respectively. Of those amounts, $21.9 million
and $15.9 million represented depreciation and amortization from rental
operations in 1996 and 1995, respectively.
Depreciation for ATLANTIC increased $4.9 million to $20.8 million in 1996 from
$15.9 million in 1995, an increase of 31%, due to the increase in the number of
operating multifamily communities between 1995 and 1996. Depreciation for
Homestead was $1.1 million for the two and one-half month period ended December
31, 1996. The remaining depreciation and amortization of $12.6 million and
$10.1 million in 1996 and 1995, respectively, is attributable to the Services
Division, which is discussed below.
SERVICES DIVISION
Revenues
Services Division revenues increased from $49.4 million in 1995 to $77.5
million in 1996. Services Division revenues are only reflected in the Company's
consolidated financial statements if they were earned from investees in which
Security Capital owns less than a 50% interest. Financial services revenues
earned from PTR and SCI are based on a percentage of the cash flow from
operations or on a percentage of revenues, as defined by the REIT and property
management agreements, respectively. Through the Advisory Agreement (as defined
below) with Security Capital USREALTY, Security Capital earns revenues based on
a percentage of the fair value of Security Capital USREALTY's investments (not
including short term investments and investments in Security Capital). The
increase of $28.1 million in Services Division revenues in 1996 as compared to
1995 was primarily attributable to growth in operations at each of the
Company's non-consolidated investees. In particular, financial services
revenues earned from SCI increased $13.8 million, financial services revenues
earned from PTR increased $3.8 million and advisory revenues earned from
Security Capital USREALTY increased $7.9 million. The remaining services
revenues of $2.6 million were earned by Security Capital Markets Group.
Services Division revenues and associated expenses will be reduced
substantially following completion of the proposed Mergers. See "--Overview."
Depreciation and Amortization
As discussed above, total depreciation and amortization for Security Capital
was $34.5 million in 1996, $12.6 million of which was attributable to Services
Division companies, representing an increase of $2.5 million over Services
Division depreciation and amortization for 1995 of $10.1 million. Both the 1996
and 1995 amounts included approximately $7.9 million of amortization of
goodwill from the 1995 Merger, as further described in Note 1 to Security
Capital's consolidated financial statements. The $2.5 million increase between
1995 and 1996 is a result of additional depreciation on furniture, fixtures and
equipment (consisting primarily of computer and communications equipment)
acquired in connection with the expansion of the Services Division and Security
Capital's decision to fund additional investments in information technology.
INTEREST EXPENSE
Security Capital's consolidated interest expense consists of interest on the
2014 Convertible Debentures and 2016 Convertible Debentures, interest on
revolving lines of credit which are obligations of Security Capital and
ATLANTIC and interest on mortgage notes payable which are obligations of
ATLANTIC and Homestead. Interest expense for 1996 and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
SECURITY CAPITAL ATLANTIC HOMESTEAD TOTAL
--------------------- --------------------- --------- ---------------------
1996 1995 1996 1995 1996 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Convertible Debentures $ 93,912 $ 78,785 - - - $ 93,912 $ 78,785
Lines of credit 6,256 5,977 $ 16,947 $ 15,784 - 23,203 21,761
Mortgage notes payable - - 9,484 7,662 $ 2,978 12,462 7,662
Capitalized interest - - (10,250) (4,404) (2,103) (12,353) (4,404)
--------- --------- --------- --------- --------- --------- ---------
Total $ 100,168 $ 84,762 $ 16,181 $ 19,042 $ 875 $ 117,224 $ 103,804
========= ========= ========= ========= ========= ========= =========
</TABLE>
46
<PAGE>
Debenture interest increased as a result of the issuance of 2016 Convertible
Debentures in 1996 totalling $226.5 million as well as the issuance of an
additional $185 million of 2014 Convertible Debentures during 1995. See the
discussion of "Convertible Debt" in Note 4 to the Company's consolidated
financial statements included herein.
ATLANTIC's mortgage interest expense increase in 1996 was the result of an
increase in average mortgage debt outstanding.
ATLANTIC's line of credit interest expense increase in 1996 was primarily
attributable to an increase in the average outstanding balance ($204.3 million
in 1996 as compared to $178.3 million in 1995) and was partially offset by a
lower weighted-average interest rate (7.39% in 1996 as compared to 7.92% in
1995). The increase was also attributable to increased amortization of loan-
related costs.
The overall increase in interest expense for ATLANTIC was offset by an increase
in capitalized interest of $5.8 million in 1996 over 1995. The increase in
capitalized interest was attributable to ATLANTIC's increased development
activity.
Homestead's mortgage interest expense for 1996 was attributable to Homestead's
borrowing under its funding commitment agreement with PTR for development of
extended-stay lodging facilities. Interest expense was recorded for the period
from October 17, 1996, the date of the spin-out transaction, through December
31, 1996. Interest expense for Homestead was also affected by the amortization
of deferred financing costs and other loan-related costs incurred as a result
of the spin-out.
PAYROLL AND RELATED COSTS
Payroll and related costs increased by $24.0 million, or 43%, in 1996 to $80.1
million from $56.1 million in 1995. The increase was primarily attributable to
the expansion of the Services Division, including the hiring of additional
professionals. Security Capital continues to make substantial investments in
personnel, operating systems and research capabilities in order to take
advantage of future growth opportunities. Payroll and related costs will be
reduced following the proposed Mergers as a result of the transfer of personnel
employed by Security Capital to PTR and SCI. See "--Overview."
GENERAL AND ADMINISTRATIVE
General and administrative costs increased by $13.0 million, or 56%, in 1996 to
$36.0 million from $23.0 million in 1995. The increase was directly
attributable to the increase in the number of employees as a result of the
growth of the Services Division. General and administrative costs will be
reduced following the proposed Mergers as a result of the transfer of personnel
employed by Security Capital to PTR and SCI. See "--Overview."
PROVISION FOR INCOME TAXES
The provision for income taxes in 1996 was primarily attributable to deferred
income taxes on the equity in earnings of Security Capital USREALTY, none of
which is currently taxable. In 1995, Security Capital had net deferred tax
assets (primarily net operating losses) that were completely offset by a
valuation allowance. Accordingly, no provision for income taxes was recorded in
1995. See Note 8 to the Company's consolidated financial statements included
herein.
MINORITY INTERESTS
Minority interests increased from $4.8 million in 1995 to $13.4 million in 1996
due to increased earnings at ATLANTIC, coupled with an increase in minority
interests in ATLANTIC in conjunction with its initial public offering in
October 1996.
PREFERRED STOCK DIVIDENDS
On April 1, 1996, Security Capital issued 139,000 shares of Series A Preferred
Stock to a single investor. The Series A Preferred Stock carries a 7.5%
preferential cash dividend rate, payable when and if authorized by the Board
quarterly in arrears. Security Capital paid $7.8 million in dividends on the
Series A Preferred Stock in 1996. See "Description of Capital Stock--Preferred
Stock."
1995 COMPARED TO 1994
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $41.4 million, or 86%, from
$48.2 million in 1994 to $89.6 million in 1995.
47
<PAGE>
Equity in earnings of less than 50% owned investees
Security Capital consolidated SCI's operations in 1994 and reported earnings of
SCI based on the equity method in 1995. For purposes of comparison between the
years, SCI results of operations for 1994 are discussed below as if the equity
method was in effect for 1994. Security Capital's share of SCI's earnings
increased 65%, from $12.7 million in 1994 to $21.0 million in 1995. This
increase was primarily attributable to an increase in the amount of
distribution space owned and leased by SCI (58.5 million square feet at
December 31, 1995 compared to 39.1 million square feet at December 31, 1994),
improvements in SCI's average occupancy levels (95.42% in 1995 compared to
93.32% in 1994) and increased rental rates on renewal leases for previously
occupied space. At December 31, 1995 and 1994, Security Capital's ownership
interest in the outstanding common shares of SCI was 48% and 51%, respectively.
Security Capital reported earnings of PTR based on the equity method in both
1995 and 1994. However, PTR's 1995 earnings include the earnings of PACIFIC
which was merged into PTR in March 1995. For purposes of comparison between the
years, PTR's results of operations for 1994 are discussed below as if the PTR
Merger had occurred at the beginning of 1994. Security Capital's share of PTR's
earnings increased 69%, from $14.6 million in 1994 ($8.8 million from PTR and
$5.8 million from PACIFIC) to $24.6 million in 1995. This increase was
primarily attributable to a substantial increase in 1995 in the number of
multifamily properties owned by PTR (38,737 operating units at December 31,
1995 compared to 30,182 operating units at December 31, 1994) and Security
Capital's increased ownership interest in PTR. At December 31, 1995 and 1994,
Security Capital's ownership interest in the outstanding common shares of PTR
was 38% and 32%, respectively.
Rental Operations--from greater than 50% owned consolidated investees
Rental Revenues and Expenses
During 1995 and 1994, all rental revenues and expenses of the Company pertained
solely to ATLANTIC's operations. Rental revenues increased $48.6 million, or
88%, to $103.6 million in 1995 from $55.0 million in 1994. Rental expenses
increased $14.9 million, or 65%, to $37.9 million in 1995 (excluding REIT and
property management fees) from $23.0 million in 1994. The increase in rental
revenues and expenses was primarily attributable to the increase in the number
of multifamily communities. At December 31, 1995, ATLANTIC had 15,823 operating
multifamily units as compared to 11,990 operating multifamily units at December
31, 1994. In 1994, ATLANTIC acquired 11,307 units and the majority of its
properties were not owned for the full year. At December 31, 1994, 94.7% of
ATLANTIC's units were classified as "pre-stabilized" as compared to 25.7% at
December 31, 1995. The term "pre-stabilized" means that renovation,
repositioning, new management and new marketing programs (or development and
marketing in the case of newly developed communities) have not been completed
and in effect for a sufficient period of time (but in no event longer than 12
months, except in cases of major rehabilitation) to achieve 93% occupancy at
market rents.
Depreciation and Amortization
Total depreciation and amortization for Security Capital was $26.0 million for
1995, which represented an increase of $17.2 million from depreciation and
amortization of $8.8 million for 1994. Depreciation and amortization from
rental operations was $15.9 million and $8.8 million in 1995 and 1994,
respectively. The $7.1 million increase in depreciation and amortization from
rental operations, which represented an increase of 81% over 1994, was due to
increases in ATLANTIC's portfolio of operating properties and the reflection of
a full year of depreciation in 1995 for properties acquired during 1994. The
remaining increase of $10.1 million in 1995 was attributable to the Services
Division.
SERVICES DIVISION
Revenues
Services Division revenues were $49.4 million in 1995. As mentioned previously,
the Services Division companies were acquired by Security Capital on January 1,
1995 as a result of the 1995 Merger.
Depreciation and Amortization
Depreciation and amortization for the Services Division was $10.1 million in
1995, of which $7.9 million was attributable to amortization of goodwill from
the 1995 Merger and $2.2 million was attributable to depreciation on furniture,
fixtures and equipment (primarily computer and communications equipment) which
was not owned by Security Capital in 1994.
48
<PAGE>
INTEREST EXPENSE
Security Capital's interest expense for 1995 and 1994 consisted of interest on
the 2014 Convertible Debentures, interest on revolving lines of credit which
are obligations of Security Capital and ATLANTIC and interest on mortgage notes
payable which are obligations of ATLANTIC. Interest expense for 1995 and 1994
can be summarized as follows:
----------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY CAPITAL ATLANTIC TOTAL
--------------------- --------------------- ---------------------
Dollars in thousands 1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
2014 Convertible
Debentures $ 78,785 $ 29,647 - - $ 78,785 $ 29,647
Lines of credit 5,977 6,424 $ 15,784 $ 5,487 21,761 11,911
Mortgage notes payable - - 7,662 3,363 7,662 3,363
Capitalized interest - - (4,404) (793) (4,404) (793)
--------- --------- --------- --------- --------- ---------
$ 84,762 $ 36,071 $ 19,042 $ 8,057 $ 103,804 $ 44,128
========= ========= ========= ========= ========= =========
</TABLE>
Interest on 2014 Convertible Debentures increased $49.1 million in 1995 from
$29.6 million in 1994. The increase was primarily due to the issuance of $461
million of 2014 Convertible Debentures in 1994, and the issuance of an
additional $185 million of 2014 Convertible Debentures in 1995.
ATLANTIC's mortgage interest expense increased $4.3 million in 1995 as compared
to 1994, due to an increase in average mortgage debt outstanding.
ATLANTIC's line of credit interest expense increased $10.3 million in 1995 over
1994. The increase was primarily attributable to an increase in the average
outstanding balance on its line of credit ($178.3 million in 1995 as compared
to $65.6 million in 1994) and a higher weighted-average interest rate (7.92% in
1995 as compared to 7.34% in 1994). A portion of the increase was also
attributable to amortization of loan-related costs.
The overall increase in interest expense was offset by an increase in
capitalized interest of $3.6 million in 1995 over 1994. The increase in
capitalized interest was the result of ATLANTIC's increased development
activity.
PAYROLL AND RELATED COSTS
During 1995, Security Capital incurred payroll and related costs of $56.1
million as a result of the acquisition of the Services Division in the 1995
Merger.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased to $23.0 million in 1995 from $6.2
million in 1994, primarily as a result of the acquisition of the Services
Division in the 1995 Merger. General and administrative costs in 1994 consisted
primarily of a REIT management fee paid by Security Capital amounting to $5.3
million, which was eliminated in 1995 as a result of the acquisition of the
Services Division in the 1995 Merger. General and administrative costs in 1995
included approximately $22.1 million in additional costs related to expansion
of the Services Division.
PROVISION FOR INCOME TAXES
Security Capital elected to be taxed as a REIT in 1994 and, therefore, incurred
no federal or state tax at the corporate level in 1994. In 1995, Security
Capital elected to be taxed as a C corporation. Security Capital sustained a
loss for tax purposes in 1995 and its deferred tax assets (primarily net
operating losses) were completely offset by a valuation allowance.
MINORITY INTERESTS
Minority interests decreased $10.4 million, from $15.2 million in 1994 to $4.8
million in 1995, primarily as a result of the deconsolidation of SCI and
PACIFIC.
INVESTING AND FINANCING ACTIVITIES
OVERVIEW
Security Capital's investment activities consist primarily of the investment in
the common shares of its Capital Division investees and capital expenditures
relating to expansion of its Services Division business. The investment
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<PAGE>
activities of Security Capital's operating companies consist primarily of the
acquisition and development of real estate. Security Capital has historically
financed its investment activities primarily through the sale of stock and
debentures in private placements and borrowings under its line of credit.
Based on Security Capital's current level of operations and anticipated growth
as a result of pending new business initiatives, Security Capital expects that
cash flows from operations (including dividends and fees received from its
operating companies), the proceeds of this Offering and funds currently
available under its $300 million revolving line of credit will be sufficient to
enable Security Capital to satisfy its anticipated requirements for operating
and investing activities for the next twelve months. Security Capital intends
to finance its long-term business activities (including investments in new
business initiatives) through the proceeds of the Offering, borrowings under an
expanded line of credit and the exercise of the Warrants to be issued as
described below. In addition, the Company anticipates that its operating
companies will separately finance their activities through cash flow from
operations, sales of equity and debt securities and the incurrence of mortgage
debt or line of credit borrowings.
As of December 31, 1996, Security Capital had $193.0 million of callable
subscriptions for 2016 Convertible Debentures and Class A Shares, which
subscription amounts had been called and received as of March 31, 1997.
Concurrent with the Offering, Security Capital intends to register Warrants to
purchase $250 million of Class B Shares and to distribute the Warrants to the
shareholders of certain of its investees pursuant to the Mergers. These
Warrants will be issued subject to the closing of the proposed Mergers, will
have an exercise price based on the price of the Class B Shares on a date to be
established following completion of the Offering, and will have a term of one
year.
Security Capital's consolidated investees have undertaken the following recent
financing activities:
. In April 1997, ATLANTIC completed an $86 million (gross proceeds) equity
offering to finance development and acquisition plans for 1997. (The
offering is subject to a 15% overallotment option that could be
exercised at the option of the underwriters through May 10, 1997.)
Additionally, cash on hand, borrowings under its $350 million line of
credit and securities offerings are expected to provide the remaining
source of capital for ATLANTIC's financing needs.
. Homestead plans a development program for its extended-stay lodging
properties which will be financed primarily through its funding
commitment agreements with PTR and ATLANTIC, which agreements will
provide up to $129 million and $111 million, respectively, in financing,
as well as through outstanding warrants to purchase approximately $51
million of Homestead common stock outstanding as of December 31, 1996
(if such warrants are exercised). Homestead is currently negotiating a
revolving line of credit and is considering securities offerings to
provide additional sources of capital to meet its financing needs.
1996 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of approximately $832.3 million in 1996,
consisting primarily of (i) $267 million invested by ATLANTIC for the
development and acquisition of multifamily communities, (ii) $65 million
invested by Homestead for development of extended-stay lodging properties from
October 17, 1996 to December 31, 1996, (iii) $95 million invested by Security
Capital for common shares of SCI and ATLANTIC and (iv) $392.9 million invested
by Security Capital for common shares of Security Capital USREALTY.
Security Capital's 1996 net financing activity of $807.7 million consisted
primarily of (i) net proceeds from sales of common and preferred stock of
$438.3 million and $139.0 million, respectively, (ii) $221.6 million in net
proceeds from the issuance of Convertible Debentures, (iii) a $45.9 million
increase in outstanding mortgage loans for ATLANTIC and Homestead, (iv) net
repayments on lines of credit of $10.0 million and (v) other financing
transactions resulting in an aggregate use of cash of $26 million.
Also in 1996, ATLANTIC increased its line of credit to $350 million, and
Security Capital increased its line of credit to $300 million.
Security Capital completed the following non-cash transaction in 1996:
. On October 17, 1996, Security Capital, PTR, ATLANTIC and Homestead
consummated the merger transactions described under "Relationship with
Operating Companies--Homestead--Homestead Transaction." Since ATLANTIC
and Homestead are consolidated with Security Capital, only the effect of
PTR's transaction with Homestead is reflected in the Company's
consolidated financial statements for the
50
<PAGE>
year ended December 31, 1996. With respect to the transaction between
PTR and Homestead, Homestead acquired at the date of merger
approximately $166 million of net assets in exchange for the issuance of
9,485,727 shares of Homestead common stock and $76 million of
convertible mortgage notes payable.
1995 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of approximately $493.9 million in 1995,
consisting primarily of $235.1 million invested by ATLANTIC for the development
and acquisition of multifamily communities and $254.4 million invested by the
Company for the acquisition of common shares of PTR, SCI, ATLANTIC and Security
Capital USREALTY.
Security Capital's 1995 net financing activity of $486.9 million primarily
consisted of (i) net proceeds from the sale of common stock of $363.3 million,
(ii) $184.8 million in net proceeds from the issuance of Convertible
Debentures, (iii) a decrease in outstanding mortgage loans of $7.0 million for
ATLANTIC, (iv) net repayments on lines of credit of $39.5 million and (v) other
financing transactions resulting in an aggregate use of cash of $14.7 million.
Security Capital completed the following non-cash investing and financing
activities in 1995:
. On January 1, 1995, Security Capital acquired through the 1995 Merger
the net assets of the Services Division companies for $233.7 million in
exchange for debt and equity securities of Security Capital.
. On March 23, 1995, Security Capital exchanged the shares of its PACIFIC
subsidiary for additional shares of PTR. The transaction was valued at
approximately $136.0 million and resulted in Security Capital receiving
an additional 8.5 million shares of PTR.
1994 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of approximately $1.2 billion in 1994,
primarily as a result of ATLANTIC's development and acquisition of multifamily
communities and SCI's development and acquisition of distribution facilities.
Security Capital also invested approximately $73.8 million to acquire PTR
common shares.
Security Capital's 1994 net financing activity of $1.2 billion primarily
consisted of (i) net proceeds from the sale of common stock of $788 million,
(ii) $48.2 million in net proceeds from the issuance of 2014 Convertible
Debentures; (iii) net borrowings on lines of credit of $400 million, (iv)
distributions to shareholders (primarily SCI shareholders) amounting to $50
million and (v) other financing transactions resulting in an aggregate use of
cash of $19 million.
Security Capital completed the following non-cash investing and financing
activities in 1994:
. In June 1994, the Board authorized a distribution of 2014 Convertible
Debentures. For the year ended December 31, 1994, $417.2 million of 2014
Convertible Debentures were distributed representing $757.50 for each
common share outstanding or subscribed for.
. During the year ended December 31, 1994, Security Capital assumed $274.1
million in mortgage notes payable in connection with the acquisition of
multifamily communities and distribution facilities through its
ATLANTIC, PTR and SCI investees.
LINE OF CREDIT
SC Realty, a wholly owned subsidiary of the Company, has entered into a $300
million secured revolving line of credit with Wells Fargo. The line of credit
matures in November 1998 and may be extended for one year periods with the
approval of Wells Fargo and the other participating lenders. Borrowings on the
line of credit bear interest, at SC Realty's option, at either (i) LIBOR plus a
margin of 1.50% or (ii) the higher of the federal funds rate plus a margin of
.50% or Wells Fargo's prime rate, with interest payable monthly in arrears. SC
Realty pays a commitment fee ranging from .125% to .25% per annum based on the
average unfunded line of credit balance. The line of credit is guaranteed by
Security Capital and is secured by shares of PTR, SCI, ATLANTIC, Security
Capital USREALTY and Homestead, as well as warrants to purchase shares in
Homestead.
The line of credit contains a restricted payments covenant which prohibits
dividends and distributions on SC Realty's capital stock in excess of 100% of
SC Realty's cash flow available for distribution (as defined). Security
Capital's guaranty of the line of credit also contains various financial and
other covenants applicable to the Company, including a minimum shareholders'
equity test, a total liabilities to net worth ratio and an interest
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coverage ratio, as well as restrictions on the Company's ability to incur
indebtedness and effect consolidations, mergers (other than a consolidation or
merger in which the Company is the surviving entity) and sales of assets. The
guaranty also contains a restricted payments covenant which prohibits dividends
and distributions on the Company's capital stock in excess of 95% of the
Company's cash flow available for distribution (as defined).
As of April 25, 1997, SC Realty had borrowed $22 million under the line of
credit. See "Use of Proceeds."
2014 CONVERTIBLE DEBENTURES
At December 31, 1996, the Company had approximately $713.7 million principal
amount of 2014 Convertible Debentures outstanding. The 2014 Convertible
Debentures accrue interest at an annual rate of 12% and require semi-annual
cash interest payments at a minimum rate of 3.5%. Interest above the minimum
may be paid currently or deferred at the option of the Company. Any deferred
interest accrues interest at 12% and is due upon maturity. The principal amount
of the 2014 Convertible Debentures are convertible into Class A Shares at
$1,046.00 per share at the option of the holder at any time after the earlier
to occur of (i) the first anniversary of the Company's initial public offering,
(ii) July 1, 1999, (iii) the consolidation or merger of the Company with
another entity (other than a merger in which the Company is the surviving
entity) or any sale or disposition of substantially all the assets of the
Company or (iv) notice of redemption of the 2014 Convertible Debentures by the
Company. The Company may redeem the 2014 Convertible Debentures at any time, in
whole or in part, at par plus accrued and unpaid interest to the date of
redemption.
2016 CONVERTIBLE DEBENTURES
At December 31, 1996, the Company had approximately $226.5 million principal
amount of 2016 Convertible Debentures outstanding. The 2016 Convertible
Debentures accrue interest at an annual rate of 6.5% and require semi-annual
cash interest payments. The principal amount of the 2016 Convertible Debentures
are convertible into Class A Shares at $1,153.90 per share at the option of the
holder at any time after the earlier to occur of (i) the first anniversary of
the Company's initial public offering, (ii) March 29, 2001, (iii) the
consolidation or merger of the Company with another entity (other than a merger
in which the Company is the surviving entity) or any sale or disposition of
substantially all the assets of the Company, (iv) a recommendation by the Board
of any tender offer or exchange offer for 50% or more of the Company's
outstanding common stock (provided that the 2014 Convertible Debentures have
then become convertible pursuant to their terms) or (v) notice of redemption of
the 2016 Convertible Debentures by the Company. The Company may redeem the 2016
Convertible Debentures at any time after March 29, 1999, in whole or in part,
at par plus accrued and unpaid interest to the date of redemption.
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RELATIONSHIPS WITH OPERATING COMPANIES
In addition to the transactions with affiliates described elsewhere in this
Prospectus, Security Capital has entered into the following agreements with its
affiliated real estate operating companies:
ATLANTIC
ATLANTIC REIT Management Agreement
ATLANTIC's REIT manager, Security Capital (Atlantic) Incorporated (the
"ATLANTIC REIT Manager"), is owned by Security Capital. The ATLANTIC REIT
Manager's sole business and principal occupation since its formation in October
1993 is advising ATLANTIC. The services provided or coordinated by the ATLANTIC
REIT Manager include strategic and day-to-day management, research, investment
analysis, acquisition and due diligence, multifamily property development,
asset management, capital markets, asset disposition, legal and accounting
services. All such services are included in the fee paid to the ATLANTIC REIT
Manager by ATLANTIC (the "ATLANTIC REIT Management fee"), including capital
markets and development services, which most REITs capitalize (or, in the case
of capital markets, deduct from proceeds). The ATLANTIC REIT Management fee is
paid monthly and was $10.4 million, $6.9 million and $3.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. This agreement will be
terminated upon the closing of the Mergers and all the employees of the
ATLANTIC REIT Manager will become employees of ATLANTIC.
ATLANTIC Property Management
Commencing May 12, 1994, SCG Realty Services (Atlantic) Incorporated (the
"ATLANTIC Property Manager"), an affiliate of the ATLANTIC REIT Manager and a
subsidiary of Security Capital, began providing property management services
for certain of ATLANTIC's properties. At March 31, 1997, the ATLANTIC Property
Manager managed approximately 88.3% of ATLANTIC's multifamily units. The
agreement terminates September 30, 1997, subject to earlier termination by
ATLANTIC on 30 days' notice, is renewable annually upon approval of ATLANTIC's
independent directors and contemplates a fee to the ATLANTIC Property Manager
of 3.5% per annum of property revenues for properties located in Atlanta and
Washington, D.C. markets and 3.75% per annum of property revenues for all other
properties, paid monthly, which was $4.2 million, $3.5 million and $1.5 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Any
management contracts executed with the ATLANTIC Property Manager are expected
to be at market rates. This agreement will be terminated upon the closing of
the Mergers and all employees of the ATLANTIC Property Manager will become
employees of ATLANTIC.
ATLANTIC Investor Agreement
ATLANTIC and Security Capital are parties to an Investor Agreement, dated as of
October 28, 1993 (the "ATLANTIC Investor Agreement"), which required Security
Capital to purchase $21.5 million in common stock of ATLANTIC, subject to
certain conditions. The ATLANTIC Investor Agreement, among other things,
requires ATLANTIC to obtain Security Capital's approval of (i) the annual
operating budget and substantial deviations therefrom, (ii) contracts for
investment management, property management or leasing services or that
contemplate annual payments in excess of $100,000 and (iii) acquisitions or
dispositions in a single transaction or a group of related transactions where
the purchase price exceeds $5 million. The ATLANTIC Investor Agreement also
provides that, so long as Security Capital owns at least 10% of the outstanding
common stock of ATLANTIC, ATLANTIC may not increase its Board of Directors to
more than seven members. Security Capital is entitled to designate one or more
persons as directors, and ATLANTIC is obligated to use its best efforts to
cause the election of such persons, as follows: (i) so long as Security Capital
owns at least 10%, but less than 20%, of the outstanding common stock of
ATLANTIC, it is entitled to nominate two persons; and (ii) so long as Security
Capital owns at least 20% of the outstanding common stock of ATLANTIC, it is
entitled to nominate three persons.
In addition, the ATLANTIC Investor Agreement provides Security Capital with
registration rights pursuant to which, in certain circumstances, Security
Capital may demand, at any time, registration pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act") of all or any part of
the shares of ATLANTIC's common stock owned by Security Capital.
At the closing of the Mergers, ATLANTIC and Security Capital will amend and
restate the ATLANTIC Investor Agreement (as so amended and restated, the
"ATLANTIC Amended Investor Agreement"), which will provide that, without first
having consulted with the nominees of Security Capital designated in writing,
ATLANTIC may
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not seek Board of Directors approval of (i) ATLANTIC's annual budget; (ii) the
incurrence of expenses in any year exceeding (a) any line item in the annual
budget by the greater of $500,000 or 20% and (b) the total expenses set forth
in the annual budget by 15%; (iii) the purchase or sale of any assets in any
single transaction or series of related transactions in the ordinary course of
ATLANTIC's business where the aggregate purchase price to be paid or received
by ATLANTIC would exceed $25 million; and (iv) the entering into of any new
contract with a service provider (a) for investment management, property
management or leasing services or (b) that reasonably contemplates annual
contract payments by ATLANTIC in excess of $1 million. ATLANTIC is under no
obligation to accept or comply with any advice offered by Security Capital with
respect to the foregoing matters.
Additionally, so long as Security Capital beneficially owns at least 25% of the
common shares of ATLANTIC, Security Capital will have the right to approve the
following matters proposed by ATLANTIC: (i) the issuance or sale of any common
shares, (including the grant of any rights, options or warrants to subscribe
for or purchase common shares or any security convertible into or exchangeable
for common shares or the issuance or sale of any security convertible into or
exchangeable for common shares) at a price per share less than the fair market
value of a common share on the date of such issuance or sale; (ii) the issuance
and sale of any disqualified shares (as defined) if, as a result thereof,
ATLANTIC's Fixed Charge Coverage Ratio (as defined) would be less than 1.4 to
1.0; (iii) the adoption of any employee benefit plan pursuant to which shares
of ATLANTIC or any securities convertible into shares of ATLANTIC may be issued
and any action with respect to the compensation of the senior officers of
ATLANTIC (including the granting or award of any bonuses or share-based
incentive awards); and (iv) the incurrence of any additional indebtedness
(including guarantees and including renegotiations and restructurings of
existing indebtedness) if, as a result thereof, ATLANTIC's Interest Expense
Coverage Ratio (as defined) would be less than 2.0 to 1.0. The restriction
referred to in clause (i) above does not apply to (A) the sale or grant of any
options to purchase shares of ATLANTIC pursuant to the provisions of any
benefit plan approved by the shareholders of ATLANTIC, (B) the issuance or sale
of shares upon the exercise of any rights, options or warrants granted, or upon
the conversion or exchange of any convertible or exchangeable security issued
or sold, prior to the closing date of the Mergers or in accordance with the
provisions of the ATLANTIC Amended Investor Agreement, (C) the issuance and
sale of any shares of ATLANTIC pursuant to any dividend reinvestment and share
purchase plan approved by the ATLANTIC Board of Directors or (D) the issuance,
grant of distribution of rights, options or warrants to all holders of common
shares entitling them to subscribe for or purchase shares of ATLANTIC or
securities convertible into or exercisable for shares.
The ATLANTIC Amended Investor Agreement will also provide that, so long as
Security Capital owns at least 10% of the outstanding common shares, ATLANTIC
may not increase the number of persons serving on the ATLANTIC Board of
Directors to more than seven. Security Capital also will be entitled to
designate one or more persons as directors of ATLANTIC, as follows: (i) so long
as Security Capital owns at least 10% but less than 25% of the outstanding
common shares, it is entitled to nominate one person; and (ii) so long as
Security Capital owns at least 25% of the outstanding common shares, it is
entitled to nominate that number of persons as shall bear approximately the
same ratio to the total number of members of the ATLANTIC Board of Directors as
the number of common shares beneficially owned by Security Capital bears to the
total number of outstanding common shares, provided, that Security Capital
shall be entitled to designate no more than three persons so long as the
ATLANTIC Board of Directors consists of no more than seven members.
As part of the ATLANTIC Amended Investor Agreement, Security Capital may make
employment opportunities with Security Capital or its affiliates available to
the officers and employees of ATLANTIC. Prior to commencing discussions with a
senior officer of ATLANTIC about any such opportunity, Security Capital must
give the ATLANTIC Board of Directors 14 days' prior written notice.
In addition, the ATLANTIC Amended Investor Agreement provides Security Capital
with registration rights pursuant to which, in certain specified circumstances,
Security Capital may request at any time, registration of all of Security
Capital's common shares pursuant to Rule 415 under the Securities Act. Security
Capital may request one such registration for every $100 million (based on
market value) of common shares of ATLANTIC it owns.
Administrative Services Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into an
administrative services agreement, pursuant to which Security Capital will
provide ATLANTIC with certain administrative and other services with respect to
certain aspects of ATLANTIC's business, as selected from time to time by
ATLANTIC at
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its option. These services are expected to include, but are not limited to,
payroll and tax administration services, cash management and accounts payable
services, data processing and other computer services, human resources,
research, investor relations, insurance administration and legal
administration. The fees payable to Security Capital will be equal to Security
Capital's cost of providing such services plus 20%, subject to a maximum amount
of approximately $5.2 million during the initial term of the agreement, of
which approximately $1.5 million will apply to the period between the closing
of the Mergers and December 31, 1997 and the remainder will apply to 1998. Cost
savings under this agreement will accrue to ATLANTIC. The agreement will be for
an initial term expiring on December 31, 1998 and will be automatically renewed
for consecutive one-year terms, subject to approval by a majority of the
independent members of the ATLANTIC Board of Directors.
License Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into a
license agreement pursuant to which Security Capital will grant ATLANTIC a non-
exclusive license to use Security Capital's registered logo and the non-
exclusive right to use the name "Security Capital." The term of the license
will be for a period of 15 years, subject to ATLANTIC's right to extend the
license for up to two additional five-year periods.
Protection of Business Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into a
protection of business agreement (the "ATLANTIC Protection of Business
Agreement"), which will prohibit Security Capital and its affiliates from
providing, anywhere within the United States, directly or indirectly,
substantially the same services as those currently provided by the ATLANTIC
REIT Manager and the ATLANTIC Property Manager to any entity that owns or
operates multifamily properties. The ATLANTIC Protection of Business Agreement
does not prohibit Security Capital or its affiliates from owning the securities
of any class of ATLANTIC or PTR. The ATLANTIC Protection of Business Agreement
will terminate in the event of an acquisition, directly or indirectly, (other
than by purchase from Security Capital or any of its affiliates), by any person
(or group of persons acting in concert), other than Security Capital or any of
its affiliates, of the greater of (i) 25% or more of the outstanding shares of
voting securities of ATLANTIC and (ii) the percentage of outstanding voting
securities of ATLANTIC owned directly or indirectly by Security Capital and its
affiliates, in either case without the prior written consent of the ATLANTIC
Board of Directors. Subject to earlier termination pursuant to the preceding
sentence, the ATLANTIC Protection of Business Agreement will terminate on the
third anniversary of the closing date of the Mergers.
ATLANTIC Development Agreements
ATLANTIC and certain affiliates of Hanover Realty Services Inc. ("Hanover") are
parties to several development agreements, in connection with the acquisition
and development of six properties located in North Carolina. In consideration
for Hanover's development of these properties, the development agreements
provide that ATLANTIC will make certain earnest payments to Hanover either in
the form of cash, shares of ATLANTIC's common stock or shares of Security
Capital's common stock, as determined in the sole discretion of Hanover. The
amount of such payments shall be determined on a per site basis and shall be a
percentage of the amount by which annualized net operating income exceeds the
total actual project costs. In February 1997, Hanover was paid $800,000 with
respect to one community. The aggregate amount of such earnout amounts for the
five remaining communities cannot exceed $5.8 million. Hanover was not entitled
to receive any earnout payment at February 28, 1997 on the five remaining
communities.
HOMESTEAD
Homestead Transaction
In January 1996, Security Capital began considering ways for ATLANTIC, PTR and
Security Capital to maximize shareholder value with respect to their Homestead
Village properties and operations. In May 1996, ATLANTIC, PTR, Security Capital
and Homestead entered into a merger agreement, pursuant to which each of
ATLANTIC, PTR and Security Capital agreed to contribute, through a series of
merger transactions, all of their respective assets relating to Homestead
Village properties to Homestead, and ATLANTIC and PTR agreed to enter into
certain funding commitment agreements. ATLANTIC's and PTR's respective
shareholders approved the Homestead transaction on September 13, 1996 and
September 12, 1996, respectively, and the closing of the Homestead transaction
occurred on October 17, 1996, which resulted in (i) ATLANTIC (a) owning
4,201,220 shares of Homestead common stock, (b) owning 2,818,517 warrants each
to purchase one share of Homestead common stock at $10 per share, (c) agreeing
to provide up to $111.1 million of mortgage financing to Homestead in exchange
for up to approximately $98 million in convertible mortgage notes and (d)
providing a cash payment of $16.6 million to Homestead on the closing date;
(ii) PTR (a) owning 9,485,727 shares of Homestead common stock, (b) owning
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6,363,789 warrants each to purchase one share of Homestead common stock at $10
per share and (c) agreeing to provide up to $198.8 million of mortgage
financing to Homestead in exchange for up to approximately $221 million in
convertible mortgage notes and (iii) Security Capital (a) owning 4,062,788
shares of Homestead common stock and (b) owning 817,694 warrants each to
purchase one share of Homestead common stock at $10 per share. ATLANTIC and PTR
both distributed the Homestead common stock and warrants which each received to
their respective shareholders pro rata in the Homestead transaction on November
12, 1996 to shareholders of record on October 29, 1996. Each holder of record
of a share of ATLANTIC's common stock received 0.110875 shares of Homestead
common stock and warrants to purchase 0.074384 shares of Homestead common stock
and each holder of record of a share of PTR's common shares received 0.125694
shares of Homestead common stock and warrants to purchase 0.084326 shares of
Homestead common stock. As a result of the Homestead transaction, including the
distributions by each of ATLANTIC and PTR, Security Capital owned 9,894,401
shares of Homestead common stock and warrants to purchase 4,730,022 shares of
Homestead common stock. As of March 31, 1997, Security Capital had purchased in
the open market warrants to purchase 1,420,700 shares of Homestead common stock
and has exercised warrants to purchase 3,250,000 shares of Homestead common
stock, and as a result, as of March 31, 1997 owned 13,144,401 shares of
Homestead common stock and warrants to purchase 2,900,722 shares of Homestead
common stock.
Protection of Business Agreement
ATLANTIC, PTR and Security Capital entered into a protection of business
agreement with Homestead, dated as of October 17, 1996 (the "Homestead
Protection of Business Agreement"), which prohibits ATLANTIC, PTR and Security
Capital, and their respective affiliates, from engaging, directly or
indirectly, in the extended-stay lodging business except through Homestead and
its subsidiaries. The agreement also prohibits Homestead from, directly or
indirectly, engaging in the ownership, operation, development, management or
leasing of multifamily communities. The agreement does not prohibit ATLANTIC,
PTR or Security Capital from: (i) owning securities of Homestead; (ii) owning
up to 5% of the outstanding securities of another person engaged in owning,
operating, developing, managing or leasing extended-stay lodging properties, so
long as it does not actively participate in the business of such person; (iii)
owning the outstanding securities of another person, a majority-owned
subsidiary, division, group, franchise or segment of which is engaged in
owning, operating, developing, managing or leasing extended-stay lodging
properties, so long as not more than 5% of such person's consolidated revenues
are derived from such properties; and (iv) owning securities of another person
primarily engaged in a business other than owning, operating, developing,
managing or leasing extended-stay lodging properties, including a person
primarily engaged in business as an owner, operator or developer of hotel
properties, whether or not such person owns, operates, develops, manages or
leases extended-stay lodging properties. The agreement does not prohibit
Homestead from: (i) owning securities of ATLANTIC, PTR or Security Capital;
(ii) owning up to 5% of the outstanding securities of another person engaged in
owning, operating, developing, managing or leasing multifamily communities; and
(iii) owning the outstanding securities of another person, a majority-owned
subsidiary, division, group, franchise or segment of which is engaged in
owning, operating, developing, managing or leasing multifamily communities, so
long as not more than 5% of such person's consolidated revenues are derived
from such properties. The agreement will terminate in the event of an
acquisition, directly or indirectly (other than by purchase from ATLANTIC, PTR
or Security Capital or any of their respective affiliates), by any person (or
group of associated persons acting in concert), other than ATLANTIC, PTR or
Security Capital or their respective affiliates, of 25% or more of the
outstanding voting stock of Homestead, without the prior written consent of
Homestead's Board of Directors. Subject to earlier termination pursuant to the
preceding sentence, the Homestead Protection of Business Agreement will
terminate on October 17, 2006.
Homestead Investor Agreement
Homestead and Security Capital have entered into an investor agreement (the
"Homestead Investor Agreement"), dated as of October 17, 1996, which requires
Security Capital, upon notice from Homestead, to exercise all of the warrants
to purchase shares of Homestead common stock (at an exercise price of $10 per
share) owned by Security Capital. Homestead may call for the exercise of such
warrants by Security Capital upon 10 days' prior written notice. The Homestead
Investor Agreement, among other things, provides that, without having first
consulted with the nominee of Security Capital designated in writing, Homestead
may not seek Homestead Board of Directors' approval of (i) Homestead's annual
budget, (ii) the incurrence of expenses in any year exceeding (A) any line item
in the annual budget by 20% and (B) the total expenses set forth in the annual
budget by 5%, (iii) acquisitions or dispositions in a single transaction or
group of related transactions where the aggregate purchase price paid or
received exceeds $5 million, (iv) new contracts with a service provider (A) for
investment management, property management or leasing services or (B) that
reasonably contemplates annual contract payments by Homestead in excess of
$200,000, (v) the declaration or payment of any dividend or other distribution,
(vi) the approval of stock
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option plans, (vii) the offer or sale of any shares of stock of Homestead or
any securities convertible into shares of stock of Homestead (other than the
sale or grant of any stock or grants of options or exercise of options granted
under any benefit option plan approved by stockholders) and (viii) the
incurrence, restructuring, renegotiation or repayment of indebtedness for
borrowed money in which the aggregate amount involved exceeds $5 million. The
Homestead Investor Agreement also provides that, so long as Security Capital
owns at least 10% of the outstanding shares of Homestead's common stock,
Homestead may not increase the number of persons serving on the Homestead Board
of Directors to more than seven. Security Capital also will be entitled to
designate one or more persons as directors of Homestead, as follows: (i) so
long as Security Capital owns at least 10% but less than 30% of the outstanding
shares of Homestead's common stock, it is entitled to nominate one person and
(ii) so long as Security Capital owns at least 30% of the outstanding shares of
Homestead's common stock, it is entitled to nominate that number of persons as
shall bear approximately the same ratio to the total number of members of the
Homestead Board of Directors as the number of shares of Homestead common stock
beneficially owned by Security Capital bears to the total number of outstanding
shares of Homestead common stock, provided that Security Capital shall be
entitled to designate no more than two persons so long as the Homestead Board
of Directors consists of no more than seven members. Any person who is employed
by Security Capital or who is an employee, a 25% shareholder or a director of
any corporation of which Security Capital is a 25% shareholder (except for
Homestead) shall be deemed to be a designee of Security Capital.
In addition, the Homestead Investor Agreement provides Security Capital with
registration rights pursuant to which, in certain specified circumstances,
Security Capital may request, at any time after October 22, 1997, and on not
more than three occasions, registration pursuant to Rule 415 under the
Securities Act of all of the shares of Homestead's common stock owned by
Security Capital.
Homestead Escrow Agreement
Pursuant to an escrow agreement dated October 17, 1996 (the "Escrow Agreement")
among Homestead, Security Capital and State Street Bank and Trust Company (the
"Escrow Agent"), a portion of the shares of Homestead common stock issuable to
Security Capital as part of the Homestead transaction described above was
placed in an escrow account maintained with the Escrow Agent. In general, as
PTR and ATLANTIC advance funds to Homestead in accordance with the terms of
their respective funding commitment agreements with Homestead, a portion of the
shares of Homestead's common stock in the escrow account will be released to
Security Capital, together with a proportionate amount of accrued dividends, if
any. On January 1, 2000, unless all of the shares of Homestead's common stock
placed in the escrow account have been released to Security Capital sooner in
accordance with the provisions of the Escrow Agreement, the Escrow Agent will
release to Homestead all of the shares of Homestead's common stock remaining in
the escrow account. All dividends or other distributions paid by Homestead in
respect of the shares of Homestead's common stock held in the escrow account
shall be retained by the Escrow Agent for the benefit of the party to whom the
related shares of Homestead's common stock are ultimately issued. The Escrow
Agent will vote all shares of Homestead's common stock held in the escrow
account proportionately in accordance with the vote of all other Homestead
shareholders as instructed by Homestead. In the event that instructions are not
received, the Escrow Agent will not vote such shares. Currently, 1,671,929
shares of Homestead common stock remain in the escrow account.
Homestead Administrative Services Agreement
Homestead has entered into an administrative services agreement with Security
Capital (the "Homestead Administrative Services Agreement"), pursuant to which
Security Capital, through SCGroup, provides Homestead with administrative
services with respect to certain aspects of Homestead's business. These
services include, but are not limited to, insurance administration, accounts
payable administration, internal audit, cash management, human resources,
management information systems, tax and legal administration, research,
shareholder communications and investor relations. The fees payable to Security
Capital are based on Security Capital's cost of the services provided plus an
additional 20%. Any arrangements under the Homestead Administrative Services
Agreement for the provision of services are required to be commercially
reasonable and on terms not less favorable than those which could be obtained
from unaffiliated third parties. The Homestead Administrative Services
Agreement expires on December 31, 1997 and is automatically renewed for
successive one-year terms, subject to approval by a majority of the
disinterested members of the Homestead Board of Directors of the annual
compensation payable to Security Capital for services rendered to Homestead.
Homestead paid fees of $375,000 to Security Capital for administrative services
provided in 1996.
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PTR
Merger and Public Offerings
On December 6, 1994, PTR entered into a merger agreement with PACIFIC and
Security Capital, providing for the merger (the "PTR Merger") of PACIFIC with
and into PTR. The PTR Merger was consummated on March 23, 1995 with 80.7% of
PTR's common shares being voted in favor of the PTR Merger. Pursuant to the PTR
Merger, each then outstanding share of PACIFIC common stock was converted into
the right to receive 0.611 PTR common shares. Security Capital was the
principal stockholder of PACIFIC prior to the PTR Merger, having owned
approximately 97.6% of PACIFIC's common stock outstanding at the time of the
PTR Merger. Security Capital's PACIFIC common stock was converted into
8,266,112 PTR common shares pursuant to the terms of the PTR Merger. In
addition, William D. Sanders, the Chairman of Security Capital, and William G.
Myers and John C. Schweitzer, both trustees of PTR, received 9,165, 9,165 and
7,637 PTR common shares, respectively, upon conversion of their PACIFIC common
stock pursuant to the terms of the PTR Merger. Upon consummation of the PTR
Merger, PTR changed its name from "Property Trust of America" to "Security
Capital Pacific Trust."
PTR REIT Management Agreement
Security Capital Pacific Incorporated (the "PTR REIT Manager") is owned by
Security Capital. All officers of PTR are employees of the PTR REIT Manager and
PTR has no employees. Pursuant to a REIT management agreement (the "PTR REIT
Management Agreement"), the PTR REIT Manager provides both strategic and day-
to-day management to PTR, including research, investment analysis, acquisition
and development services, asset management, capital markets services,
disposition of assets and legal and accounting services. The PTR REIT
Management Agreement requires PTR to pay a base annual fee of $855,000 plus 16%
of cash flow (as defined in the PTR REIT Management Agreement) in excess of
$4,837,000. The PTR REIT Manager also receives a fee of 0.25% per year on the
average daily balance of cash equivalent investments. PTR is obligated to
reimburse the PTR REIT Manager for certain expenses incurred by the PTR REIT
Manager on behalf of PTR relating to PTR's operations, primarily including
third party legal, accounting and similar fees paid on behalf of PTR, and
travel expenses incurred in seeking financing, property acquisitions, property
sales, property development, attendance at trustee and shareholder meetings and
similar activities on behalf of PTR. The PTR REIT Management Agreement is
renewable by PTR annually, subject to a determination by the independent
trustees that the PTR REIT Manager's performance has been satisfactory and that
the compensation payable to the PTR REIT Manager is fair. Each of PTR and the
PTR REIT Manager may terminate the PTR REIT Management Agreement on 60 days'
notice. For 1996, 1995 and 1994, the PTR REIT Manager earned REIT management
fees totalling $22.2 million, $20.4 million and $13.2 million, respectively.
This agreement will be terminated upon the closing of the Mergers and all
employees of the PTR REIT Manager will become employees of PTR.
PTR Property Management
At March 31, 1997, SCG Realty Services Incorporated ("SCG Realty Services"), as
property manager for most of PTR's multifamily communities, managed
approximately 95.2% of PTR's operating multifamily units, with the balance in
various stages of transition to SCG Realty Services' management. Security
Capital owns SCG Realty Services. Rates for services performed by SCG Realty
Services are subject to annual approval by PTR's independent trustees (who
receive an annual review of fees paid for similar services from an independent
third party). During 1996, 1995 and 1994, PTR paid aggregate fees of $9.7
million, $7.9 million and $7.1 million, respectively, to SCG Realty Services.
This agreement will be terminated upon the closing of the Mergers and all
employees of SCG Realty Services will become employees of PTR.
PTR Investor Agreement
Pursuant to various agreements, as amended, between PTR and Security Capital
(the "PTR Investor Agreement"), Security Capital is entitled to designate three
persons to be nominated for election to the PTR Board of Trustees. So long as
Security Capital beneficially owns at least 10% of PTR's common shares, PTR is
prohibited from increasing the number of members of the PTR Board of Trustees
to more than seven. Additionally, the PTR Investor Agreement, among other
things, requires PTR to obtain Security Capital's approval of (i) the annual
operating budget and substantial deviations therefrom, (ii) contracts for
investment management, property management or leasing services or that
contemplate annual payments in excess of $100,000 and (iii) acquisitions or
dispositions in a single transaction or a group of related transactions where
the purchase or sale price exceeds $5 million. The PTR Investor Agreement also
provides certain registration rights to Security Capital in respect of PTR's
common shares beneficially owned by Security Capital.
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At the closing of the Mergers, PTR and Security Capital will amend and restate
the PTR Investor Agreement such that it will be substantially similar to the
ATLANTIC Amended Investor Agreement described above except: (i) it will
restrict the ability of Security Capital (or a group of which it is a member)
from acquiring in excess of 49% of PTR's common shares subject to certain
exceptions and (ii) it will permit PTR to increase the size of the PTR Board of
Trustees to eight members.
Administrative Services Agreement
At the closing of the Mergers, PTR and Security Capital will enter into an
administrative services agreement, pursuant to which Security Capital will
provide PTR with certain administrative and other services with respect to
certain aspects of PTR's business, as selected from time to time by PTR at its
option. These services are expected to include, but are not limited to, payroll
and tax administration services, cash management and accounts payable services,
data processing and other computer services, human resources, research,
investor relations, insurance administration and legal administration. The fees
payable to Security Capital will be equal to Security Capital's cost of
providing such services plus 20%, subject to a maximum amount of approximately
$7.7 million during the initial term of the agreement, of which approximately
$2.2 million will apply to the period between closing of the Mergers and
December 31, 1997 and the remainder will apply to 1998. Cost savings under this
agreement will accrue to PTR. The agreement will be for an initial term
expiring on December 31, 1998 and will be automatically renewed for consecutive
one-year terms, subject to approval by a majority of the independent members of
the PTR Board of Trustees.
License Agreement
At the closing of the Mergers, PTR and Security Capital will enter into a
license agreement (the "PTR License Agreement") pursuant to which Security
Capital will grant PTR a non-exclusive license to use Security Capital's
registered logo and the non-exclusive right to use the name "Security Capital."
The term of the license will be for a period of 15 years, subject to PTR's
right to extend the license for up to two additional five-year periods. As part
of the PTR License Agreement, Security Capital will agree that, during the term
of the agreement, it will not exercise its rights under the PTR Declaration of
Trust to cause PTR to change its name.
Protection of Business Agreement
At the closing of the Mergers, PTR and Security Capital will enter into a
protection of business agreement (the "PTR Protection of Business Agreement"),
which will prohibit Security Capital and its affiliates from providing,
anywhere within the United States, directly or indirectly, substantially the
same services as those currently provided by the PTR REIT Manager and the PTR
Property Manager to any entity that owns or operates multifamily properties.
The PTR Protection of Business Agreement does not prohibit Security Capital or
its affiliates from owning the securities of any class of PTR or ATLANTIC. The
PTR Protection of Business Agreement will terminate in the event of an
acquisition, directly or indirectly, (other than by purchase from Security
Capital or any of its affiliates), by any person (or group of persons acting in
concert), other than Security Capital or any of its affiliates, of the greater
of (i) 25% or more of the outstanding shares of voting securities of PTR and
(ii) the percentage of outstanding voting securities of PTR owned directly or
indirectly by Security Capital and its affiliates, in either case without the
prior written consent of the PTR Board of Trustees. Subject to earlier
termination pursuant to the preceding sentence, the PTR Protection of Business
Agreement will terminate on the third anniversary of the closing date of the
Mergers.
PTR Development Services
PTR owns all of the preferred stock of PTR Development Services Incorporated
("PTR Development Services"), which entitles PTR to 95% of the net operating
cash flow of PTR Development Services. Security Capital owned all of the common
stock of PTR Development Services during 1995. Effective as of January 1, 1996,
Security Capital transferred such common stock to an unaffiliated trust. The
common stock is entitled to receive the remaining 5% of net operating cash
flow. During 1996, PTR made mortgage loans to PTR Development Services in an
aggregate amount of $18.8 million for the purchase of land for multifamily
development. Owning land through PTR Development Services provides greater
flexibility for the use of such land and the disposition of excess parcels. PTR
expects to make similar loans to PTR Development Services in 1997. The
aggregate amount of such loans will vary depending upon the volume of
development activity.
SCI
SCI REIT Management Agreement
Security Capital Industrial Incorporated (the "SCI REIT Manager") is owned by
Security Capital. All officers of SCI are employees of the SCI REIT Manager and
SCI has no employees. Pursuant to a REIT management
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agreement (the "SCI REIT Management Agreement"), the SCI REIT Manager provides
both strategic and day-to-day management, research, investment analysis,
acquisition and due diligence, development, marketing, asset management,
capital markets, disposition of assets, management information systems support
and legal and accounting services. The SCI REIT Management Agreement requires
SCI to pay a base annual fee of approximately 16% of cash flow as defined in
the SCI REIT Management Agreement. The SCI REIT Manager also receives a fee of
0.20% per year on the average daily balance of cash equivalent investments. SCI
is obligated to reimburse the SCI REIT Manager for all expenses incurred by the
SCI REIT Manager on behalf of SCI relating to SCI's operations, primarily
including third-party legal, accounting, property development and similar fees
paid on behalf of SCI, and travel expenses incurred in seeking financing,
property acquisitions, property sales, attendance at SCI Board of Trustees and
shareholder meetings and similar activities on behalf of SCI. The SCI REIT
Management Agreement is renewable annually by SCI, subject to a determination
by the independent trustees that the SCI REIT Manager's performance has been
satisfactory and that the compensation payable to the SCI REIT Manager is fair.
Each of SCI and the SCI REIT Manager may terminate the SCI REIT Management
Agreement on 60 days' notice. For 1996, 1995 and 1994, the SCI REIT Manager
earned REIT management fees of $21.5 million, $14.2 million and $8.7 million,
respectively, pursuant to the SCI REIT Management Agreement. This agreement
will be terminated upon the closing of the Mergers and all employees of the SCI
REIT Manager will become employees of SCI.
SCI Property Management
Commencing in January 1994, SCI Client Services Incorporated ("Client
Services"), an affiliate of the SCI REIT Manager, began providing property
management services for certain of SCI's properties. As of March 31, 1997
Client Services managed 92.7% of SCI's 82.7 million total operating square
feet. The agreement is subject to termination by SCI on 30 days' notice and by
Client Services on 60 days' notice, is renewable annually upon approval of
SCI's independent trustees, and contemplates a fee to Client Services of not
more than 3% per annum of property revenues, paid monthly, plus leasing
commissions and maintenance recovery fees consistent with industry practice,
which together were $11.8 million, $5.3 million and $1.7 million for 1996, 1995
and 1994, respectively. Any management contracts executed with Client Services
are expected to be at or below market rates. This agreement will be terminated
upon the closing of the Mergers and all employees of Client Services will
become employees of SCI.
SCI Investor Agreement
SCI and Security Capital are parties to an Investor Agreement, dated as of
November 18, 1993 (the "SCI Investor Agreement"), which required Security
Capital to invest a minimum of $75 million in SCI's common shares in SCI's
December 1993 private rights offering to shareholders, subject to certain
conditions. The SCI Investor Agreement, among other things, requires SCI to
obtain Security Capital's approval of (i) the annual operating budget and
substantial deviations therefrom, (ii) contracts for investment management,
property management or leasing services or that contemplate annual payments in
excess of $100,000 and (iii) acquisitions or dispositions in a single
transaction or a group of related transactions where the purchase or sale price
exceeds $5 million. The SCI Investor Agreement also provides that, so long as
Security Capital beneficially owns at least 10% of the outstanding SCI common
shares, SCI may not increase the size of its Board of Trustees to more than
seven members. Security Capital is entitled to designate one or more persons
for nomination to election as trustees, and SCI is obligated to use its best
efforts to cause the election of such persons, as follows: (i) so long as
Security Capital beneficially owns at least 10% but less than 20% of the
outstanding SCI common shares, it is entitled to designate two persons; and
(ii) so long as Security Capital beneficially owns at least 20% of the
outstanding SCI common shares, it is entitled to designate three persons. The
SCI Investor Agreement also provides certain registration rights to Security
Capital with respect to SCI's common shares beneficially owned by Security
Capital.
At of the closing of the Mergers, SCI and Security Capital will amend and
restate the SCI Investor Agreement such that it will be substantially similar
to the ATLANTIC Amended Investor Agreement described above.
Administrative Services Agreement
At the closing of the Mergers, SCI and Security Capital will enter into an
administrative services agreement, pursuant to which Security Capital will
provide SCI with certain administrative and other services with respect to
certain aspects of SCI's business, as selected from time to time by SCI at its
option. These services are expected to include, but are not limited to, payroll
and tax administration services, cash management and accounts payable services,
data processing and other computer services, human resources, research,
investor relations, insurance administration and legal administration. The fees
payable to Security Capital will be equal to Security Capital's cost
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of providing such services plus 20%, subject to a maximum amount of
approximately $7.1 million during the initial term of the agreement, of which
approximately $2.0 million will apply to the period between the closing of the
Mergers and December 31, 1997 and the remainder will apply to 1998. Cost
savings under this agreement will accrue to SCI. The agreement will be for an
initial term expiring on December 31, 1998 and will be automatically renewed
for consecutive one-year terms, subject to approval by a majority of the
independent members of the SCI Board of Trustees.
License Agreement
At the closing of the Mergers, SCI and Security Capital will enter into a
license agreement (the "SCI License Agreement") pursuant to which Security
Capital will grant SCI a non-exclusive license to use Security Capital's
registered logo and the non-exclusive right to use the name "Security Capital."
The term of the license will be for a period of 15 years, subject to SCI's
right to extend the license for up to two additional five-year periods. As part
of the SCI License Agreement, Security Capital will agree that during the term
of the agreement, it will not exercise its rights under the SCI Declaration of
Trust to cause SCI to change its name.
Protection of Business Agreement
At the closing of the Mergers, SCI and Security Capital will enter into a
protection of business agreement (the "SCI Protection of Business Agreement"),
which will prohibit Security Capital and its affiliates from providing,
anywhere within the United States, directly or indirectly, substantially the
same services as those currently provided by the SCI REIT Manager and the SCI
Property Manager to any entity that owns or operates distribution properties.
The SCI Protection of Business Agreement does not prohibit Security Capital or
its affiliates from owning the securities of any class of SCI. The SCI
Protection of Business Agreement will terminate in the event of an acquisition,
directly or indirectly, (other than by purchase from Security Capital or any of
its affiliates), by any person (or group of persons acting in concert), other
than Security Capital or any of its affiliates, of the greater of (i) 25% or
more of the outstanding shares of voting securities of SCI and (ii) the
percentage of outstanding voting securities of SCI owned directly or indirectly
by Security Capital and its affiliates, in either case without the prior
written consent of the SCI Board of Trustees. Subject to earlier termination
pursuant to the preceding sentence, the SCI Protection of Business Agreement
will terminate on the third anniversary of the closing date of the Mergers.
SCI Development Services
To better serve national companies which are valued SCI customers and enable
SCI to exclusively meet all of their distribution space needs, SCI Development
Services Incorporated ("SCI Development Services") develops for these customers
build-to-suit distribution space facilities which do not meet SCI's strict
investment criteria. SCI will not own these buildings but owns a preferred
stock interest representing 95% of the net operating cash flow of SCI
Development Services. Security Capital owned all of the common stock of SCI
Development Services during 1995. Effective as of January 1, 1996, Security
Capital transferred such common stock to an unaffiliated trust. The common
stock is entitled to receive the remaining 5% of net operating cash flow.
Through its preferred stock ownership, SCI will realize substantially all
economic benefits of SCI Development Services' activities. Under a separate
agreement, the SCI REIT Manager provides SCI Development Services with day-to-
day management services for a fee based on 16% of SCI Development Services'
pre-tax cash flow plus .20% of the average daily balance of cash equivalent
investments, including gains and losses realized on property sales. The fee
incurred for 1996, 1995 and 1994 was approximately $1.3 million, $700,000 and
$20,000, respectively. During 1996, 1995 and 1994, SCI earned $1.1 million,
$1.7 million and $1.1 million, respectively, in interest income and had $2.7
million, $1.9 million and $17,000, respectively, in accrued interest receivable
from SCI Development Services. As of December 31, 1996, 1995 and 1994, SCI had
outstanding $162 million, $31.1 million and $1.1 million, respectively, of
mortgage loans to SCI Development Services for development and acquisition of
distribution facilities. SCI expects to make similar loans to SCI Development
Services in 1997, however, SCI is unable to quantify the amount of such loans.
SECURITY CAPITAL USREALTY
Advisory Agreement
Pursuant to an agreement dated July 7, 1995 (the "Advisory Agreement"),
Security Capital USREALTY appointed Security Capital (EU) Management S.A.
("USREALTY Adviser") as operating advisor to provide Security Capital USREALTY
with advice with respect to strategy, investments, financing, administrative
and all other operating matters affecting Security Capital USREALTY. The
USREALTY Adviser receives a single all-inclusive annual advisory fee equal to
1.25% of Security Capital USREALTY's assets, excluding investments in Security
Capital
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securities and investments of short-term cash and cash equivalents. The fee
payable to the USREALTY Adviser is reduced to the extent that the third-party
operating and administrative expenses of Security Capital USREALTY exceed .25%
of assets per annum. The USREALTY Adviser is responsible for paying all fees of
Security Capital Investment Research and Security Capital Investment Research
Group (described below) and any other Security Capital advisory affiliates for
services related to advising Security Capital USREALTY. The Advisory Agreement
expires on July 7, 1997 and is automatically renewable for successive two-year
periods, unless either the USREALTY Adviser, on one hand, or Security Capital
USREALTY and Security Capital Holdings S.A., a wholly owned subsidiary of
Security Capital USREALTY ("USREALTY Holdings"), acting together, on the other
hand, give sixty days' prior written notice that the Advisory Agreement will
not be renewed; provided, however, after the first anniversary date of the
agreement or the first anniversary date of any renewal date, both Security
Capital USREALTY and USREALTY Holdings, acting together, may terminate the
agreement on not less than sixty days' prior written notice to the USREALTY
Adviser. During 1996 and 1995, the USREALTY Adviser received fees of $8.0
million and $99,000, respectively, pursuant to the Advisory Agreement.
Sub-Advisory Agreements
Pursuant to an agreement dated July 7, 1995 (the "Sub-Advisory Agreement"), the
USREALTY Adviser appointed Security Capital Investment Research Incorporated, a
wholly owned subsidiary of Security Capital ("Security Capital Investment
Research") as sub-adviser to provide fundamental research, investment
identification, investment due diligence and investment monitoring services.
Effective , 1997, the Sub-Advisory Agreement was amended and the
USREALTY Advisor entered into a separate agreement (together with the Sub-
Advisory Agreement, the "Sub-Advisory Agreements") with Security Capital
Investment Research Group Incorporated, a wholly-owned subsidiary of Security
Capital Investment Research ("Security Capital Investment Research Group") and
a registered investment adviser under the Investment Advisers Act of 1940, as
amended, with respect to its analysis, advice and research in relation to
intermediate term investments in real estate operating companies. Pursuant to
its Sub-Advisory Agreements, Security Capital Investment Research receives (i)
an annual fee based on .06% on strategic investments up to $1 billion and .03%
on strategic investments in excess of $1 billion, (ii) a one time fee equal to
.10% of the consideration payable each time Security Capital USREALTY makes a
strategic investment and (iii) reimbursement of certain expenses, and pursuant
to its Sub-Advisory Agreement, Security Capital Investment Research Group
receives an annual fee equal to .50% on Security Capital USREALTY's other
investments and reimbursement of certain expenses. The Sub-Advisory Agreements
expire on July 7, 1997 and are automatically renewable for successive two-year
periods unless the USREALTY Adviser notifies Security Capital Investment
Research or Security Capital Investment Research Group that either Sub-Advisory
Agreement will not be renewed; provided, however, after the first anniversary
date of the agreements or at any time during a renewal period, the USREALTY
Adviser may terminate either agreement on not less than sixty days' prior
written notice to Security Capital Investment Research or Security Capital
Investment Research Group. During 1996 and 1995, Security Capital Investment
Research earned $1.6 million and $60,000, respectively, pursuant to the Sub-
Advisory Agreement.
OTHER TRANSACTIONS WITH AFFILIATES
In ATLANTIC's March through June 1995 private offering, Security Capital
purchased $94.8 million of shares of ATLANTIC's common stock at $22 per share.
In ATLANTIC's December 1995 through May 1996 private offering, Security Capital
purchased an aggregate of $50 million of shares of ATLANTIC's common stock,
$21.1 million of which were purchased at $23 per share (which was the price per
share paid by other investors in the offering) and $28.9 million of which were
purchased at $23.136 per share. In ATLANTIC's October 1996 initial public
offering, Security Capital purchased $10 million of shares of ATLANTIC's common
stock at $24 per share. Except as described above, all subscriptions were made
on the same terms and at the same times as made available to other investors.
In previous offerings, Security Capital purchased approximately $75 million of
SCI's common shares in 1993 at a price of $11 per share, $98 million of SCI's
common shares in 1994 at a price of $11.50 per share, $53 million of SCI's
common shares in 1994 at a price of $15.125 per share, $150 million of SCI's
common shares in 1994 at a price of $15.25 per share and $100 million of SCI's
common shares in 1995 at a price of $15.375 per share. All such purchases were
made on the same terms and at the same time as such shares were made available
to other shareholders or investors.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
On March 31, 1995, Security Capital entered into an unsecured, full recourse
promissory note with R. Scot Sellers, a Managing Director of PTR and PTR's REIT
Manager. Under the terms of the promissory note, Security Capital lent Mr.
Sellers $249,997.13, which amount is due on the earlier of January 4, 2005 or
120 days after Mr. Sellers is no longer an officer of PTR. Interest on the
unpaid balance accrues at a floating rate per annum equal to the lowest rate
charged by Morgan Guaranty Trust Company of New York to its most creditworthy
corporate customers for unsecured loans having a maturity of ninety days or
less, in effect from time to time, plus .25%, and is payable semiannually on
each July 4 and January 4. The proceeds of the promissory note were used by Mr.
Sellers to purchase common shares of PTR.
On March 31, 1995, Security Capital entered into an unsecured, full recourse
promissory note with Constance B. Moore, then a Managing Director of PTR and
PTR's REIT Manager. Under the terms of such promissory note, Security Capital
lent Ms. Moore $245,625, which amount is due on the earlier of January 4, 2005
or 120 days after Ms. Moore is no longer an officer of PTR or any affiliate
thereof. Interest on the unpaid balance accrues at a floating rate per annum
equal to the lowest rate charged by Morgan Guaranty Trust Company of New York
to its most creditworthy corporate customers for unsecured loans having a
maturity of ninety days or less, in effect from time to time, plus .25%, and is
payable semiannually on each July 4 and January 4. The proceeds of such
promissory note were used by Ms. Moore to purchase common shares of PTR.
On October 3, 1995, Security Capital entered into an unsecured, full recourse
promissory note with K. Dane Brooksher, Co-Chairman and Chief Operating Officer
of SCI and SCI's REIT Manager. Under the terms of the promissory note, Security
Capital lent Mr. Brooksher $249,997.50, which amount is due on the earlier of
January 4, 2005 or 120 days after Mr. Brooksher is no longer an officer of SCI.
Interest on the unpaid balance accrues at a floating rate per annum equal to
the lowest rate charged by Morgan Guaranty Trust Company of New York to its
most creditworthy corporate customers for unsecured loans having a maturity of
ninety days or less, in effect from time to time, plus .25%, and is payable
semi-annually on each July 4 and January 4. The proceeds of the promissory note
were used by Mr. Brooksher to purchase common shares of SCI.
On May 10, 1996, Security Capital entered into an unsecured, full recourse
promissory note with Ms. Moore, Co-Chairman and Chief Operating Officer of
ATLANTIC and ATLANTIC's REIT Manager. Under the terms of such promissory note,
Security Capital lent Ms. Moore $250,000, which amount is due on the earlier of
January 5, 2006 or 120 days after Ms. Moore is no longer an officer of
ATLANTIC. Interest on the unpaid balance accrues at a floating rate per annum
equal to the lowest rate charged by Morgan Guaranty Trust Company of New York
to its most creditworthy corporate customers for unsecured loans having a
maturity of ninety days or less, in effect from time to time, plus .25%, and is
payable semiannually on each July 5 and January 5. The proceeds of such
promissory note were used by Ms. Moore to purchase common shares of ATLANTIC.
On May 17, 1996, Security Capital entered into an unsecured, full recourse
promissory note with James C. Potts, Co-Chairman and Chief Investment Officer
of ATLANTIC and ATLANTIC's REIT Manager. Under the terms of the promissory
note, Security Capital lent Mr. Potts $180,550, which amount is due on the
earlier of January 5, 2006 or 120 days after Mr. Potts is no longer an officer
of ATLANTIC. Interest on the unpaid balance accrues at a floating rate per
annum equal to the lowest rate charged by Morgan Guaranty Trust Company of New
York to its most creditworthy corporate customers for unsecured loans having a
maturity of ninety days or less, in effect from time to time, plus .25%, and is
payable semi-annually on each July 5 and January 5. The proceeds of the
promissory note were used by Mr. Potts to purchase common shares of ATLANTIC.
On December 27, 1996, Security Capital entered into a secured promissory note
and related pledge agreement with C. Ronald Blankenship, a Managing Director of
Security Capital. Under the terms of the secured promissory note, Security
Capital lent Mr. Blankenship $925,000, which amount is due on the earlier of
January 15, 2000 or 120 days after Mr. Blankenship is no longer an officer of
Security Capital or an affiliate thereof. Interest on the unpaid balance
accrues at six percent per year and is payable annually on January 15 each year
the secured promissory note is outstanding. The proceeds of the secured
promissory note were used by Mr. Blankenship to repay principal and interest on
earlier notes issued by Mr. Blankenship to Security Capital between August 1992
and March 1995, aggregating approximately $370,000, for repayment of other
obligations and for the payment of taxes. The secured promissory note is
secured by Class A Shares of Security Capital, common shares of PTR, SCI,
ATLANTIC and Homestead, and by 2014 Convertible Debentures, owned by Mr.
Blankenship. The secured promissory note is also secured by a life insurance
policy on Mr. Blankenship in the amount of $925,000 which policy names Security
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Capital as beneficiary. Mr. Blankenship has also agreed that if he exercises
any options for Security Capital securities prior to repayment of the secured
promissory note, any securities obtained upon exercise of such options shall
become subject to the pledge agreement and the net proceeds (after payment of
minimum withholding taxes) of any securities obtained upon exercise of such
options and disposed of by Mr. Blankenship shall be immediately applied to the
outstanding and unpaid interest and principal on the secured promissory note.
On April 1, 1997, Security Capital entered into a secured promissory note and
related pledge agreement with Thomas G. Wattles, a Managing Director of
Security Capital. Under the terms of the secured promissory note, Security
Capital lent Mr. Wattles $411,000, which amount may be increased by Mr. Wattles
up to $536,000, which amount is due on the earlier of January 15, 2000 or 120
days after Mr. Wattles is no longer an officer of Security Capital or an
affiliate thereof. Interest on the unpaid balance accrues at six percent per
year and is payable annually on January 15 each year the secured promissory
note is outstanding. The proceeds of the secured promissory note were used by
Mr. Wattles to repay principal and interest on earlier notes issued by Mr.
Wattles to Security Capital between January 1991 and October 1995, aggregating
approximately $362,000, for repayment of other obligations and for the payment
of taxes. The secured promissory note is secured by Class A Shares of Security
Capital, common shares of SCI, and by 2014 Convertible Debentures, owned by Mr.
Wattles. The secured promissory note is also secured by a life insurance policy
on Mr. Wattles in the amount of $536,000 which policy has been assigned to
Security Capital. Mr. Wattles has also agreed that if he exercises any options
for Security Capital securities prior to repayment of the secured promissory
note, any securities obtained upon exercise of such options shall become
subject to the pledge agreement and the net proceeds (after payment of minimum
withholding taxes) of any securities obtained upon exercise of such options and
disposed of by Mr. Wattles shall be immediately applied to the outstanding and
unpaid interest and principal on the secured promissory note.
As of April 24, 1997, Security Capital and William D. Sanders, Chairman and
Chief Executive Officer of Security Capital, entered into an agreement (the
"Sanders Agreement") under which Security Capital agreed to acquire all the
shares of a corporation owned by Mr. Sanders in exchange for 19,938 Class A
Shares, providing Mr. Sanders increased direct ownership in the Company. The
corporation's sole assets are warrants and options issued to Mr. Sanders
between 1991 and 1993 to purchase an aggregate of 16,143 Class A Shares and
$8,047,303 principal amount of 2014 Convertible Debentures (convertible into an
aggregate of 7,693 Class A Shares), or a total of 23,836 Class A Shares, with
an aggregate exercise price of approximately $11.3 million. All the options and
warrants are fully vested and expire in 2002. The Company and Mr. Sanders
agreed to use the average net asset value of the Class A Shares between April 1
and April 21, 1997 of $1,205 per share in determining the value of the 23,836
Class A Shares, which was approximately $28.7 million. The Sanders Agreement
was entered into as an alternative to Mr. Sanders funding the exercise of the
options and warrants with Class A Shares owned by Mr. Sanders, which was
rejected by the Company. Under the Sanders Agreement, the Company issued $17.4
million of Class A Shares which is equal to the difference between the total
value of the shares issuable ($28.7 million), and the total exercise price
($11.3 million) for the options and warrants. As additional consideration in
the transaction, the Company issued $6.6 million of Class A Shares for the
value of the holder's ability to defer exercising the warrants and options
until 2002 in accordance with their terms. As a result, the Company agreed to
issue 19,938 Class A Shares with an aggregate value of $24 million. The
transaction will result in a non-cash, non-recurring charge to earnings of the
Company in 1997 of approximately $6.6 million.
On April 24, 1997, SCI, through an affiliate of SCI, acquired the
refrigerated warehouse and distribution operations of Christian Salvesen, Inc.
and related companies located in the United States and Canada for $122.4
million. The acquired companies were subsequently transferred to a new entity,
CS Integrated LLC ("CSI"), which is 60% owned by an affiliate of SCI and 40%
owned by an affiliate of Hunt Financial Corporation. SCI's affiliate paid
approximately $73.4 million for its interest in CSI and the affiliate of Hunt
Financial Corporation paid approximately $49.0 million for its interest in CSI.
Under the terms of its agreement with Hunt Financial Corporation's affiliate,
SCI's affiliate has the option to increase its ownership interest in CSI to 80%
as SCI's affiliate invests additional capital. Hunt Financial Corporation is a
wholly owned subsidiary of Hunt Consolidated Inc., which is part of the Hunt
family interests headed by Ray L. Hunt, who is a director of Security Capital.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 31, 1997, the beneficial ownership
of Class A Shares and Class B Shares which could be received if the respective
Class A Shares were converted into Class B Shares by the holders thereof after
January 1, 1998 for (i) each director of Security Capital, (ii) each Named
Executive Officer, (iii) each person known to Security Capital to be the
beneficial owner of more than 5% of Class A Shares, and (iv) the directors and
executive officers of Security Capital or certain affiliates as a group and the
percentage ownership by each of such persons after the Offering and all of such
interests are owned directly, and the indicated person or entity has sole
voting and investment power. There are currently no Class B Shares outstanding.
The address for each director and executive officer listed below is c/o
Security Capital Group Incorporated at its administrative offices located at
7777 Market Center Avenue, El Paso, Texas 79912.
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS A SHARES CLASS B SHARES
(1)(2) (1)(2)(3)
---------------------- ----------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER % NUMBER %
------------------------ ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Samuel W. Bodman 3,922 * 196,100
Hermann Buerger - (4) * -
John P. Frazee, Jr. 3,526(5) * 176,300
Cyrus F. Freidheim, Jr. 2,762 * 138,100
H. Laurance Fuller 2,935(6) * 146,750
Ray L. Hunt 20,041(7) 1.54 1,002,050(7)
John T. Kelley III 2,652(8) * 132,600
William D. Sanders 39,124(9)(10) 3.00 1,956,200
Peter S. Willmott 3,344(11) * 167,200
C. Ronald Blankenship 3,853 * 192,650
Thomas G. Wattles 3,085(12) * 154,250
K. Dane Brooksher 1,361 * 68,050
David C. Dressler, Jr. 2,326 * 116,300
All directors and
executive officers
as a group (22 persons) 90,882(13) 6.99 4,544,100
The Allstate Corporation
2775 Sanders Road
Northbrook, IL 60062 69,474 5.34 3,473,700
</TABLE>
- --------
* Less than 1%
(1) Includes Class A Shares that may be acquired upon the exercise of options
or warrants within 60 days for Messrs. Bodman (1,362), Buerger (0), Frazee
(1,362), Freidheim (1,362), Fuller (1,362), Hunt (1,362), Kelley (1,362),
Sanders (3,817), Willmott (1,362), Blankenship (3,559), Wattles (2,918),
Brooksher (855) and Dressler (1,330).
(2) For each person who owns options or warrants that are exercisable within 60
days, the calculation of the percentage ownership assumes that only that person
has exercised all of his options or warrants and that no other person has
exercised any outstanding options or warrants.
(3) Assumes full conversion of all Class A Shares into Class B Shares and does
not give effect to the exercise of any Warrants that may be issued pursuant to
the Merger Agreements.
(4) Mr. Buerger is Executive Vice President of Commerzbank AG in New York.
Commerzbank Aktiengesellschaft, Grand Cayman Branch, owns all 139,000 shares of
Series A Preferred Stock, which are convertible into a maximum of 105,896 Class
A Shares as described under "Description of Capital Stock--Preferred Stock."
Mr. Buerger disclaims beneficial ownership of these shares.
(5) Includes five shares held by Mr. Frazee's children, and one share held by
his wife.
(6) Includes three shares held by Mr. Fuller's wife, and three shares held by
his children.
(7) Includes four shares held by family trusts for which Mr. Hunt is trustee
and 3,572 shares for which Mr. Hunt shares beneficial ownership pursuant to a
power of attorney. Excludes 1,430 shares that Mr. Hunt's wife owns as separate
property, of which Mr. Hunt disclaims beneficial ownership.
(8) Includes 1,289 shares held by a trust of which Mr. Kelley is trustee, and
one share held by his son.
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<PAGE>
(9) Includes 430 shares held by the Sanders Foundation; an aggregate of 93
shares held by Mr. Sanders' wife and children; and 17,993 warrants held by Mr.
Sanders.
(10) Subsequent to March 31, 1997, Mr. Sanders acquired 19,938 Class A Shares
in exchange for shares of a corporation he owned which holds options and
warrants to purchase 16,143 Class A Shares and $8,047,303 principal amount of
2014 Convertible Debentures. See "Certain Relationships and Transactions."
(11) Includes two shares held by Mr. Willmott's children.
(12) Includes one share held by Mr. Wattles' wife.
(13) Includes options to purchase 23,417 Class A Shares exercisable within 60
days.
The following table sets forth, as of March 31, 1997, the beneficial ownership
of the outstanding common shares of each of the operating companies for (i)
each director of Security Capital, (ii) each Named Executive Officer and (iii)
the directors and executive officers of Security Capital as a group. The
address of each person listed below is c/o Security Capital Group Incorporated
at its administrative offices located at 7777 Market Center Avenue, El Paso,
Texas 79912. Unless otherwise indicated in the footnotes, all of such interests
are owned directly, and the indicated person or entity has sole voting and
investment power.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
SECURITY
ATLANTIC HOMESTEAD PTR SCI CAPITAL
(1)(2) (2)(3) (1)(2) (1)(2) USREALTY (2)
-------------- ---------------- ---------------- --------------- ------------------
NAME OF BENEFICIAL OWNER NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
- ------------------------ ------ --- ------- ---- ------- ---- ------- --- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Samuel W. Bodman (4) - - - - - - 48,308 * 196,705 *
Hermann Buerger (5) - - 12,000 - - - - - - -
John P. Frazee, Jr. (6) 6,250 * 4,758(7) * 7,637 * 40,223 * - -
Cyrus F. Freidheim,
Jr. (8) 2,500 * 1,102 * 3,055 * 5,408 * 5,000 *
H. Laurance Fuller (9) 500 * 216 * 610 * 2,850 * - -
Ray L. Hunt 17,000(10) * 85,237(11) * 390,404(12) * 160,135(13) * 2,131,056(14) 1.87
John T. Kelley III (15) 250 * 2,739 * 16,835 * 90,448 * 26,000 *
William D. Sanders (16) 6,155 * 235,111 * 287,938 * 269,403 * 611,028 *
Peter S. Willmott (17) 1,250 * 3,447 * 15,327 * 10 * - -
C. Ronald Blankenship (18) 500 * 7,311 * 34,385 * 436 * - -
Thomas G. Wattles (19) 12 * 1,837 * 8,750 * 26,245 * - -
David C. Dressler (20) 500 * 25,629 * 6,611 * 2,425 * 1,600 *
K. Dane Brooksher (21) 1,075 * 325 * 611 * 30,077 * 5,000 *
All directors and
executive officers as a
group (20 persons) 35,992 * 368,912 1.32% 772,163 1.01% 675,968 * 2,976,389 2.62%
</TABLE>
- --------
* Less than 1%
(1) Assumes that (i) no common shares are issued pursuant to the rights
offerings being conducted pursuant to the Merger Agreements and (ii) Security
Capital receives common shares of ATLANTIC, common shares of PTR
and common shares of SCI, respectively, pursuant to the Merger
Agreements.
(2) For each person who owns options or warrants that are exercisable within 60
days, the calculation of the percentage ownership assumes that only that person
has exercised all of his options or warrants and that no other person has
exercised any outstanding options or warrants.
(3) Includes common shares and warrants.
(4) SCI shares are owned by the Bodman Foundation, a charitable trust of which
Mr. Bodman is a trustee. Security Capital USREALTY shares include 49,176 shares
owned by Elizabeth L. Bodman Trust. Mr. Bodman claims no beneficial interest in
these shares.
(5) Homestead shares include warrants to acquire 11,000 shares held by Mr.
Buerger and warrants to acquire 1,000 shares held in trust for Mr. Buerger's
daughter.
(6) ATLANTIC and PTR shares are held in an IRA account; SCI shares include 404
shares held by Mr. Frazee's wife and 2,428 shares held by children.
(7) Includes option for 2,000 shares.
(8) Security Capital USREALTY shares are held by Mr. Freidheim's wife.
66
<PAGE>
(9) Includes 250 ATLANTIC shares held by Mr. Fuller's wife, 108 Homestead
shares held by Mr. Fuller's wife, 305 PTR shares held by Mr. Fuller's children,
404 SCI shares held by Mr. Fuller's children and two SCI shares held by Mr.
Fuller's wife.
(10) Includes 750 shares held by a family trust for which Mr. Hunt is trustee,
2,250 shares for which Mr. Hunt shares direct or indirect beneficial ownership
pursuant to powers of attorney, 12,500 shares held by a family limited
partnership of which a corporation that Mr. Hunt owns is the general partner
and 750 shares held by a corporation that Mr. Hunt owns. Excludes 750 shares
that Mr. Hunt's wife owns as separate property, of which Mr. Hunt disclaims
beneficial ownership.
(11) Includes 198 shares held by family trusts for which Mr. Hunt is trustee,
396 shares for which Mr. Hunt shares beneficial ownership pursuant to powers of
attorney, 3,304 shares held by a family limited partnership of which a
corporation that Mr. Hunt owns is the general partner, and 198 shares held by a
corporation that Mr. Hunt owns. Excludes 198 shares that Mr. Hunt's wife owns
as separate property and 14,052 shares held by Hunt Financial Corporation, the
capital stock of which is held, indirectly through a series of corporations, by
trusts for the benefit of Mr. Hunt and members of his family, as to which Mr.
Hunt disclaims beneficial ownership. Includes 132 warrants held by family
trusts for which Mr. Hunt is trustee, 701 warrants for which Mr. Hunt shares
beneficial ownership pursuant to powers of attorney, 2,217 warrants held by a
family limited partnership of which a corporation that Mr. Hunt owns is the
general partner and 132 warrants held by a corporation that Mr. Hunt owns.
Excludes 132 warrants that Mr. Hunt's wife owns as separate property and 9,427
warrants held by Hunt Financial Corporation, as to which Mr. Hunt disclaims
beneficial ownership.
(12) Includes 917 shares held by a family trust for which Mr. Hunt is trustee,
2,748 shares for which Mr. Hunt shares direct or indirect beneficial ownership
pursuant to powers of attorney, 15,275 shares held by a family limited
partnership of which a corporation that Mr. Hunt owns is the general partner
and 916 shares held by a corporation that Mr. Hunt owns. Excludes 916 shares
that Mr. Hunt's wife owns as separate property and 111,800 shares held by Hunt
Financial Corporation, as to which Mr. Hunt disclaims beneficial ownership.
(13) Includes 6,343 shares held by family trusts for which Mr. Hunt is trustee,
3,801 shares for which Mr. Hunt shares direct or indirect beneficial ownership
pursuant to powers of attorney, 146,192 shares held by a family limited
partnership of which a corporation that Mr. Hunt owns is the general partner,
1,266 shares held by a corporation that Mr. Hunt owns and 1,266 shares of which
Mr. Hunt may be deemed to be the beneficial owner as trustee of family trusts
owning 50% of the stock of a corporation that owns those shares. Excludes 1,269
shares that Mr. Hunt's wife owns as separate property, of which Mr. Hunt
disclaims beneficial ownership.
(14) Includes 196,706 shares for which Mr. Hunt shares indirect beneficial
ownership pursuant to powers of attorney, 1,671,997 shares held by a family
limited partnership of which a corporation that Mr. Hunt owns is the general
partner and 98,353 shares held by a corporation that Mr. Hunt owns. Excludes
82,000 shares that Mr. Hunt's wife owns as separate property, of which Mr. Hunt
disclaims beneficial ownership.
(15) ATLANTIC shares and Homestead shares are held in a trust for which Mr.
Kelley is trustee. SCI shares include 404 shares held by Mr. Kelley's son;
remaining SCI shares are held in a trust for which Mr. Kelley is trustee.
Security Capital USREALTY shares includes 1,000 shares held by Mr. Kelley's
son.
(16) Homestead shares includes 40,340 shares and 61,080 shares held by
partnerships, 2,625 shares held by the Sanders Foundation and 3,500 shares held
by a limited partnership. PTR shares include 74,188 shares and 9,165 shares
held by partnerships and 12,500 shares held by the Sanders Foundation. SCI
shares include 74,005 shares and 22,666 shares held by partnerships and an
aggregate of 2,730 shares held by Mr. Sanders' wife and children. Security
Capital USREALTY shares include 207,117 shares held by partnerships and an
aggregate of 500 shares held by Mr. Sanders' children.
(17) Includes four SCI shares held by Mr. Willmott's children.
(18) Includes 2,895 shares of Homestead stock held by Mr. Blankenship's child;
13,791 PTR common shares owned by a corporation of which Mr. Blankenship is
controlling shareholder.
(19) Includes 12 shares of ATLANTIC common stock held by Mr. Wattles' children;
Homestead shares include one share held by Mr. Wattles' child, remaining
Homestead shares are held in an IRA account; PTR shares are held in an IRA
account; SCI shares include 1,970 shares held by Mr. Wattles' children, five
shares held by his wife, and 7,422 shares held in an IRA account.
(20) ATLANTIC shares are held in trust accounts of which Mr. Dressler is
trustee; Homestead shares include 25,000 shares of restricted securities; PTR
common shares include 3,611 shares held in trust accounts for which Mr.
Dressler is trustee and SCI shares include one share held by Mr. Dressler's son
and shares held in trust accounts of which Mr. Dressler is trustee; Security
Capital USREALTY shares are held in trust accounts for which Mr. Dressler is
trustee.
(21) SCI shares include 640 shares held in Mr. Brooksher's wife's name;
Security Capital USREALTY shares are held in an IRA account.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Security Capital consists of 250,000,000
shares, consisting of 20,000,000 Class A Shares, 229,861,000 Class B Shares and
139,000 shares of Series A Preferred Stock. The Board may, by articles
supplementary, classify or reclassify any unissued shares of stock from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such stock. No holder of
any class of capital stock of Security Capital will have any preemptive right
to subscribe for any securities of Security Capital except as may be granted by
the Board pursuant to an agreement between Security Capital and a shareholder.
Under Maryland law, shareholders are generally not liable for Security
Capital's debts or obligations. For a description of certain provisions that
could have the effect of delaying, deferring or preventing a change in control,
see "Risk Factors--Limitations on Acquisition of Shares and Change in Control,"
and "Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws."
The transfer agent and registrar for the Shares is The First National Bank of
Boston, 150 Royall Street, Canton, Massachusetts 02021.
COMMON STOCK
The holders of outstanding Class A Shares are entitled to one vote, and the
holders of outstanding Class B Shares are entitled to one two-hundredth
(1/200th) of a vote, for each share held of record on all matters submitted to
a vote of shareholders. Unless otherwise required by Maryland law, the Class A
Shares and the Class B Shares will vote as a single class with respect to all
matters submitted to a vote of shareholders of Security Capital, including the
election of directors. Shareholders do not have the right to cumulate their
votes in the election of directors, which means that, the holders of a majority
of the outstanding Class A Shares can elect all of the directors then standing
for election.
Commencing January 1, 1998, each Class A Share may be converted into 50 Class B
Shares at the holder's option at any time. Class B Shares are not convertible
into Class A Shares or any other security.
Holders of Class A Shares are entitled to receive ratably such dividends as may
be declared by the Board out of funds legally available therefor. Holders of
Class B Shares are entitled to dividends equal to one-fiftieth (1/50th) of the
amount per share declared by the Board for each Class A Share. Dividends with
respect to the Class B Shares will be paid in the same form and at the same
time as dividends with respect to the Class A Shares, except that, in the event
of a stock split or stock dividend, holders of Class A Shares will receive
Class A Shares and holders of Class B Shares will receive Class B Shares,
unless otherwise specifically designated by resolution of the Board. Security
Capital has no present intention to pay a dividend on Class B Shares or Class A
Shares (which would necessitate a one-fiftieth (1/50th) equivalent dividend on
Class B Shares) in the future.
In the event of the liquidation, dissolution or winding-up of Security Capital,
holders of Class A Shares and Class B Shares are entitled to share ratably in
all assets remaining after the payment of liabilities, with holders of Class B
Shares entitled to receive per share one-fiftieth (1/50th) of any amount per
share received by holders of Class A Shares. Neither holders of Class A Shares
or Class B Shares shall have preemptive rights to subscribe for additional
shares of either class. All outstanding Class A Shares are, and all Class B
Shares to be outstanding upon completion of the Offering will be, fully paid
and non-assessable.
PREFERRED STOCK
The Board is empowered by the Charter, without the approval of shareholders, to
cause shares of preferred stock to be issued in one or more series and to
determine, among other things, the number of preferred shares of each series
and the rights, preferences, powers and limitations of each series which may be
senior to the rights of Shares. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of Security
Capital and may adversely affect the voting and other rights of shareholders.
Upon completion of the Offering and except for the Series A Preferred Stock
described below, no shares of preferred stock will be outstanding and Security
Capital has no present plans to issue any preferred stock following completion
of the Offering other than as contemplated by the Rights Agreement (as defined
below).
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<PAGE>
Security Capital currently has outstanding 139,000 shares of Series A Preferred
Stock. Generally, the Series A Preferred Stock is entitled to receive quarterly
cumulative cash dividends in an annual amount equal to $75 per share. The
Series A Preferred Stock is entitled to receive $1,000 per share, plus an
amount equal to accrued and unpaid dividends, if any, upon any liquidation,
dissolution or winding up of Security Capital before any distribution could be
made to holders of Class A Shares or Class B Shares. Each share of Series A
Preferred Stock is convertible at the option of the holder, into 0.76184 Class
A Shares, subject to customary adjustments to prevent dilution. In the event
that a holder of the Series A Preferred Stock would be prohibited under the
Bank Holding Company Act of 1956, as amended, from owning securities
constituting or convertible into 5% or more of the outstanding Class A Shares,
then the conversion rights of the shares of Series A Preferred Stock by such
holder shall be modified as follows: (i) the number of shares of Series A
Preferred Stock held by such holder which may then be converted by such holder
without resulting in such holder owning 5% or more of the Class A Shares
outstanding after such conversion shall be convertible into Class A Shares; and
(ii) any shares of Series A Preferred Stock held by such holder in excess of
the number of shares which may then be converted as described in clause (i)
will not be convertible into Class A Shares until such time as (and only to the
extent that) (A) such shares may be converted without resulting in such holder
owning 5% or more of the Class A Shares outstanding after such conversion or
(B) such shares are held by a person not prohibited from owning securities
constituting or convertible into 5% or more of Class A Shares as described
above.
The Series A Preferred Stock is not redeemable before March 29, 1999. On and
after such date, the Series A Preferred Stock is redeemable, in whole or in
part, at the option of Security Capital upon not less than 30 days' notice, in
cash at $1,000 per share plus accrued and unpaid dividends, if any. The vote or
consent of a majority of the Series A Preferred Stock is necessary (i) to
amend, alter or repeal any provision of the Articles Supplementary governing
the Series A Preferred Stock in a manner which materially and adversely affects
the voting powers, rights or preferences of the Series A Preferred Stock or
(ii) to authorize, reclassify, create or increase the authorized amount of any
stock of any class (or any security convertible into stock of any class)
ranking prior to the Series A Preferred Stock in the distribution of assets on
any liquidation, dissolution or winding up of Security Capital or in the
payment of dividends. The Series A Preferred Stock is entitled to one vote per
Class A Share into which the Series A Preferred Stock is then convertible,
voting together with the Class A Shares, on any of the following matters if the
Class A Shares are entitled to vote thereon: (i) an amendment, alteration or
repeal of any of the provisions of the Charter, (ii) a consolidation or merger
of Security Capital with or into another entity or of another entity with or
into Security Capital, (iii) a sale or transfer of all or substantially all of
Security Capital's assets or (iv) the voluntary liquidation or dissolution of
Security Capital. Also, the Series A Preferred Stock is entitled to one-half
vote per Class A Share into which the Series A Preferred Stock is then
convertible, voting together with the Class A Shares, on any other matter
submitted to a vote of Security Capital's shareholders.
PURCHASE RIGHTS
On April 21, 1997, the Board declared a dividend of one Purchase Right for each
Share outstanding at the close of business on April 21, 1997 (the "Rights
Record Date") to the holders of Shares of record as of the Rights Record Date.
The dividend was paid on the Rights Record Date. The holders of any additional
Shares issued after the Rights Record Date and before the redemption or
expiration of the Purchase Rights will also be entitled to one Shareholder
Purchase Right for each such additional Share. Each Purchase Right entitles the
registered holder, under certain circumstances, to purchase from Security
Capital, in the event the underlying share is a Class A Share, one one-
hundredth of a Participating Preferred Share of Security Capital at a price of
$6,000 per one one-hundredth of a Participating Preferred Share (the "Purchase
Price"), subject to adjustment. In the event the underlying share is a Class B
Share, the Purchase Right entitles the registered holder under certain
circumstances to purchase from Security Capital one five-thousandth of a
Participating Preferred Share of Security Capital at a price of $120 per one
five-thousandth of a Participating Preferred Share. The description and terms
of the Purchase Rights are set forth in the Rights Agreement dated as of April
21, 1997 between Security Capital and The First National Bank of Boston, as
rights agent (the "Rights Agreement").
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earlier to occur of: (1) 10 days following a public
announcement that a person or group of affiliated or associated persons, other
than Security Capital USREALTY and certain affiliates of Security Capital, has
acquired beneficial ownership of 20% or more of the voting power of the voting
equity securities of Security Capital (thereby becoming an "Acquiring Person")
or (2) 15 business days (or such later date as may be determined by action of
the Board prior
69
<PAGE>
to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of persons of 25% or more of the
voting power of the voting equity securities of Security Capital (the first to
occur of such dates being called the "Rights Distribution Date"). With respect
to any of the Class A Share or Class B Share certificates outstanding as of the
Rights Record Date, until the Rights Distribution Date the Purchase Rights will
be evidenced by such certificate. Until the Rights Distribution Date (or
earlier redemption or expiration of the Purchase Rights), new certificates
issued after the Rights Record Date upon transfer or new issuance of Class A
Shares or Class B Shares will contain a notation incorporating the Rights
Agreement by reference. Notwithstanding the foregoing, if the Board in good
faith determines that a person who would otherwise be an Acquiring Person under
the Rights Agreement has become such inadvertently, and such person divests as
promptly as practicable a sufficient number of Class A Shares or Class B Shares
so that such person would no longer be an Acquiring Person, then such person
shall not be deemed to be an Acquiring Person for purposes of the Rights
Agreement.
The Purchase Rights will expire on April 21, 2007 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed or exchanged by Security Capital, in each case as described
below.
The Purchase Price payable, and the number of Participating Preferred Shares or
other securities or property issuable, upon exercise of the Purchase Rights are
subject to adjustment under certain circumstances from time to time to prevent
dilution. With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase Rights
will not be redeemable. Each Participating Preferred Share will be entitled to
a minimum preferential quarterly distribution payment of $1 per share but will
be entitled to an aggregate distribution of 100 times the distribution declared
per Class A Share, or if no Class A Shares are outstanding, 2 times the
distribution declared per Class B Share. Each Participating Preferred Share
will have 100 votes, voting together with the Shares. In the event of
liquidation, the holders of the Participating Preferred Shares will be entitled
to a minimum preferential liquidation payment of $1 per share but will be
entitled to an aggregate payment of 100 times the payment made per Class A
Share, or if no Class A Shares are outstanding, 2 times the payment made per
Class B Share. In the event of any merger, consolidation or other transaction
in which Class A Shares or Class B Shares are exchanged, each Participating
Preferred Share will be entitled to receive 100 times the amount received per
Class A Share or Class B Share, as the case may be. In the event of issuance of
Participating Preferred Shares upon exercise of the Purchase Rights, in order
to facilitate trading, a depositary receipt may be issued for each one one-
hundredth or one five-thousandth of a Participating Preferred Share. The
Purchase Rights will be protected by customary antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of Class A Shares or Class B Shares, as
the case may be, having a market value (determined in accordance with the
Rights Agreement) of twice the Purchase Price. In lieu of the issuance of Class
A Shares or Class B Shares, as the case may be, upon exercise of Purchase
Rights, the Board may under certain circumstances, and if there is an
insufficient number of Class A Shares or Class B Shares, as the case may be,
authorized but unissued or held as treasury Shares to permit the exercise in
full of the Purchase Rights, the Board is required to, take such action as may
be necessary to cause Security Capital to issue or pay upon the exercise of
Purchase Rights, cash (including by way of a reduction of purchase price),
property, other securities or any combination of the foregoing having an
aggregate value equal to that of the Class A Shares or Class B Shares, as the
case may be, which otherwise would have been issuable upon the exercise of
Purchase Rights.
In the event that, after any person or group becomes an Acquiring Person,
Security Capital is acquired in a merger or other business combination
transaction of 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a Purchase Right
will thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price, a number of shares of
common stock of the acquiring company having a market value (determined in
accordance with the Rights Agreement) of twice the Purchase Price.
70
<PAGE>
At any time after any person or group becomes an Acquiring Person and prior to
the acquisition by that person or group of 50% or more of the outstanding Class
A Shares or Class B Shares, the Board may exchange the Purchase Rights (other
than Purchase Rights owned by that person or group which will have become
void), in whole or in part, at an exchange ratio of one Class A Share or Class
B Share, as the case may be (or one one-hundredth or one five-thousandth of a
Participating Preferred Share as the case may be), per Purchase Right (subject
to adjustment).
As soon as practicable after a Rights Distribution Date, Security Capital is
obligated to use its best efforts to file a registration statement under the
Securities Act relating to the securities issuable upon exercise of Purchase
Rights and to cause such registration statement to become effective as soon as
practicable.
At any time prior to the time a person or group of persons becomes an Acquiring
Person, the Board may redeem the Purchase Rights in whole, but not in part, at
a price of $.01 per Purchase Right (the "Redemption Price") payable in cash,
Shares or any other form of consideration deemed appropriate by the Board. The
redemption of the Purchase Rights may be made effective at such time, on such
basis and with such conditions as the Board in its sole discretion may
establish. Immediately upon the effectiveness of any redemption of the Purchase
Rights, the right to exercise the Purchase Rights will terminate and the only
right of the holders of Purchase Rights will be to receive the Redemption
Price.
The terms of the Purchase Rights may be amended by the Board without the
consent of the holders of the Purchase Rights, except that from and after the
time any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Purchase Rights and in no event shall any such amendment change
the 20% threshold at which a person acquiring beneficial ownership of Class A
Shares or Class B Shares becomes an Acquiring Person.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
Security Capital on terms not approved by its Board, except pursuant to an
offer conditioned on a substantial number of Purchase Rights being acquired.
The Purchase Rights should not interfere with any merger or other business
combination approved by the Board since the Purchase Rights may be redeemed by
Security Capital at the Redemption Price prior to the time that a person or
group has acquired beneficial ownership of 20% or more of the voting power of
the voting equity securities of Security Capital. The form of Rights Agreement
specifying the terms of the Purchase Rights has been incorporated by reference
into the registration statement of which this Prospectus forms a part and is
incorporated herein by reference. The foregoing description of the Purchase
Rights does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Rights Agreement, including the definitions
therein of certain terms.
RESTRICTION ON SIZE OF HOLDINGS OF SHARES
The Charter contains certain restrictions on the number of Shares that
individual shareholders may own. For the operating companies to qualify as
REITs under the Code, no more than 50% of the value of their shares (after
taking into account options to acquire shares) may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities and constructive ownership among specified family members)
during the last half of a taxable year (other than the first taxable year), by
100 or more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year. Because certain of the operating
companies are REITs, their respective charters and Security Capital's Charter
contain restrictions on the acquisition of shares intended to ensure compliance
with these requirements.
Subject to certain exceptions specified in the Charter, no holder may own, or
be deemed to own by virtue of the attribution provisions of the Code, more than
9.8% (the "Ownership Limit") of the number or value of the issued and
outstanding shares of Security Capital's stock. The Board, upon receipt of a
ruling from the U.S. Internal Revenue Service (the "IRS") or an opinion of
counsel or other evidence satisfactory to the Board and upon such other
conditions as the Board may direct, may also exempt a proposed transferee from
the Ownership Limit. As a condition of such exemption, the proposed transferee
must give written notice to Security Capital of the proposed transfer no later
than the fifteenth day prior to any transfer which, if consummated, would
result in the intended transferee owning shares of Security Capital's stock in
excess of the Ownership Limit. The Board may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the operating companies' status as REITs. Any
transfer of Shares that would (i) create a direct or indirect ownership of
shares of Security Capital's stock in excess of the Ownership Limit or (ii)
result in a
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Security Capital investee being "closely held" within the meaning of Section
856(h) of the Code, shall be null and void ab initio, and the intended
transferee will acquire no rights to the shares of Security Capital's stock.
The foregoing restrictions on transferability and ownership will not apply if
the Board determines, which determination must be approved by the shareholders,
that it is no longer in the best interests of Security Capital to attempt to,
or to continue to, assist Security Capital's operating companies in qualifying
as REITs. The Charter excludes Security Capital USREALTY (and its transferees)
from the Ownership Limit.
Any shares of Security Capital's stock, the purported transfer of which would
result in a person owning Shares in excess of the Ownership Limit or cause any
or all of the operating companies to become "closely held" under Section 856(h)
of the Code, that is not otherwise permitted as provided above will constitute
excess shares ("Excess Shares"), which will be transferred pursuant to the
Charter to a party not affiliated with Security Capital designated by Security
Capital as the trustee of a trust for the exclusive benefit of an organization
or organizations described in Sections 170(b)(1)(A) and 170(c) of the Code and
identified by the Board as the beneficiary or beneficiaries of the trust (the
"Charitable Beneficiary"), until such time as the Excess Shares are transferred
to a person whose ownership will not violate the restrictions on ownership.
While these Excess Shares are held in trust, they will be entitled to share in
any distributions which will be paid to the trust for the benefit of the
Charitable Beneficiary and may only be voted by the trustee for the benefit of
the Charitable Beneficiary. Subject to the Ownership Limit, the Excess Shares
shall be transferred by the trustee at the direction of Security Capital to any
person (if the Excess Shares would not be Excess Shares in the hands of such
person). The purported transferee will receive the lesser of (i) the price paid
by the purported transferee for the Excess Shares (or, if no consideration was
paid, fair market value on the day of the event causing the Excess Shares to be
held in trust) and (ii) the price received from the sale or other disposition
of the Excess Shares held in trust. Any proceeds in excess of the amount
payable to the purported transferee will be paid to the Charitable Beneficiary.
In addition, such Excess Shares held in trust are subject to purchase by
Security Capital for a 90-day period at a purchase price equal to the lesser of
(i) the price paid for the Excess Shares by the purported transferee (or, if no
consideration was paid, fair market value at the time of the event causing the
Shares to be held in trust) and (ii) the fair market value of the Excess Shares
on the date Security Capital elects to purchase. Fair market value, for these
purposes, means the last reported sales price reported on the NYSE on the
trading day immediately preceding the relevant date, or if not then traded on
the NYSE, the last reported sales price on the trading day immediately
preceding the relevant date as reported on any exchange or quotation system
over or through which the relevant class of shares of stock may be traded, or
if not then traded over or through any exchange or quotation system, then the
market price on the relevant date as determined in good faith by the Board.
From and after the purported transfer to the purported transferee of the Excess
Shares, the purported transferee shall cease to be entitled to distributions,
voting rights and other benefits with respect to the Excess Shares except the
right to payment on the transfer of the Excess Shares as described above. Any
distribution paid to a purported transferee on Excess Shares prior to the
discovery by Security Capital that such Excess Shares have been transferred in
violation of the provisions of the Charter shall be repaid, upon demand, to
Security Capital, which shall pay any such amounts to the trust for the benefit
of the Charitable Beneficiary. If the foregoing transfer restrictions are
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the purported transferee of any Excess Shares may be deemed,
at the option of Security Capital, to have acted as an agent on behalf of
Security Capital in acquiring such Excess Shares and to hold such Excess Shares
on behalf of Security Capital.
All certificates representing Shares will bear a legend referring to the
restrictions described above.
Each shareholder shall upon demand be required to disclose to Security Capital
in writing such information with respect to the direct, indirect and
constructive ownership of Shares as the Board deems reasonably necessary to
assist its operating companies in complying with the provisions of the Code
applicable to REITs, to determine Security Capital's operating companies status
as REITs, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of the Shares might
receive a premium for their Shares over the then prevailing market price or
which such holders might believe to be otherwise in their best interest.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF SECURITY CAPITAL'SCHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and the
Charter and Bylaws. The summary does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and the Charter
and Bylaws for complete information.
CLASSIFICATION OF THE BOARD
The Bylaws provide that the number of directors may be established by the Board
but may not be fewer than three nor more than fifteen. Any vacancy will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors will be filled by a
majority of the entire Board. Pursuant to the terms of the Charter, the
directors are divided into three classes. One class holds office for a term
expiring at the annual meeting of shareholders to be held in 1998, another
class holds office for a term expiring at the annual meeting of shareholders to
be held in 1999 and another class holds office for a term expiring at the
annual meeting of shareholders to be held in 2000. As the term of each class
expires, directors in that class will be elected for a term of three years and
until their successors are duly elected and qualify. Security Capital believes
that classification of the Board will help to assure the continuity and
stability of Security Capital's business strategies and policies as determined
by the Board.
The classified director provision could have the effect of making the removal
of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of Security Capital, even though such an attempt might be
beneficial to Security Capital and its shareholders. At least two annual
meetings of shareholders, instead of one, will generally be required to effect
a change in a majority of the Board. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
DIRECTOR LIABILITY LIMITATION AND INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent
permitted by Maryland law.
The Bylaws provide that Security Capital will, to the maximum extent permitted
by Maryland law in effect from time to time, indemnify and pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
individual who is a present or former director or officer of Security Capital
or (b) any individual who, while a director of Security Capital and at the
request of Security Capital, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
Security Capital has the power with the approval of the Board, to provide such
indemnification and advancement of expenses to a person who has served a
predecessor of Security Capital in any of the capacities described in (a) or
(b) above and to any employee or agent of Security Capital or its predecessors.
Maryland law requires a corporation (unless its charter requires otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. Maryland law permits Security Capital to
advance reasonable expenses to a director or officer upon Security Capital's
receipt of (a) a
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written affirmation by the director of officer of his or her good faith belief
that he or she has met the standard of conduct necessary for indemnification by
Security Capital as authorized by the Bylaws and (b) a written statement by or
on his or her behalf to repay the amount paid or reimbursed by Security Capital
if it shall ultimately be determined that the standard of conduct was not met.
Additionally, Security Capital has entered into indemnity agreements with each
of its officers and directors which provide for reimbursement of all expenses
and liabilities of such officer or director, arising out of any lawsuit or
claim against such officer or director due to the fact that he or she was or is
serving as an officer or director, except for such liabilities and expenses (a)
the payment of which is judicially determined to be unlawful, (b) relating to
claims under Section 16(b) of the Exchange Act or (c) relating to judicially
determined criminal violations.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling Security Capital
pursuant to the foregoing provisions, Security Capital has been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
BUSINESS COMBINATIONS
Under Maryland law, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the Board of such corporation and
approved by the affirmative vote of at least (a) 80% of the votes entitled to
be cast by holders of outstanding voting shares of the corporation and (b) two-
thirds of the votes entitled to be cast by holders of outstanding voting shares
of the corporation other than shares held by the Interested Stockholder with
whom the business combination is to be effected, unless, among other things,
the corporation's stockholders receive a minimum price (as defined under
Maryland law) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its shares.
These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the Board of the corporation
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
Security Capital's Charter exempts from these provisions of Maryland law any
business combination with Security Capital USREALTY and its affiliates and
successors. As a result, Security Capital USREALTY and its affiliates and
successors may be able to enter into business combinations with Security
Capital that may not be in the best interests of its stockholders without
compliance by Security Capital with the super majority vote requirements and
other provisions of the statute.
CONTROL SHARE ACQUISITIONS
Maryland law provides that "Control Shares" of a Maryland corporation acquired
in a "Control Share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority, or (iii) a majority of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "Control Share acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board to call a special meeting of stockholders to be held
within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the question
at any stockholders meeting.
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If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the Control Shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the Control Shares, as of the date of the last
Control Share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. If voting rights for
Control Shares are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
Security Capital's Bylaws contain a provision exempting Security Capital
USREALTY and its affiliates and successors from the provisions of the Control
Share acquisition statute.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
For nominations or other business to be properly brought before an annual
meeting of shareholders by a stockholder, the Bylaws require such shareholder
to deliver a notice to the Secretary, absent specified circumstances, not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting setting forth: (i) as to each person whom the
shareholder proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for the election of directors, pursuant to Regulation
14A of the Exchange Act; (ii) as to any other business that the shareholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
shareholder and of the beneficial owner, if any, on whose behalf the proposal
is made; and (iii) as to the shareholder giving notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such shareholder as they appear on Security Capital's books, and
of such beneficial owner and (y) the number of Shares which are owned
beneficially and of record by such shareholder and such beneficial owner, if
any.
SHARES AVAILABLE FOR FUTURE SALE
At March 31, 1997, Security Capital had 1,301,010 Class A Shares issued and
outstanding, which will be convertible beginning January 1, 1998 into a total
of 65,050,500 Class B Shares. In addition, Security Capital has 139,000 Series
A Preferred Shares outstanding, convertible into a maximum of 105,896 Class A
Shares. Security Capital also has outstanding (i) approximately $714 million
principal amount of its 2014 Convertible Debentures, convertible into an
aggregate of 682,293 Class A Shares, (ii) approximately $323 million principal
amount of its 2016 Convertible Debentures, convertible into an aggregate of
279,950 Class A Shares, (iii) warrants to purchase 40,241 Class A Shares and
$30,483,000 principal amount of 2014 Convertible Debentures (convertible into
29,142 Class A Shares), and (iv) options to purchase 138,521 Class A Shares and
$55,575,000 principal amount of 2014 Convertible Debentures (convertible into
53,168 Class A Shares) reserved for issuance upon exercise of options under
Security Capital's employee benefit plans. All such Class A Shares, except
those held by affiliates, and the Class B Shares into which they may be
converted, may be sold in the public market in the future pursuant to
registration rights or available exemptions from registration. In addition,
after consummation of the Mergers, Security Capital is expected to have
outstanding Warrants to purchase a total of $250 million of Class B Shares
(based on the price of the Class B Shares on a date to be established following
completion of the Offering). To the extent such Warrants are exercised, the
Class B Shares may be sold in the public markets without limitation. No
prediction can be made regarding the effect of future sales of Class B Shares
on the market prices of Class B Shares.
All of the Class B Shares to be issued or sold by Security Capital in the
Offering, other than any Class B Shares purchased by affiliates, will be
tradeable without restriction under the Securities Act. The Class A Shares
currently issued and outstanding or reserved for issuance upon exercise of
options or warrants or conversion of debentures
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will be eligible for sale, subject to the volume resale, manner of sale and
notice limitations of Rule 144 of the Securities Act. In general, under Rule
144, a person (or persons whose shares are aggregated in accordance with the
Rule) who has beneficially owned his or her shares for at least one year,
including any such persons who may be deemed "affiliates" of Security Capital
(as defined in the Securities Act), would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
then outstanding number of shares or the average weekly trading volume of the
shares during the four calendar weeks preceding each such sale. After shares
are held for two years, a person who is not deemed an "affiliate" of Security
Capital is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. Sales of shares by affiliates will continue
to be subject to the volume limitations. As defined in Rule 144, an "affiliate"
of an issuer is a person that directly or indirectly, through the use of one or
more intermediaries, controls, is controlled by, or is under common control
with, such issuer.
No prediction can be made as to the effect, if any, that future sales of Shares
or the availability of Shares for future sale will have on the market price
prevailing from time to time. Sales of substantial amounts of Shares (including
Shares issued upon the exercise of options or warrants or conversion of
Convertible Debentures and Series A Preferred Stock), or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Shares.
For a description of certain restrictions on transfers of Shares by Security
Capital (and certain of its directors, officers and affiliates), see
"Underwriting."
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS B SHARES
The following is a general discussion of certain U.S. federal tax consequences
of the ownership and disposition of Class B Shares by a beneficial owner of
such shares that is not a U.S. person (a "non-U.S. holder"). For purposes of
this discussion, a "U.S. person" means a citizen or resident of the United
States, a corporation or partnership created or organized in the United States
or under the law of the United States or of any State or political subdivision
of the foregoing, any estate whose income is includible in gross income for
U.S. federal income tax purposes regardless of its source, or a "United States
Trust." A United States Trust is (a) for taxable years beginning after December
31, 1996, or if the trustee of a trust elects to apply the following definition
to an earlier taxable year, any trust if, and only if, (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more U.S. fiduciaries have the authority to
control all substantial decisions of the trust, and (b) for all other taxable
years, any trust whose income is includible in gross income for United States
Federal income tax purposes regardless of its source. This discussion does not
deal with all aspects of U.S. federal income and estate taxation that may be
relevant to non-U.S. holders in light of their particular circumstances, and
does not address state, local or non-U.S. tax considerations. Furthermore, the
following discussion is based on provisions of the Code, Treasury Regulations
promulgated thereunder and administrative and judicial interpretations as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Treasury Regulations were recently proposed that would, if adopted in
their present form, revise in certain respects the rules applicable to non-U.S.
holders of Class B Shares (the "Proposed Regulations"). The Proposed
Regulations are generally proposed to be effective with respect to payments
made after December 31, 1997. It is not certain whether, or in what form, the
Proposed Regulations will be adopted as final regulations. Each prospective
investor is urged to consult its own tax adviser with respect to the particular
U.S. federal, state and local consequences to it of owning and disposing of
Class B Shares, as well as any tax consequences arising under the laws of any
other taxing jurisdiction.
U.S. INCOME AND ESTATE TAX CONSEQUENCES
Although Security Capital does not currently intend to pay dividends on either
its Class A Shares or Class B Shares, dividends paid to a non-U.S. holder are
subject to U.S. withholding tax at a rate of 30% of the gross amount of the
dividend or, if applicable, a lower treaty rate, unless the dividend is
effectively connected with the conduct of a trade or business in the United
States by a non-U.S. holder (and, if certain tax treaties apply, is
attributable to a United States permanent establishment maintained by such non-
U.S. holder) and a Form 4224 stating that the dividends are so connected is
filed with Security Capital. A dividend that is effectively connected with the
conduct of a trade or business in the United States by a non-U.S. holder (and,
if certain tax treaties apply, is attributable to a
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United States permanent establishment maintained by such non-U.S. holder) will
be exempt from the withholding tax described above and subject instead (i) to
the U.S. federal income tax on net income that applies to U.S. persons and (ii)
with respect to corporate holders under certain circumstances, a 30% (or, if
applicable, lower treaty rate) branch profits tax that in general is imposed on
its "effectively connected earnings and profits" (within the meaning of the
Code) for the taxable year, as adjusted for certain items.
Under current Treasury Regulations, dividends paid to an address in a foreign
country are presumed to be paid to a resident of that country (unless the payor
has knowledge to the contrary) for purposes of the withholding discussed above
and, under the current interpretation of the Treasury Regulations, for purposes
of determining the applicability of a tax treaty rate. Under the Proposed
Regulations, however, a non-U.S. holder of Class B Shares who wishes to claim
the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements. In the case of a foreign
partnership, the certification requirement would generally be applied to the
partners of the partnership. In addition, the Proposed Regulations would also
require the partnership to provide certain information, including a United
States taxpayer identification number, and would provide look-through rules for
tiered partnerships. A non-U.S. holder that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amount withheld by filing an appropriate claim for refund with the
IRS.
Under current law, a non-U.S. holder generally will not be subject to U.S.
federal income tax on any gain recognized on a sale or other disposition of a
Class B Share unless (i) subject to the exception discussed in the paragraph
below Security Capital is or has been at any time within the shorter of the
five-year period preceding such disposition or such holder's holding period a
"United States real property holding corporation" for U.S. federal income tax
purposes, (ii) the gain is effectively connected with the conduct of a trade or
business within the United States of the non-U.S. holder (and, if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by the non-U.S. holder), (iii) the gain is not described in clause
(ii) above, the non-U.S. holder is an individual who holds the share as a
capital asset, is present in the United States for 183 days or more in the
taxable year of the disposition and the gain is attributable to an office or
other fixed place of business maintained in the United States by such
individual, or (iv) the non-U.S. holder is subject to tax pursuant to the Code
provisions applicable to certain U.S. expatriates. In the case of a non-U.S.
holder that is described under clause (ii) above, its gain will be subject to
the U.S. federal income tax on net income that applies to U.S. persons and, in
addition, if such non-U.S. holder is a foreign corporation, it may be subject
to the branch profits tax as described in the second preceding paragraph. An
individual non-U.S. holder that is described under clause (iii) above will be
subject to a flat 30% tax on the gain derived from the sale, which may be
offset by capital losses which are treated as U.S. source (notwithstanding the
fact that he or she is not considered a resident of the United States).
Security Capital believes that it currently is not a "United States real
property holding corporation." In general, if Security Capital were treated as
or were to become a "United States real property holding corporation" under the
Foreign Investment in Real Property Tax Act ("FIRPTA"), a non-U.S. holder of
Class B Shares deemed to own more than 5% of the Class B Shares would be
subject to United States federal income tax on a sale or other disposition of
such Class B Shares, and a non-U.S. holder that is not deemed to own more than
5% of the Class B Shares would not be subject to United States federal income
tax on gain on a sale or other disposition of such shares provided that such
shares are "regularly traded on an established securities market" (within the
meaning of Section 897(c)(3) of the Code and the temporary regulations issued
pursuant thereto). Additionally if the Class B Shares are not "regularly traded
on an established securities market" a non-U.S. holder of such shares would be
subject to a United States withholding tax equal to 10% of the amount realized
on a disposition of such shares. There is no assurance that Security Capital is
not currently or will not become a "United States real property holding
corporation."
Class B Shares owned or treated as owned by an individual who is not a citizen
or resident (as specially defined for United States federal income tax
purposes) of the United States at the date of death, or Class B Shares subject
to certain lifetime transfers made by such an individual, will be included in
such individual's estate for United States federal estate tax, unless an
applicable estate tax treaty provides otherwise.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends
Except as provided below, Security Capital must report annually to the IRS and
to each non-U.S. holder the amount of dividends paid to and the tax withheld
with respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these information returns may also be available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the non-U.S. holder resides. In general, backup withholding at
a rate of 31% and additional information reporting will apply to dividends paid
on Class B Shares to holders that are not "exempt recipients" and that fail to
provide in the manner required certain identifying information (such as the
holder's name, address and taxpayer identification number). Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients. However, dividends that are subject
to U.S. withholding tax at the 30% statutory rate or at a reduced tax treaty
rate are exempt from backup withholding of U.S. federal income tax and such
additional information reporting.
Broker Sales
If a non-U.S. holder sells Class B Shares through a U.S. office of a U.S. or
foreign broker, the broker is required to file an information return and is
required to withhold 31% of the sale proceeds unless the non-U.S. holder is an
exempt recipient or has provided the broker with the information and
statements, under penalties of perjury, necessary to establish an exemption
from backup withholding. If payment of the proceeds of the sale of a share by a
non-U.S. holder is made to or through the foreign office of a broker, that
broker will not be required to backup withhold or, except as provided in the
next sentence, to file information returns. In the case of proceeds from a sale
of a share by a non-U.S. holder paid to or through the foreign office of a U.S.
broker or a foreign office of a foreign broker that is (i) a controlled foreign
corporation for U.S. tax purposes or (ii) a person 50% or more of whose gross
income for the three-year period ending with the close of the taxable year
preceding the year of payment (or for the part of that period that the broker
has been in existence) is effectively connected with the conduct of a trade or
business within the United States (a "Foreign U.S. Connected Broker"),
information reporting is required unless the broker has documentary evidence in
its files that the payee is not a U.S. person and certain other conditions are
met, or the payee otherwise establishes an exemption. In addition, the Treasury
Department has indicated that it is studying the possible application of backup
withholding in the case of such foreign offices of U.S. and Foreign U.S.
Connected Brokers.
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a non-U.S. holder would be subject to backup
withholding and information reporting unless Security Capital receives
certification from the holder of its non-U.S. status.
Refunds
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder may be refunded or credited against the non-U.S. holder's U.S.
federal income tax liability, provided that the required information is
furnished to the IRS.
78
<PAGE>
ERISA MATTERS
The fiduciary requirements of Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), require the investments of a
pension, profit sharing or other employee benefit plan subject to ERISA (an
"ERISA Plan") to be (i) prudent and in the best interests of the ERISA Plan,
its participants and beneficiaries; (ii) diversified in order to reduce the
risk of large losses, unless it is clearly prudent not to do so; and (iii)
authorized under the terms of the governing documents of the ERISA Plan. Each
fiduciary of an ERISA Plan should carefully consider whether an investment in
the Class B Shares is consistent with his or her fiduciary duties.
A fiduciary making the decision to invest in the Class B Shares on behalf of
an ERISA Plan, a governmental plan, an Individual Retirement Account or certain
non-ERISA plans (a "Plan") is advised to consult his or her own legal advisor
regarding the specific considerations arising under ERISA, the Code or state
law with respect to the purchase, ownership or sale of Class B Shares by such
Plan.
A regulation promulgated by the Department of Labor (the "DOL Regulation")
provides that, except under certain circumstances set forth therein, investment
by a Plan in a corporation, partnership or other entity may result in the
assets of that entity being treated as the assets of the investing Plan.
An investment in an "operating company" is one circumstance in which the
entity's assets will not be deemed to be "plan assets." The DOL Regulation
includes in the definition of "operating company" a "venture capital operating
company" ("VCOC"). A VCOC is an entity which, as of its "initial valuation
date" and annually on its "annual valuation date" (as defined by the DOL
Regulation), has at least 50% of its assets (other than short-term assets
pending long-term investment or distribution), valued at cost, invested in
venture capital investments or derivative instruments and which actually
exercises, in the ordinary course of its business, management rights in one or
more of the operating companies in which it invests. The Company has received
opinions from Mayer, Brown and Platt that it is a VCOC as of its most recent
valuation date and, assuming that at the relevant future valuation dates
(including after giving effect to the Mergers) its investments in qualifying
venture capital investments constitute at least 50% of its assets valued at
cost, and that it continues to exercise its management rights in at least one
of the operating companies in which it invests, it will qualify as a VCOC and
its assets will not be deemed "plan assets" under the DOL Regulation.
The DOL Regulation also provides that an entity's assets will not be treated
as "plan assets" because of an ERISA Plan's investment if the Plan acquires a
"publicly offered security" which is an equity interest in the entity. The DOL
Regulation defines a publicly offered security as a security that is freely
transferable, part of a class of securities that is widely held and either (i)
part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (ii) sold pursuant to an effective registration statement under
the Securities Act (provided that the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Class B Shares are expected to be
registered under Section 12(b) of the Exchange Act upon completion of the
Offering and, prior to the completion of the Offering, the Class A Shares will
be registered under Section 12(g) of the Exchange Act.
A security is "widely held" if it is part of a class of securities owned by
100 or more investors independent of the issuer and of one another. The Company
believes that the Class A Shares are widely held and expects the Class B Shares
to be widely held upon completion of the Offering.
Whether a security is "freely transferable" is a factual question to be
determined on the basis of all relevant facts and circumstances. The DOL
Regulation creates certain safe harbors for securities with a minimum
investment of $10,000 or less, which safe harbor is not available for Class B
Shares offered hereby. Nevertheless, the Company believes that any restrictions
on the transfer of Class A Shares or Class B Shares are limited to the type of
restrictions permitted by the DOL Regulation. The DOL Regulation only
establishes a presumption in favor of free transferability, and no assurance
can be given that the Department of Labor or the U.S. Treasury Department will
not reach a contrary conclusion.
Assuming that the Class A Shares and Class B Shares will be "widely held" and
that no facts and circumstances other than those referred to in the preceding
paragraph exist that restrict transferability, the Company
79
<PAGE>
believes that, while the issue is not entirely free from doubt because of its
factual nature, the Class A Shares and Class B Shares will be publicly offered
securities and the assets of the Company will not be deemed to be "plan assets"
of any Plan which invests in Class B Shares.
Notwithstanding the foregoing, if the assets of the Company were deemed to be
"plan assets" under ERISA, the Company's ability to engage in business
transactions could be hampered because: (i) certain persons exercising
discretion as to the Company's assets might be considered to be fiduciaries
under ERISA; (ii) transactions involving the Company undertaken at their
direction or pursuant to their advice might violate ERISA; and (iii) certain
transactions that the Company might enter into in the ordinary course of its
business might constitute "prohibited transactions" under ERISA and the Code.
80
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the
Underwriters named below, for whom J.P. Morgan Securities Inc. is acting as
representative (the "Representative"), have agreed to purchase, and the Company
has agreed to sell to them, the respective numbers of Class B Shares set forth
opposite their names below. Under the terms and subject to the conditions set
forth in the Underwriting Agreement, the Underwriters are obligated to take and
pay for all such Class B Shares, if any are taken. Under certain circumstances,
the commitments of nondefaulting Underwriters may be increased as set forth in
the Underwriting Agreement.
<TABLE>
<CAPTION>
------------------------
UNDERWRITERS NUMBER OF CLASS B SHARES
------------ ------------------------
<S> <C>
J.P. Morgan Securities Inc.
----------
Total.......................................
==========
</TABLE>
The Underwriters propose initially to offer the Class B Shares directly to the
public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
Class B Share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per Class B Share to certain other dealers.
After the initial public offering of the Class B Shares, the public offering
price and such concession may be changed.
Security Capital has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to
purchase up to additional Class B Shares at the initial public offering
price, less the underwriting discount. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any. To the
extent the Underwriters exercise the option, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of Class B
Shares offered hereby.
The Representative has informed Security Capital that it does not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of Class B Shares offered by them.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class B Shares or
the Class A Shares. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase, Class B Shares or Class A Shares in the open market to cover
syndicate shorts or to stabilize the price of the Class B Shares or the Class A
Shares. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the Class B Shares in the Offering, if the syndicate
repurchases previously distributed Class B Shares in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Class B Shares or
the Class A Shares above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
81
<PAGE>
Application will be made to list the Class B Shares on the NYSE. In order to
meet one of the requirements for listing the Class B Shares on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more Class B Shares to a
minimum of 2,000 beneficial holders.
Security Capital, and certain of its directors, officers and affiliates have
agreed that, without the prior written consent of J.P. Morgan Securities Inc.,
they will not (i) offer, announce the intention to sell, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, rights or warrants to purchase, or otherwise
transfer or dispose of, directly or indirectly, any Shares or any securities
convertible into or exercisable or exchangeable for Shares (including, without
limitation, Shares which may be deemed to be beneficially owned in accordance
with the rules and regulations of the Commission and securities which may be
issued upon exercise of a stock option or warrant) or (ii) enter into any swap
or other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Shares, whether any such transaction described
in clause (i) and (ii) above is to be settled by delivery of the Shares or such
other securities, in cash or otherwise, for a period of 180 days after the date
of this Prospectus, other than (1) pursuant to employee or director stock
option plans existing on the date of this Prospectus, (2) the conversion or
exchange of convertible or exchangeable securities outstanding on the date of
this Prospectus, (3) the exercise of options or warrants to purchase securities
outstanding on the date hereof, (4) the issuance of up to $250 million of
Warrants pursuant to the terms of the Merger Agreements and the issuance of
Class B Shares upon exercise thereof, (5) the sale to the Underwriters of Class
B Shares under the Underwriting Agreement and (6) the issuance of Class A
Shares pursuant to the Company's Convertible Debenture interest reinvestment
plans as in effect on the date hereof.
Prior to the Offering, there has been no public market for the Class B Shares.
The initial public offering price for the Class B Shares offered hereby will be
determined by agreement among the Company and the Underwriters based on a
methodology which will take into account a range of factors, including (i) the
market value of the Company's securities holdings in public companies, (ii) the
fair value of its securities holdings in private companies and its other
assets, (iii) its accrued or outstanding liabilities, (iv) estimates of its
business potential and prospects for future earnings, (v) an assessment of its
management, (vi) the current state of its industry and the economy as a whole,
(vii) the general conditions of the securities markets at the time of the
Offering and (viii) the prices of similar securities of generally comparable
companies.
At the request of the Company, the Underwriters have reserved up to Class B
Shares for sale at the initial public offering price to directors, officers,
and employees of the Company and its affiliates. The number of Class B Shares
available to the general public will be reduced to the extent such persons
purchase the reserved Class B Shares. Any reserved Class B Shares that are not
so purchased by such persons at the closing of the Offering will be offered by
the Underwriters to the general public on the same terms as the other Class B
Shares offered by this Prospectus.
Security Capital has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
From time to time in the ordinary course of their respective businesses, J.P.
Morgan Securities Inc., and its affiliates have provided and may in the future
provide investment banking, commercial banking and other financial services to
Security Capital and its affiliates. J.P. Morgan Securities Inc. is acting as
financial advisor to ATLANTIC in connection with the proposed Mergers.
EXPERTS
The consolidated financial statements and related schedules of Security Capital
and SCI included in this Prospectus and elsewhere in the registration statement
of which this Prospectus forms a part, have been audited by Arthur Andersen
LLP, independent public accountants to the extent indicated in their reports
thereon also appearing elsewhere herein and in the registration statement. Such
financial statements have been included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The financial statements and related schedule of PTR included in this
Prospectus and elsewhere in the registration statement, of which this
Prospectus forms a part, have been audited by KPMG Peat Marwick LLP,
independent public accountants to the extent indicated in their reports thereon
also appearing elsewhere herein and in the registration statement. Such
financial statements have been included or consolidated herein in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
82
<PAGE>
The financial statements and related schedules of ATLANTIC and Homestead
consolidated into the financial statements of Security Capital, have been
audited by Ernst & Young LLP, independent public accountants to the extent
indicated in their reports thereon appearing elsewhere herein and in the
registration statement. Such financial statements have been consolidated in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements and related schedules of Security Capital USREALTY
included in this Prospectus and elsewhere in the registration statement of
which this Prospectus forms a part, have been audited by Price Waterhouse LLP,
independent public accountants to the extent indicated in their reports thereon
also appearing elsewhere herein and in the registration statement. Such
financial statements have been included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in respect of the validity of the issuance of the Class B
Shares offered hereby will be passed upon for Security Capital by Mayer, Brown
& Platt, Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by Davis Polk & Wardwell. Mayer, Brown & Platt has in the past
represented and is currently representing Security Capital and certain of its
affiliates, including representation of Security Capital in connection with the
proposed Mergers. As to certain matters of Maryland law, Mayer, Brown & Platt
and Davis Polk & Wardwell may rely upon the opinion of Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland.
AVAILABLE INFORMATION
Security Capital has filed with the Commission a registration statement (of
which this Prospectus forms a part) on Form S-1 under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the registration statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respect by such reference and the exhibits and schedules hereto. For
further information regarding Security Capital and the Class B Shares offered
hereby, reference is hereby made to the registration statement and such
exhibits and schedules.
The registration statement, the exhibits and schedules forming a part thereof
filed by Security Capital with the Commission can be inspected and copies
obtained from the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-
2511. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, such material can also be obtained from the
Commission's Web site at http://www.sec.gov.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Security Capital Group Incorporated
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-9
Schedule III--Real Estate and Accumulated Depreciation.................. F-25
Security Capital Group Incorporated (acquired company)
Report of Independent Public Accountants................................ F-34
Consolidated Balance Sheet.............................................. F-35
Consolidated Statement of Operations.................................... F-36
Consolidated Statement of Shareholders' Equity.......................... F-36
Consolidated Statement of Cash Flows.................................... F-37
Notes to Consolidated Financial Statements.............................. F-38
Security Capital Pacific Trust
Report of Independent Public Accountants................................ F-43
Balance Sheets.......................................................... F-44
Statements of Earnings.................................................. F-45
Statements of Shareholders' Equity...................................... F-46
Statements of Cash Flows................................................ F-47
Notes to Financial Statements........................................... F-48
Schedule III--Real Estate and Accumulated Depreciation.................. F-66
Security Capital Industrial Trust
Report of Independent Public Accountants................................ F-72
Consolidated Balance Sheets............................................. F-73
Consolidated Statements of Operations................................... F-74
Consolidated Statements of Shareholders' Equity......................... F-75
Consolidated Statements of Cash Flows................................... F-76
Notes to Consolidated Financial Statements.............................. F-77
Report of Independent Public Accountants................................ F-93
Schedule III--Real Estate and Accumulated Depreciation.................. F-94
Security Capital U.S. Realty
Report of Independent Public Accountants................................ F-110
Consolidated Statement of Net Assets.................................... F-111
Consolidated Statement of Operations.................................... F-112
Consolidated Statement of Cash Flows.................................... F-113
Consolidated Statement of Changes in Net Assets......................... F-114
Statement of Changes in Shares Outstanding.............................. F-114
Consolidated Schedule of Investments in Strategic Positions............. F-115
Consolidated Schedule of Investments in Special Opportunity Positions... F-115
Notes to the Consolidated Financial Statements.......................... F-116
Security Capital Atlantic Incorporated
Report of Independent Public Accountants................................ F-121
Homestead Village Incorporated
Report of Independent Public Accountants................................ F-122
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have audited the accompanying consolidated balance sheets of Security
Capital Group Incorporated and subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule referred to below based on our
audits. We did not audit the financial statements and accompanying Schedule
IIIs of Security Capital Pacific Trust, Security Capital Atlantic Incorporated,
Security Capital U.S. Realty and Homestead Village Incorporated, for which the
accompanying statements reflect $1,800,084,000 (58.6%) and $918,860,000 (49.2%)
of the total consolidated assets of Security Capital Group Incorporated and
subsidiaries as of December 31, 1996 and 1995, respectively, and $248,469,000
(62.9%), $103,287,000 (51.5%) and $63,728,000 (35.8%) of the total consolidated
income in the consolidated statements of operations of Security Capital Group
Incorporated and subsidiaries for each of the three years ended December 31,
1996, respectively. Those statements and the accompanying Schedule IIIs were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for those entities, is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Security Capital Group Incorporated and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The attached Schedule III
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our
opinion, based solely upon the reports of other auditors, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 28, 1997
(except with respect to the matters discussed in Note 11, as to which the date
is April 18, 1997)
F-2
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Investments, at equity:
Security Capital Industrial Trust $ 548,194 $ 498,916
Security Capital Pacific Trust 374,317 410,793
Security Capital U.S. Realty 516,426 20,334
---------- ----------
1,438,937 930,043
---------- ----------
Real estate, less accumulated depreciation, held by:
Security Capital Atlantic Incorporated 1,116,069 865,367
Homestead Village Incorporated 249,304 -
---------- ----------
1,365,373 865,367
---------- ----------
Total real estate investments 2,804,310 1,795,410
Cash and cash equivalents 23,662 13,708
Intangible assets 142,600 150,522
Other assets 101,312 45,938
---------- ----------
Total assets $3,071,884 $2,005,578
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Lines of credit $ 262,000 $ 272,000
Mortgage notes payable 257,099 118,524
Convertible debt 940,197 718,611
Accrued interest on convertible debt 42,450 24,523
Accounts payable and accrued expenses 83,427 33,520
Deferred income taxes 30,872 -
---------- ----------
Total liabilities 1,616,045 1,167,178
---------- ----------
Minority interests 394,537 159,339
SHAREHOLDERS' EQUITY:
Common shares, $.01 par value; 20,000,000 shares
authorized, 1,209,009 and 994,791 shares issued and
outstanding in 1996 and 1995, respectively 12 10
Series A Preferred stock, $.01 par value; 139,000
shares issued and outstanding in 1996; stated
liquidation preference of $1,000 per share 139,000 -
Additional paid-in capital 985,392 766,298
Accumulated deficit (63,102) (87,247)
---------- ----------
Total shareholders' equity 1,061,302 679,061
---------- ----------
Total liabilities and shareholders' equity $3,071,884 $2,005,578
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
INCOME:
Equity in earnings of:
Security Capital Industrial Trust $ 25,439 $ 20,975 $ -
Security Capital Pacific Trust 39,864 24,646 8,812
Security Capital U.S. Realty 103,170 64 -
Rental revenues 145,907 103,634 55,071
Services Division revenues 77,512 49,404 -
Other income, net 6,230 1,811 312
Security Capital Industrial Trust income - - 71,702
Security Capital Pacific Incorporated income - - 20,958
---------- -------- --------
398,122 200,534 156,855
---------- -------- --------
EXPENSES:
Rental expenses 54,050 37,948 23,052
Depreciation and amortization 34,520 26,031 8,770
Interest expense--convertible debt 93,912 78,785 29,647
Interest expense--other obligations 23,312 25,019 14,481
Loss on exchange of convertible notes for stock and
debentures - - 5,650
Payroll and related costs 80,115 56,108 -
General and administrative 36,007 22,992 6,172
Security Capital Industrial Trust expenses - - 46,561
Security Capital Pacific Incorporated expenses - - 15,030
---------- -------- --------
321,916 246,883 149,363
---------- -------- --------
Earnings (loss) before income taxes and minority
interests 76,206 (46,349) 7,492
Provision for income taxes 30,872 - -
Minority interests in net earnings of subsidiaries 13,370 4,763 15,177
---------- -------- --------
Net earnings (loss) 31,964 (51,112) (7,685)
Less Series A Preferred Stock dividends 7,819 - -
---------- -------- --------
Net earnings (loss) attributable to common shares
and common equivalent shares $ 24,145 $(51,112) $ (7,685)
========== ======== ========
Weighted average common shares outstanding 1,133,711 896,681 458,945
========== ======== ========
Net earnings (loss) per common share and common
equivalent share $ 21.30 $ (57.00) $ (16.74)
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARES)
----------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A
PREFERRED
STOCK AT
COMMON COMMON AGGREGATE ADDITIONAL TOTAL
SHARES SHARES AT LIQUIDATION PAID-IN ACCUMULATED SHAREHOLDERS'
OUTSTANDING PAR VALUE PREFERENCE CAPITAL DEFICIT EQUITY
----------- --------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 246,322 $ 2.463 $ - $ 298,964 $ (5,143) $ 293,823
Subscriptions receivable
collected 19,281 0.193 - 26,994 - 26,994
Sale of subscriptions for
common shares, net of
offering costs 587,081 5.870 - 690,646 - 690,652
Less subscriptions
receivable (243,862) (2.439) - (215,086) - (215,088)
Distribution of convertible
subordinated debentures - - - (417,185) - (417,185)
Cash distributions - - - - (11,652) (11,652)
Net loss - - - - (7,685) (7,685)
--------- --------- --------- --------- --------- ----------
Balances at December 31, 1994 608,822 $ 6.087 $ - $ 384,333 $(24,480) $ 359,859
Retirement of shares in
connection with the
purchase of GROUP (40,252) (0.403) - (26,618) (11,655) (38,273)
Issuance of shares in
connection with the
purchase of GROUP 135,261 1.353 - 163,529 - 163,530
Issuance of common shares on
January 1 for 7.25% and 7%
convertible notes 43,493 0.435 - 26,643 - 26,644
Subscriptions receivable
collected 243,862 2.439 - 215,086 - 215,088
Exercise of stock options 538 0.005 - 140 - 140
Interest Reinvestment Plan 3,683 0.037 - 3,536 - 3,536
Issuance of common shares 26 - - 24 - 24
Repurchase of common shares (642) (0.006) - (375) - (375)
Net loss - - - - (51,112) (51,112)
--------- --------- --------- --------- --------- ----------
Balances at December 31, 1995 994,791 $ 9.947 $ - $ 766,298 $(87,247) $ 679,061
Sale of subscriptions for
common shares, net of
offering costs 307,958 3.080 - 320,116 - 320,119
Less subscriptions
receivable (92,012) (0.920) - (96,521) - (96,522)
Issuance of Series A
preferred stock - - 139,000 - - 139,000
Repurchase of common shares (12,326) (0.123) - (11,483) - (11,483)
Interest Reinvestment Plans 5,214 0.052 - 5,516 - 5,516
Exercise of stock options 5,353 0.054 - 1,430 - 1,430
Issuance of common shares 31 - - 36 - 36
Net earnings - - - - 31,964 31,964
Series A preferred stock
dividends - - - - (7,819) (7,819)
--------- --------- --------- --------- --------- ----------
Balances at December 31, 1996 1,209,009 $12.090 $139,000 $ 985,392 $(63,102) $1,061,302
========= ========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 31,964 $ (51,112) $ (7,685)
Adjustments to reconcile net earnings
(loss) to cash flows provided by
operating activities:
Provision for deferred income taxes 30,872 - -
Minority interests 13,370 4,763 15,177
Equity in earnings of unconsolidated
investees (168,473) (45,685) (8,812)
Distributions from unconsolidated
investees 74,653 62,838 13,169
Depreciation and amortization 34,520 26,031 8,770
Amortization of deferred financing
costs 2,923 2,404 1,283
Other (2,792) - -
Increase in other assets (21,172) (5,053) (3,830)
Increase in accrued interest on
convertible debt 17,927 18,195 6,807
Increase in accounts payable and accrued
expenses 20,799 1,289 16,822
Net operating cash flows of:
Security Capital Industrial Trust - - 22,121
Security Capital Pacific Incorporated - - 1,680
--------- --------- ----------
Net cash flows provided by
operating activities 34,591 13,670 65,502
--------- --------- ----------
INVESTING ACTIVITIES:
Real estate properties (396,578) (259,008) (392,718)
Disposition of real estate properties 61,872 23,859 -
Investment in shares of:
Security Capital Industrial Trust (64,528) (100,113) -
Security Capital Pacific Trust - (50,000) (73,843)
Security Capital U.S. Realty (392,922) (300) -
Purchase of Security Capital Atlantic
Incorporated minority interest (30,700) (83,972) -
Advances on notes receivable from
Security Capital U.S. Realty - (53,000) -
Payment on notes receivable from
Security Capital U.S. Realty - 33,030 -
Cash acquired in purchase of GROUP - 4,940 -
Other (9,453) (9,354) -
Net investing cash flows of:
Security Capital Industrial Trust - - (631,871)
Security Capital Pacific
Incorporated - - (132,921)
--------- --------- ----------
Net cash flows used in investing
activities (832,309) (493,918) (1,231,353)
--------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from lines of credit $ 778,000 $ 695,000 $ 999,121
Payments on lines of credit (788,000) (734,525) (717,596)
Proceeds from mortgage notes
payable 45,863 - -
Principal payments on mortgage
notes payable (1,101) (7,001) (190)
Increase in accounts payable--
developments 6,599 - -
Proceeds from issuance of
convertible debt 229,426 184,990 48,228
Proceeds from sale of common
shares, net of expenses 230,579 218,786 502,560
Proceeds from sale of preferred
stock 139,000 - -
Distributions paid to shareholders - - (11,652)
Distributions paid to minority
interest holders (19,090) (8,404) (3,887)
Debt issuance costs (5,688) (6,265) (9,303)
Proceeds from issuance of stock to
minority interest holders 219,226 144,884 3,348
Repurchase of common shares (11,483) (375) -
Retirement of convertible debt (7,840) (194) -
Preferred dividends paid (7,819) - -
Net financing cash flows of:
Security Capital Industrial Trust - - 312,608
Security Capital Pacific
Incorporated - - 43,652
--------- --------- ----------
Net cash flows provided by
financing activities 807,672 486,896 1,166,889
--------- --------- ----------
Net increase in cash and cash
equivalents 9,954 6,648 1,038
Cash and cash equivalents, beginning
of year 13,708 7,060 6,022
--------- --------- ----------
Cash and cash equivalents, end of
year $ 23,662 $ 13,708 $ 7,060
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Homestead purchase from PTR:
Depreciated cost of assets acquired $177,983 $ - $ -
Liabilities assumed (11,818) - -
Convertible mortgages issued (75,946) - -
Reallocation of investment in PTR to
Homestead (42,376) - -
Minority interest contributed (48,271) - -
Net cash acquired 428 - -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Dividend distribution declared for 1st
quarter 1997 to minority interest
holders $ 6,375 $ - $ -
========= ========= =========
Purchase of GROUP on January 1, 1995:
Fair value of assets acquired, net of
cash $ - $ 244,920 $ -
Liabilities assumed - (16,152) -
Securities issued - (233,708) -
Net cash acquired - 4,940 -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Exchange of 7.25% and 7.0% convertible
notes:
Issuance of securities to convertible
note holders:
-convertible subordinated debentures $ - $ 32,947 $ -
-common stock, including value
attributable to induced conversion - 26,644 -
Retirement of 7.25% and 7.0%
convertible notes - (53,201) -
Loss on exchange of convertible notes - (5,650) -
Reduction in interest accrued on
convertible notes - (740) -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Assumption of existing mortgage notes
payable in conjunction with real estate
acquired $ 17,867 $ 24,678 $274,086
========= ========= =========
Exchange of ownership interest in
Security Capital Pacific Incorporated
for ownership interest in Security
Capital Pacific Trust $ - $ 135,996 $ -
========= ========= =========
Receipt of Security Capital U.S. Realty
shares in satisfaction of indebtedness $ - $ 19,970 $ -
========= ========= =========
Reduction of mortgages payable upon sale
of property $ - $ (6,500) $ -
========= ========= =========
Increase in minority interest as
consideration for real estate acquired $ - $ - $100,000
========= ========= =========
Minority ownership interest contributed $ - $ - $ 16,780
========= ========= =========
Distribution of convertible subordinated
debentures $ - $ - $417,185
========= ========= =========
Disposition proceeds applied to real
estate purchase $ - $ - $ 113
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
Security Capital Group Incorporated ("Security Capital"), formerly Security
Capital Realty Incorporated, is a corporation organized under the laws of the
state of Maryland engaged in the creation and operation of real estate
operating companies. Security Capital has invested in five operating companies
(the "Capital Division"). Three such investees are highly focused, fully
integrated real estate operating companies formed as real estate investment
trusts (REITs), which own, develop, acquire, and operate income-producing
multifamily properties and distribution facilities. The fourth investee is a
European-based company formed with the objective of owning strategic positions
in United States real estate operating companies focused on specific subsectors
of retail, office and other well researched property types. The fifth investee
develops, owns and operates moderately priced, extended-stay lodging properties
across the United States. Security Capital also includes a "Services Division",
which provides management and property management services to the companies in
which Security Capital has made investments. The Services Division provides
strategic guidance, research, investment analysis, acquisition and development
services, asset management, property management, capital markets services and
legal and accounting services.
Merger:
Security Capital was formed by the merger of two affiliated, but not commonly
controlled, entities on January 1, 1995. Security Capital Group Incorporated
("GROUP"), a Delaware corporation, which consisted of the Services Division
companies, was merged with and into Security Capital Realty Incorporated
("REALTY"). Subsequently REALTY changed its name to that of its merged
affiliate, Security Capital Group Incorporated, and the combined entity is
referred to herein as Security Capital. In the merger, all of GROUP's
outstanding stock and principal amount of GROUP convertible subordinated
debentures were exchanged for REALTY stock and REALTY convertible subordinated
debentures due June 30, 2014 (the "2014 Convertible Debentures"). REALTY issued
135,261 shares of common stock, $70,178,000 of 2014 Convertible Debentures and
options to acquire 58,772 shares of REALTY common stock and $29,298,000 of 2014
Convertible Debentures for an aggregate securities issuance of $233,708,000.
The REALTY options were issued in exchange for GROUP options and warrants held
by certain employees and directors and such options are exercisable subject to
their prior terms regarding vesting and aggregate exercise price.
The acquisition of GROUP was recorded under the purchase method of accounting.
The results of GROUP operations have been combined with those of REALTY's since
the date of acquisition. The fair value of tangible assets acquired and
liabilities assumed was $91,416,000 and $16,152,000, respectively. The balance
of the purchase price, $158,444,000, was recorded as excess of cost over net
assets acquired (goodwill).
F-9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reflects unaudited pro forma combined results of operations
of REALTY and GROUP on the basis that the acquisition had taken place and the
goodwill, noted above, was recorded on January 1, 1994. The weighted average
common shares outstanding have been adjusted to reflect the Merger conversion
rate (1.22 common shares for each GROUP share and 1.147 common shares for each
$1,000 principal amount of GROUP's convertible subordinated debentures). The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had REALTY and GROUP constituted a single
entity during such period (in thousands, except share data).
--------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenues $ 177,926
=========
Net loss $ (25,197)
=========
Weighted average common shares outstanding 594,206
=========
Net loss per common share $ (42.40)
=========
</TABLE>
Principles of Financial Presentation:
The accompanying consolidated financial statements include the results of
Security Capital, its majority-owned operating companies (Security Capital
Atlantic Incorporated and Homestead Village Incorporated) and its wholly owned
Services Division subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Minority interest is
comprised of the minority shareholders of Security Capital Atlantic
Incorporated and Homestead Village Incorporated.
Security Capital accounts for its 20% or greater (but not more than 50%) owned
investees by the equity method. For an investee accounted for under the equity
method, Security Capital's share of net earnings or losses of the investee is
reflected in income as earned and dividends are credited against the investment
as received.
Goodwill:
Goodwill results from REALTY's acquisition of GROUP on January 1, 1995 and
represents acquisition costs in excess of net assets acquired. Goodwill, net of
accumulated amortization, aggregating $142,600,000 and $150,522,000 at December
31, 1996 and 1995, respectively, is included in intangible assets in the
accompanying consolidated balance sheets and is amortized on a straight-line
basis over 20 years. Amortization for each of the years ended December 31, 1996
and 1995 was $7,922,000.
Cash and Cash Equivalents:
Security Capital considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original maturities
of three months or less to be cash equivalents.
Real Estate and Depreciation:
Real estate is carried at cost, which is not in excess of net realizable value.
Costs directly related to the acquisition, renovation or development of real
estate for Security Capital's majority-owned operating companies are
capitalized. Costs incurred in connection with the pursuit of unsuccessful
acquisitions or developments are expensed at the time the pursuit is abandoned.
Repairs and maintenance are expensed as incurred. Renovations and improvements
are capitalized and depreciated over their estimated useful lives.
Depreciation is computed over the expected useful lives of depreciable property
on a straight-line basis. Properties are depreciated principally over the
useful lives of 20 to 40 years for multifamily and extended-stay buildings and
improvements and 2 to 10 years for furnishings and other equipment.
F-10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest:
Security Capital capitalizes interest as part of the cost of real estate
projects under development. During 1996, 1995 and 1994, the total interest paid
on all outstanding debt was $100,423,000, $82,336,000 and $46,760,000,
respectively, including $12,353,000, $4,404,000 and $3,184,000, respectively,
which was capitalized.
Cost of Raising Capital:
Costs incurred in connection with the issuance of common shares are deducted
from shareholders' equity. Costs incurred in connection with the issuance or
renewal of debt are capitalized, included with other assets and amortized over
the term of the related loan in the case of issuance costs or twelve months in
the case of renewal costs. Amortization of deferred financing costs included in
interest expense for the years ended December 31, 1996, 1995 and 1994 was
$2,923,000, $2,404,000 and $2,387,000, respectively.
Revenue Recognition:
Rental, fee and interest income are recorded on the accrual method of
accounting. A provision for possible loss is made when collection of
receivables is considered doubtful.
Per Share Data:
Per share data is computed based on weighted-average shares outstanding during
the period. In the computation of net loss per common share, outstanding
options and warrants are not included as common stock equivalents as to do so
would have an anti-dilutive effect. In the computation of net earnings per
common share, outstanding options and warrants are included as common stock
equivalents using the treasury stock method. The conversion of convertible debt
into common shares is not assumed as the effect would be anti-dilutive.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent 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.
Recent Accounting Pronouncement:
Properties and other long-lived assets are periodically evaluated for
impairment and provisions for possible losses are made if required. Statement
of Financial Accounting Standards No. 121, Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, has been adopted
by Security Capital and its affiliates, as required, effective January 1, 1996.
The adoption of this accounting standard had no material impact on the
financial statements as of the date of adoption.
Reclassifications:
Certain amounts in the 1995 and 1994 consolidated financial statements and
notes to consolidated financial statements have been reclassified to conform to
the 1996 presentation.
F-11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SERVICES DIVISION
Certain Security Capital Services Division subsidiaries, under the terms of
separate agreements, manage the operations of the separate REITs ("REIT
Managers"), provide property management services to those REITs ("Property
Managers") and manage the operations of Security Capital U.S. Realty
("USREALTY") ("Operating Advisor"). Each REIT Manager is paid a REIT management
fee based on a percentage of the REIT's pre-management fee cash flow, after
deducting actual and assumed regularly scheduled principal payments for long-
term debt and dividends paid on non-convertible preferred shares, as defined in
the REIT Management Agreements. The fee is generally 16% of cash flow, as so
defined, for the REIT. Property management fees are at market rates and are
paid separately to Security Capital's property management subsidiaries. The
REIT and Property Management Agreements are generally one year in term,
renewable annually by the REIT and cancelable upon sixty days notice. The
Operating Advisor is paid a management fee of 1.25% of USREALTY's investments
at fair value (other than liquid short-term investments and investments in
Security Capital). The Operating Advisor agreement dated August 7, 1995 is for
a term of two years, renewable every two years on the same terms and cancelable
upon sixty days notice.
There were no Services Division revenues reported for the year ended 1994.
These subsidiaries were acquired January 1, 1995 in the GROUP/REALTY merger.
See Note 1.
In late January 1997, Security Capital made a proposal to Security Capital
Industrial Trust, Security Capital Pacific Trust and Security Capital Atlantic
Incorporated to exchange the REIT and Property Managers for additional shares
of the respective REITs. As a result of the proposed transaction, each of the
REITs would become internally managed. The board of trustees or directors of
each REIT has appointed a special committee comprised of independent directors
or trustees to review the proposed transaction. The proposed transaction is
subject to approval (see Note 11) by each REIT's special committee as well as
its board of directors or trustees and shareholders.
REIT, Property and Operating Advisor management fees for the years ended
December 31, 1996 and 1995 were earned from the following sources (in
thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
REIT management fees:
Security Capital Industrial Trust $21,472 $14,207
Security Capital Pacific Trust 22,191 20,354
Security Capital Pacific Incorporated - 581
Security Capital Atlantic Incorporated 10,445 6,923
--------- ---------
54,108 42,065
--------- ---------
Property management fees:
Security Capital Industrial Trust 11,781 5,251
Security Capital Pacific Trust 11,466 8,805
Security Capital Pacific Incorporated - 107
Security Capital Atlantic Incorporated 4,244 3,499
--------- ---------
27,491 17,662
--------- ---------
Security Capital U.S. Realty advisory fee 8,041 99
Security Capital Markets Group Incorporated fees 2,561 -
--------- ---------
Total Services Division revenues 92,201 59,826
Less amounts eliminated in consolidation 14,689 10,422
--------- ---------
Consolidated Services Division revenues $77,512 $49,404
========= =========
</TABLE>
F-12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REAL ESTATE INVESTMENTS:
Security Capital holds investments at December 31, 1996 through its wholly-
owned subsidiary, SC Realty Incorporated ("SC Realty"), as follows:
. Security Capital Industrial Trust ("SCI"), a publicly held REIT,
acquires, develops, markets, operates and owns distribution facilities
and develops master-planned distribution parks and build-to-suit
facilities throughout the United States. At December 31, 1996 and 1995,
Security Capital owned 46.00% and 48.33%, respectively, of the issued
and outstanding common shares of beneficial interest of SCI. During 1996
and 1995, Security Capital accounted for its investment in SCI by the
equity method as Security Capital's ownership in SCI fell below 50% upon
completion of SCI's September 1995 rights offering. In 1994, Security
Capital consolidated SCI's accounts.
. Security Capital Pacific Trust ("PTR"), a publicly held REIT, primarily
owns, develops, acquires and operates income-producing multifamily
properties in the western United States. On March 23, 1995, Security
Capital Pacific Incorporated ("PACIFIC"), a real estate investment trust
owned 97.61% by Security Capital, was merged with and into PTR, and PTR
changed its name to Security Capital Pacific Trust. In the merger each
share of PACIFIC was converted into 0.611 shares of PTR. At December 31,
1996 and 1995, Security Capital owned 36.28% and 37.93%, respectively,
of the issued and outstanding common shares of beneficial interest of
PTR.
. Security Capital accounts for its investment in PTR by the equity
method. Due to PACIFIC's merger into PTR in 1995, Security Capital has
accounted for its investment in PACIFIC in 1995 by the equity method and
combined such amounts with PTR's in the accompanying 1995 consolidated
financial statements. In 1994, Security Capital consolidated PACIFIC's
accounts.
. Security Capital Atlantic Incorporated ("ATLANTIC"), a publicly held
REIT as of October 18, 1996, owns, acquires, develops and operates
income-producing multifamily properties in the southeastern United
States. In consideration for Security Capital's participation in
ATLANTIC's March 31, 1995 and November 15, 1995 private placement
offerings, ATLANTIC assumed Security Capital's Put Obligations to
purchase 3,750,000 shares of ATLANTIC stock, owned by the holder of the
Put Obligations, at a total cost of $83,920,000. On July 1, 1996,
Security Capital purchased 1,250,000 shares of ATLANTIC stock from a
minority interest holder at a total cost of $30,663,000. On October 18,
1996, Security Capital purchased an additional 416,666 shares of
ATLANTIC in ATLANTIC's initial public offering at a cost of $24 per
share. At December 31, 1996 and 1995, Security Capital owned 56.86% and
71.60%, respectively, of the issued and outstanding common shares of
ATLANTIC. Security Capital consolidates ATLANTIC's accounts in the
accompanying consolidated financial statements.
. USREALTY is a Luxembourg real estate corporation formed at the direction
of Security Capital with the objective of becoming one of Europe's
preeminent publicly held real estate entities that will principally own
real estate through strategic positions in both public and private real
estate companies in the United States. Security Capital made its first
investment of $19,970,000 in USREALTY, by converting $19,970,000 of the
principal of a $53,000,000 note receivable to an investment in 1,997,000
shares of USREALTY, on October 30, 1995 as part of its subscription
commitment. Security Capital has funded total subscriptions of
$200,000,000 for the common stock of USREALTY ($199,700,000 was invested
by Security Capital and $300,000 by Security Capital (EU) Management
S.A., a wholly-owned subsidiary of Security Capital and the advisor to
USREALTY). In addition to the subscriptions, on July 1, 1996, Security
Capital purchased 9,132,420 shares of USREALTY in a public European
offering at a cost of $11.06 per share and an additional 6,282,241
shares in a public European offering, at a cost of $12.44 a share, on
December 17, 1996. Also, during 1996, Security Capital purchased shares
of USREALTY with a total value of $34,041,000 in the open market and in
a privately negotiated transaction. At December 31, 1996 and 1995
Security Capital owned 39.44% and 32.20%, respectively, of the issued
and outstanding common shares of USREALTY. Security Capital accounts for
its investment in USREALTY by the equity method.
F-13
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
. On October 17, 1996, Security Capital, ATLANTIC and PTR completed the
spin-out of their extended stay lodging assets to Homestead Village
Incorporated ("Homestead"). As described below, upon consummation of the
transaction, Homestead's common shares were held by Security Capital and
shareholders of ATLANTIC and PTR. Given the common ownership of the
"Homestead assets" before and after the spin-out, Security Capital did
not record a gain on this transaction in its consolidated financial
statements.
Security Capital contributed the contractual rights (primarily fees)
from the PTR and ATLANTIC REIT management agreements and property
management agreements relating to the Homestead properties in exchange
for 4,062,788 shares of Homestead common stock, including 2,150,892
shares which are in escrow and will be released as funds are advanced
under the ATLANTIC and PTR Funding Commitment Agreements described
below. In addition, Security Capital contributed the Homestead
trademark, the operating system and certain Homestead development
properties Security Capital had acquired as they were outside the target
markets of ATLANTIC and PTR. Security Capital also received 817,694
warrants to purchase Homestead shares at $10 per share in exchange for
providing funding to Homestead during the time between the execution of
the merger agreement and the closing date and the use of office
facilities for one year. Under the terms of an Investor Agreement,
Homestead can require Security Capital to exercise all or a portion of
its warrants with proper written notice.
ATLANTIC and PTR contributed assets consisting of operating properties
as well as properties under construction or in planning (or the rights
to acquire such properties) and ATLANTIC contributed $16.8 million in
cash. In addition, ATLANTIC and PTR entered into Funding Commitment
Agreements to provide secured financing of up to $111.1 million and
$199.0 million, respectively, to Homestead for completing the
development and construction of the properties contributed in the
transaction. ATLANTIC and PTR received 4,201,220 and 9,485,727 shares,
respectively, of Homestead common stock in exchange for the assets
contributed and 2,818,517 and 6,363,789 warrants, respectively, to
purchase Homestead shares at $10 per share in exchange for entering into
the Funding Commitment Agreements. ATLANTIC and PTR will receive
convertible mortgage notes from Homestead as fundings occur under the
Funding Commitment Agreements. On November 12, 1996 ATLANTIC and PTR
distributed the Homestead common stock and warrants to their
shareholders of record as of October 29,1996. This distribution caused
Security Capital to receive an additional 5,831,613 shares of Homestead
common stock and 3,912,328 warrants to purchase Homestead shares at $10
per share. Additionally, Security Capital made purchases of Homestead
warrants in the open market totaling 206,400 shares for $1,312,807.
Security Capital exercised $17,500,000 in warrants between October 17,
1996 and December 31, 1996.
Security Capital's ownership of Homestead's outstanding common shares as
of December 31, 1996 was 59.14%. In 1996, Security Capital consolidated
Homestead's accounts in the accompanying consolidated financial
statements.
Security Capital received dividends from its investees for the years ended
December 31, 1996, 1995 and 1994 as follows (in thousands):
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SCI $40,689 $32,233 $18,886
PTR 33,963 28,244 13,169
PACIFIC - 2,361 5,389
ATLANTIC 33,975 26,715 10,761
--------- --------- ---------
$108,627 $89,553 $48,205
========= ========= =========
</TABLE>
F-14
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes real estate investments of Security Capital's
consolidated investees as of December 31, 1996 and 1995 (in thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Multifamily properties (ATLANTIC):
Operating properties $ 952,770 $781,083
Developments under construction 194,587 95,293
Developments in planning 7,795 11,258
Land held for future development 2,083 1,294
---------- ---------
Subtotal 1,157,235 888,928
---------- ---------
Extended-stay lodging properties (Homestead):
Operating properties 129,035 -
Developments under construction 108,691 -
Developments in planning 12,256 -
Land held for future development 1,448 -
Land held for sale 5,590 -
---------- ---------
Subtotal 257,020 -
---------- ---------
Total real estate, at cost 1,414,255 888,928
Less accumulated depreciation 48,882 23,561
---------- ---------
Total real estate $1,365,373 $865,367
========== =========
</TABLE>
Presented below is the summary balance sheet information for SCI as of December
31, 1996 and 1995 (in thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net real estate investments $2,399,600 $1,771,264
Cash and other assets 62,706 62,708
---------- ----------
Total assets $2,462,306 $1,833,972
========== ==========
Total liabilities $ 805,933 $ 639,040
Minority interest 56,984 58,741
Total shareholders' equity 1,599,389 1,136,191
---------- ----------
Total liabilities and shareholders' equity $2,462,306 $1,833,972
========== ==========
</TABLE>
Presented below is the summary statement of earnings information for SCI for
the years ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Rental and other income $233,434 $159,556
--------- ---------
Expenses:
Rental expenses, net of recoveries 26,674 18,460
Depreciation and amortization 59,850 39,767
Interest 38,819 32,005
General and administrative, including REIT
management fee 25,410 17,280
--------- ---------
150,753 107,512
--------- ---------
Net earnings before minority interest 82,681 52,044
Minority interest share in net earnings 3,326 3,331
--------- ---------
Net earnings 79,355 48,713
Less Preferred Share dividends 25,895 6,698
--------- ---------
Net earnings attributable to common shares $ 53,460 $ 42,015
========= =========
Security Capital share of net earnings $ 25,439 $ 20,975
========= =========
</TABLE>
F-15
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presented below is the summary balance sheet information for PTR as of December
31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Net real estate investments $2,245,619 $1,789,731
Cash and other assets 36,813 51,268
---------- ----------
Total assets $2,282,432 $1,840,999
========== ==========
Total liabilities $1,014,924 $ 565,331
Total shareholders' equity 1,267,508 1,275,668
---------- ----------
Total liabilities and shareholders' equity $2,282,432 $1,840,999
========== ==========
</TABLE>
Presented below is the summary statement of earnings information for PTR for
the years ended December 31, 1996, 1995 and 1994 (in thousands) (1995
information includes the operating results of PACIFIC):
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Rental and other income $326,246 $267,496 $186,105
--------- --------- ---------
Expenses:
Rental expenses 128,122 104,046 79,013
Depreciation 44,887 36,685 24,614
Interest 35,288 19,584 19,442
General and administrative, including
REIT management fee 24,730 22,862 16,317
--------- --------- ---------
233,027 183,177 139,386
--------- --------- ---------
Earnings from operations 93,219 84,319 46,719
Gain on sale of investments 37,492 - -
--------- --------- ---------
Net earnings 130,711 84,319 46,719
Less Preferred Share dividends 24,167 21,823 16,100
--------- --------- ---------
Net earnings attributable to common
shares $106,544 $ 62,496 $ 30,619
========= ========= =========
Security Capital share of net earnings $ 39,864 $ 24,646 $ 8,812
========= ========= =========
</TABLE>
Presented below is the summary balance sheet information for USREALTY as of
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Investments in common shares of real estate
operating companies, at fair value $1,408,140 $54,780
Investment in common shares and debentures of
Security Capital, at cost which approximates fair
value 22,500 -
Cash and other assets 63,617 8,620
---------- ---------
Total assets $1,494,257 $63,400
========== =========
Total liabilities $ 175,158 $ 252
Total shareholders' equity 1,319,099 63,148
---------- ---------
Total liabilities and shareholders' equity $1,494,257 $63,400
========== =========
</TABLE>
F-16
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presented below is the summary statement of earnings information for USREALTY
for the year ended December 31, 1996 and the period from inception (July 1,
1995) to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Dividends $ 32,163 $504
Realized gains 3,480 -
Unrealized gains 252,294 126
Other income 2,673 84
--------- ---------
290,610 714
--------- ---------
Expenses:
Interest on line of credit 6,168 163
General and administrative, including advisory
fee 15,729 349
--------- ---------
21,897 512
--------- ---------
Net earnings $268,713 $202
========= =========
Security Capital share of net earnings $103,170 $ 64
========= =========
</TABLE>
4. INDEBTEDNESS:
Lines of Credit:
At December 31, 1996, Security Capital and its consolidated REIT subsidiary,
ATLANTIC, had revolving bank lines of credit. Security Capital has a
$300,000,000 revolving line of credit with Wells Fargo Realty Advisors,
Incorporated ("Wells Fargo") as agent for a group of lenders. The agreement is
effective through November 15, 1998 with an option to renew for successive one
year periods, with the approval of Wells Fargo and the participating lenders.
Borrowings bear interest, at Security Capital's option, at either LIBOR plus
1.50% (1.75% prior to August 19, 1996) or a base rate (defined as the higher of
Wells Fargo prime rate or the Federal Funds Rate plus .50%) with interest
payable monthly in arrears. Commitment fees range from .125% to .25% per annum
based on the average unfunded line of credit balance (such fees were .125% on
all unfunded balances prior to October 1, 1996). Security Capital's line is
secured by its holdings in SCI, PTR, ATLANTIC, USREALTY and Homestead,
including warrants to purchase shares of Homestead's common stock, as well as
any unfunded subscriptions for Security Capital's common stock and convertible
subordinated debentures. Subscriptions receivable for Security Capital's 1996
private placement offering totaled $193,045,000 as of December 31, 1996.
The Security Capital line of credit is a primary obligation of SC Realty.
Security Capital guarantees the line. SC Realty is a legal entity which is
separate and distinct from Security Capital and its affiliates, and has
separate assets, liabilities, business functions and operations.
On December 18, 1996, ATLANTIC obtained a $350,000,000 unsecured line of credit
from Morgan Guaranty Trust Company of New York ("MGT"), as agent for a group of
lenders, that replaced its previous $350,000,000 secured line of credit.
Borrowings bear interest at prime, or at ATLANTIC's option, LIBOR plus a margin
ranging from 1.0% to 1.375% (currently 1.375% as compared to 1.5% under the
previous agreement) depending on ATLANTIC's debt rating. ATLANTIC currently
pays a commitment fee on the average unfunded line of credit balance of
0.1875%. The line of credit matures December 1998 and may be extended for one
year with the approval of MGT and the other participating lenders.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100,000,000 of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed rate of interest of 7.46% from February 5, 1996 to
December 17, 1996 and 7.335% thereafter. Upon expiration of the existing swap
agreement on February 5, 1997, a swap agreement with MGT took effect. The MGT
agreement provides for a fixed rate of 7.325% on $100,000,000 of borrowing
through February 5, 1998. The interest rate ATLANTIC will pay under the new
agreement will be reduced if ATLANTIC achieves an investment-grade debt rating
and will range from 6.95% to 7.2% depending on the rating
F-17
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
achieved. ATLANTIC paid $332,000 more in interest during 1996 than was received
under the swap agreement. ATLANTIC is exposed to credit loss in the event of
non-performance by the swap counterparty; however, ATLANTIC believes the risk
of loss is minimal.
Each line requires maintenance of certain financial covenants. Security
Capital, SC Realty and ATLANTIC were in compliance with all such covenants at
December 31, 1996.
A summary of the lines of credit borrowings as of and for the years ended
December 31, 1996 and 1995 is as follows (dollar amounts in thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Total lines of credit $650,000 $600,000
Borrowings outstanding at December 31, $262,000 $272,000
Weighted average daily borrowings $268,600 $238,650
Maximum borrowings outstanding at any month end $353,000 $383,500
Weighted average daily interest rate 7.34% 7.95%
Weighted average interest rate as of December 31, 7.29% 7.70%
</TABLE>
Mortgage Notes Payable:
Mortgage notes payable, which are obligations of ATLANTIC and Homestead,
consisted of the following at December 31, 1996 (dollar amounts in thousands):
-----------------------------------------
<TABLE>
<CAPTION>
INTEREST MATURITY PERIODIC PRINCIPAL
MORTGAGE TYPE RATE DATE PAYMENT TERMS BALANCE
- ------------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate 7.125% 3/1/29 fully amortizing $ 8,021
Conventional fixed rate 8.75% 4/1/24 fully amortizing 6,343
Conventional fixed rate 7.0% 9/1/13 fully amortizing 5,888
Conventional fixed rate 7.750% 11/1/00 (a) 2,004
Conventional fixed rate 7.655% 7/01/02 (c) 5,933
Conventional fixed rate 8.0% 7/10/03 (b) 5,979
---------
34,168
---------
Tax exempt fixed rate 6.0% 6/1/07 interest only 14,500
Tax exempt variable rate
subject to 7 year interest
rate protection agreement 6.48%(e) 6/1/25 interest only 23,085
Tax exempt variable rate
subject to 7 year interest
rate protection agreement 6.51%(e) 6/1/25 interest only 15,500
Tax exempt variable rate
subject to 10 year interest
rate protection agreement 6.74%(e) 6/1/25 interest only 64,635
Tax exempt variable note
subject to 10 year interest
rate protection agreement 6.18%(e) 6/1/25 interest only 5,000
Less amounts held in
principal reserve fund (d) (1,098)
---------
121,622
---------
Convertible fixed rate (f) 9.0% 10/31/06 interest only 112,639
Less discount (11,330)
---------
101,309
---------
$257,099
=========
</TABLE>
- --------
(a) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
(b) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(c) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(d) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to eight tax-exempt bond issues. This
credit enhancement agreement requires ATLANTIC to make monthly payments on each
mortgage, based upon a thirty-year amortization, into a principal reserve
account.
F-18
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(e) Interest rate is fixed through swap agreements executed in conjunction with
the credit enhancement agreement with the Federal National Mortgage
Association.
(f) In connection with the Homestead spin-out transaction described in Note 3,
Homestead executed a funding commitment agreement with PTR which provides
borrowing capability in the amount of $199,000,000. Under this funding
agreement, Homestead may call for funding from PTR through March 31, 1998 for
the development of the projects acquired from PTR in the transaction. As a
result of the fundings, PTR will receive convertible mortgage notes in stated
amounts of up to $221,000,000. The notes are collaterized by Homestead
properties.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNTS OF FIXED
BONDS TERM INTEREST RATE (1) ISSUER
---------- ---- ---------------- ------
<S> <C> <C> <C>
$23.1 million June 1995 to June 2002 6.48% General Re Financial Products Corporation
$64.6 million June 1995 to June 2005 6.74 Morgan Guaranty Trust Company of NY
$5.0 million March 1996 to March 2006 6.18 Morgan Guaranty Trust Company of NY
$15.5 million August 1996 to August 2006 6.51 Morgan Stanley Derivative Products Inc.
----
Weighted-average interest rate 6.64%
====
</TABLE>
- --------
(1) Includes the fixed interest rate provided by the swap agreements, annual
fees associated with the swap agreements and credit enhancement agreement and
amortization of capitalized costs associated with the credit enhancement
agreement.
ATLANTIC paid $1,832,000 more in interest during 1996 and $575,000 more in
interest during 1995 than was received under the swap agreements. The swap
agreements cover the principal amount of the bonds, net of amounts deposited in
the principal reserve fund. ATLANTIC pays interest on that portion of bonds not
covered by the swap agreements at the variable rates as provided by the
mortgage agreements. ATLANTIC is exposed to credit loss in the event of non-
performance by the swap counterparties; however, ATLANTIC believes the risk of
loss is minimal.
Real estate with an aggregate undepreciated cost at December 31, 1996 of
$50,714,000 and $206,963,000 serves as collateral for the conventional mortgage
notes payable and the tax-exempt mortgages, respectively.
Homestead issued warrants to PTR in exchange for entering into the funding
commitment agreements (Note 3). The costs associated with the issuance of the
warrants have been recorded as deferred financing costs. The premium/discount
(i.e. the difference between the stated amount and the funded amount), the
value attributable to the conversion feature, and the costs associated with the
warrants are amortized to interest expense over the term of the related
mortgage note payable using a method which approximates the effective interest
method. The effective interest rate on the PTR convertible mortgage note
payable after giving effect to the related discount, conversion feature, and
warrants is estimated to be 13.56%.
The mortgage notes are convertible, at the option of PTR, into common shares of
Homestead common stock beginning April 1, 1997. The conversion price is equal
to one share of common stock for every $11.50 of principal amount outstanding.
Approximate principal payments due on mortgage notes payable during each of the
years in the five-year period ending December 31, 2001 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1997 $ 1,537
1998 1,654
1999 1,765
2000 3,760
2001 2,037
Thereafter 246,346
--------
$257,099
========
</TABLE>
F-19
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible Debt:
Security Capital's 2014 Convertible Debentures totaling $713,677,000 at
December 31, 1996 and $718,611,000 at December 31, 1995 accrue interest at 12%
per annum but require semi-annual cash interest payments at a minimum rate per
annum of 3.5%. Interest above the minimum may be paid currently or deferred at
the option of Security Capital. Any deferred interest accrues interest at 12%
and is due upon maturity. The Board of Directors of Security Capital approved a
cash interest payment rate of 9.939% and 9.376% per annum for 1996 and 1995,
respectively.
Security Capital's convertible subordinated debentures due March 29, 2016 (the
"2016 Convertible Debentures") totaling $226,520,000 at December 31, 1996 and
none at December 31, 1995 accrue interest at 6.5%
per annum and require semi-annual interest payments on the last business day of
June and December. Security Capital has received subscriptions from its March
1996 private placement offering for 2016 Convertible Debentures of
$323,048,500.
The principal amount of the 2014 and 2016 Convertible Debentures are
convertible into Security Capital common stock at $1,046.00 and $1,153.90 per
share, respectively, at the option of the holder any time after the earlier to
occur of (i) the first anniversary of Security Capital's initial public
offering of its common stock, (ii) July 1, 1999 and March 29, 2001 for the 2014
and 2016 Convertible Debentures, respectively, (iii) the consolidation or
merger of Security Capital with another entity (other than a merger in which
Security Capital is the surviving entity) or any sale or disposition of
substantially all the assets of Security Capital or (iv) notice of redemption
of the debentures by Security Capital. On conversion of the 2014 Convertible
Debentures, any accrued and unpaid deferred interest shall be deemed to be paid
in full upon delivery of the common shares to the debenture holder. Security
Capital may redeem the 2014 Convertible Debentures at any time and the 2016
Convertible Debentures may be redeemed at any time after March 29, 1999. To
redeem the debentures, Security Capital must provide not less than 60 days nor
more than 90 days prior written notice to the holders. The redemption price is
par plus any accrued and unpaid interest to the redemption date.
5. SHAREHOLDERS' EQUITY:
Security Capital has received subscriptions from its March 1996 private
placement offerings of securities totaling $785,097,000. Such subscriptions
consist of preferred stock of $139,000,000, common stock of $323,048,500, and
2016 Convertible Debentures of $323,048,500.
On April 1, 1996 Security Capital issued 139,000 shares of its Series A
Cumulative Convertible Redeemable Voting Preferred Stock ("Series A Preferred
Shares"). The Series A Preferred Shares have a liquidation preference of $1,000
per share for an aggregate preference of $139,000,000 plus any accrued but
unpaid dividends. The holder of the Series A Preferred Shares is entitled to
voting rights, equal to the number of common shares into which the Series A
Preferred Shares are convertible, on matters of amendments of Security
Capital's Articles of Incorporation and merger of Security Capital, or sale of
substantially all assets or liquidation or dissolution, and one-half of such
number of common shares on other matters submitted to a vote of the common
shareholders. Each Series A Preferred Share is convertible, at the option of
the holder at any time, into 0.76184 of Security Capital common shares (a
conversion price of $1,312.61 per share). Holders of the Series A Preferred
Shares will be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends,
cumulative preferential cash distributions at the rate of 7.5% of the
liquidation preference per annum (equivalent to $75.00 per share). Such
distributions are cumulative from the date of original issue and are payable
quarterly in arrears on the last day of each March, June, September and
December or, if not a business day, the next succeeding business day. The
Series A Preferred Shares are redeemable, at the option of Security Capital,
after March 31, 1999.
Through December 31, 1996 Security Capital has received fundings for the
issuance of 215,946 shares of common stock ($226,526,000) and 2016 Convertible
Debentures ($226,526,000). Included in the fundings was $22,500,000 received
from USREALTY. USREALTY has committed to a total subscription of $110,000,000
in Security Capital's offering.
Participants in Security Capital's Debenture Interest Reinvestment Plans may
reinvest the cash portion of their interest payments applicable to Security
Capital's 2014 and 2016 Convertible Debentures in Security Capital
F-20
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock at the estimated fair value per share determined as of the prior
quarter end date. As of December 31, 1996, 74,602 shares of Security Capital's
common stock have been reserved for issuance under these plans.
6. STOCK OPTION PLANS AND WARRANTS:
Security Capital has stock and convertible debenture option plans for
directors, officers and key employees which provide for grants of non-qualified
and incentive options. Prior to 1996, all options and warrants were issued in
units consisting of common stock and 2014 Convertible Debentures. Such options
must be exercised in units which consist of both shares and debentures. In
1996, most option grants were for common stock only. Shares totaling 262,615
have been reserved for options and warrants, including shares obtainable upon
conversion of debentures. Under all plans, the option exercise price equals the
fair value of the stock or stock and debentures, as applicable as of the date
of grant. Vesting of the options commences no more than three years from grant
date and options are fully vested no more than six years from grant date.
Options expire ten years from date of grant.
Security Capital has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
option plans. As permitted by Statement 123, Security Capital has applied its
provisions to options granted subsequent to December 31, 1994. Since the
Statement 123 method of accounting has not been applied to options granted
prior to 1995, the resulting pro forma compensation cost may not be
representative of such costs to be expected in future years. The pro forma
effect of Statement 123 is summarized as follows (in thousands, except share
data):
------------------
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net earnings (loss)--as reported $24,145 $(51,112)
Net earnings (loss)--pro forma $20,915 $(52,762)
Earnings (loss) per share--as reported $ 21.30 $ (57.00)
Earnings (loss) per share--pro forma $ 18.45 $ (58.84)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.32% and 6.26%; expected lives of seven years for 1996 and 1995;
expected dividends--none; and expected volatility of 20% for both years.
A summary of the status of Security Capital's stock option plans at December
31, 1996, 1995 and 1994 and changes during the years then ended is presented in
the following table:
---------------------------------------
<TABLE>
<CAPTION>
2014 CONVERTIBLE
COMMON STOCK DEBENTURES
------------------------- -----------------------
WTD. AVG.
WTD. AVG. EX. CONVERSION
SHARES PRICE AMOUNT PRICE
--------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at December 31,
1993 14,259 $ 242 $10,374,616 $1,046
Granted 3,627 242 2,693,450 1,046
Exercised - - - -
Forfeited (146) 242 (110,876) 1,046
--------- --------- ----------- ---------
Outstanding at December 31,
1994 17,740 242 12,957,190 1,046
--------- --------- ----------- ---------
Granted--GROUP merger 58,772 203 29,298,305 1,046
Other grants 24,141 948 16,597,259 1,043
Exercised (538) 213 (174,682) 1,046
Forfeited (879) 213 (461,286) 1,046
--------- --------- ----------- ---------
Outstanding at December 31,
1995 99,236 672 58,216,786 1,045
--------- --------- ----------- ---------
Granted 47,982 1,132 2,099,880 1,133
Exercised (5,353) 217 (2,659,650) 1,046
Forfeited (1,551) 785 (917,342) 1,045
--------- --------- ----------- ---------
Outstanding at December 31,
1996 140,314 $ 928 $56,739,674 $1,048
========= ========= =========== =========
</TABLE>
F-21
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options and warrants for
common stock and debentures outstanding at December 31, 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- ------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
REMAINING EXERCISE/ EXERCISE/
RANGE OF EXERCISE AND NUMBER/AMOUNT CONTRACTUAL CONVERSION NUMBER/AMOUNT CONVERSION
CONVERSION PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Stock
---------------
$ 123-247 72,462 5.5 years $ 215 52,023 $ 216
$ 948 23,706 8.5 years $ 948 372 $ 948
$ 1139-1239 44,146 10 years $1140 - n/a
----------- -----------
140,314 52,395
=========== ===========
Convertible De-
bentures
---------------
$ 1043 $15,737,733 8.5 years $1043 $ 254,980 $1043
$1046-$1191 41,001,941 5.5 years $1051 29,067,294 $1046
----------- -----------
$56,739,674 $29,322,274
=========== ===========
</TABLE>
The weighted-average fair value per share of options granted during 1996 and
1995 was $447 and $368, respectively.
In connection with ATLANTIC's acquisition of a portfolio of multifamily assets
in June 1994, Security Capital issued a warrant to the seller to purchase
40,241 shares and $30,500,000 of 2014 Convertible Debentures for an aggregate
price of $60,000,000 ($865 per fully converted share).The warrant expires March
31, 1998; however, if Security Capital's common stock is not registered by that
date, the warrant will automatically be exercised according to its cashless
exercise provisions. Due to its immateriality, no value has been assigned to
the warrant in the accompanying consolidated balance sheets.
7. LEASES
Minimum future rental payments due under non-cancelable operating leases,
principally for office space, having remaining terms in excess of one year as
of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
---------
YEAR ENDED
DECEMBER
31, AMOUNT
---------- ---------
<S> <C>
1997 $ 2,984
1998 2,503
1999 2,101
2000 1,701
2001 1,423
Thereafter 3,391
---------
$14,103
=========
</TABLE>
Lease expense for the years ended December 31, 1996 and 1995 was $3,659,000 and
$2,692,000, respectively, including $1,390,000 and $813,000 in 1996 and 1995,
respectively, paid to SCI. There was no lease expense during 1994. Included
above are lease agreements with SCI with a total remaining obligation of
$10,647,000.
F-22
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES:
Security Capital accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes. Security Capital
files a consolidated Federal income tax return. Homestead also accounts for
income taxes under Statement 109 and its tax effects are included in Security
Capital's consolidated financial statements. Homestead files a separate Federal
income tax return. ATLANTIC has elected to be taxed as a real estate investment
trust under the Internal Revenue Code of 1986, as amended. Accordingly, no
provisions have been made for Federal income taxes for its operations in
Security Capital's consolidated financial statements.
Federal income tax expense for the years ended December 31, 1996 and 1995
consisted of deferred tax provisions of $30,872,000 and none, respectively.
Prior to 1995, Security Capital had elected to be taxed as a REIT; therefore
there is no tax provision for 1994. Security Capital terminated its REIT status
as of January 1, 1995 as a result of the merger with GROUP.
A reconciliation of income tax expense computed at the applicable Federal tax
rate of 35% in 1996 and 1995 to the amount recorded in the consolidated
financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Computed expected provision/(benefit) $26,672 $(16,222)
ATLANTIC minority interest (4,840) (1,667)
Change in valuation allowance (2,674) 15,315
Goodwill amortization 2,773 2,773
Net deferred tax assets in consolidated
subsidiaries 10,824 -
Other (1,883) (199)
--------- ---------
$30,872 $ -
========= =========
</TABLE>
Security Capital had tax net operating loss carryforwards of approximately
$61,000,000 at December 31, 1996 and 1995. If not previously utilized, the loss
carryforwards will expire beginning 2005 through 2010. Utilization of existing
net operating loss carryforwards is limited by IRC Section 382 (limitation on
net operating loss carryforwards following ownership change) and the Separate
Return Limitation Year ("SRLY") rules.
As mentioned above, prior to 1995, Security Capital elected to be taxed as a
REIT. For 1994, total distributions per share were $791.00, consisting of
$33.50 in cash distributions and a $757.50 debenture distribution. For Federal
income tax purposes, the estimated taxability of distributions was as follows--
ordinary income ($7.91 per share); return of capital ($783.09 per share). Also,
for the period that Security Capital elected to be taxed as a REIT, its
Accumulated Deficit included only ordinary income and did not include any
undistributed net realized gains on disposition of real estate.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 1996 and 1995, are as
follows (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Security Capital's net operating loss
carryforwards ("NOL's") $ 21,375 $ 21,375
Homestead's NOL's 1,112 -
Loan costs 3,547 -
Investments in equity method operating
companies - 2,674
--------- ---------
Gross deferred tax assets 26,034 24,049
Homestead valuation allowance (4,659) -
Security Capital valuation allowance (21,375) (24,049)
--------- ---------
Gross deferred tax assets, net of valuation
allowances - -
--------- ---------
Deferred tax liabilities:
Investments in equity method operating
companies 30,872 -
--------- ---------
Net deferred tax liability $ 30,872 $ -
========= =========
</TABLE>
F-23
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Security Capital and its investees are parties to various claims and routine
litigation arising in the ordinary course of business. Based on discussion with
legal counsel, Security Capital does not believe that the results of all claims
and litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
Security Capital's investees are subject to environmental regulations related
to the ownership, operation, development and acquisition of real estate. As
part of due diligence procedures, Security Capital's investees conduct Phase I
environmental assessments on each property prior to acquisition. The cost of
complying with environmental regulations was not material to Security Capital's
results of operations. Security Capital and its investees are not aware of any
environmental condition on any of their properties which is likely to have a
material adverse effect on financial condition or results of operations.
At December 31, 1996, Security Capital had approximately $323,353,000 of
unfunded development commitments for developments under construction. ATLANTIC
and Homestead's commitments were $95,900,000 and $227,453,000, respectively.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, other assets, accounts
payable and accrued expenses approximates fair value as of December 31, 1996
and 1995 because of the short maturity of these instruments. Similarly, the
carrying value of line of credit borrowings approximates fair value as of those
dates because the interest rates fluctuate based on published market rates. In
the opinion of management, the interest rates associated with the conventional
mortgages payable and the tax exempt mortgages payable approximate the market
interest rates for this type of instrument, and as such, the carrying values
approximate fair value at December 31, 1996 and 1995, in all material respects.
PTR's convertible mortgage notes are convertible into Homestead common stock
after March 31, 1997 on the basis of one share of Homestead common stock for
every $11.50 of principal amount outstanding. The fair value of the convertible
mortgage notes (assuming conversion), based upon the trading price of
Homestead's common stock on the American Stock Exchange at December 31, 1996,
($18.00) is $176,304,000.
11. SUBSEQUENT EVENTS
On March 24, 1997, the board of trustees or directors of SCI, PTR and ATLANTIC
each unanimously approved an agreement with Security Capital to exchange its
REIT common stock for Security Capital's REIT management and property
management companies. The transactions, subject to approval by the shareholders
of Security Capital SCI, PTR and ATLANTIC, are expected to be consummated
during the third quarter of 1997. Under the terms of the agreements, SCI, PTR
and ATLANTIC, will issue $81.9 million, $75.8 million and $54.6 million of
their common stock, respectively, in exchange for Security Capital's REIT
management and property management companies and operating systems. After
giving effect to income taxes, Security Capital expects the gain on sale of the
management companies to SCI and PTR will be immaterial. No gain will be
recorded on the sale to ATLANTIC as Security Capital consolidates ATLANTIC's
accounts.
In order to allow existing shareholders to maintain their relative ownership
interests, SCI, PTR and ATLANTIC will conduct rights offerings during the time
proxies are solicited from their shareholders. Also, as part of the
transaction, Security Capital will issue warrants to acquire $250 million of
Class B shares to the common and convertible preferred shareholders of SCI, PTR
and ATLANTIC. The warrants are expected to be publicly traded and have a term
of twelve months. Security Capital expects to file a registration statement
with the Securities and Exchange Commission covering its initial public
offering of Class B shares in the third quarter of 1997.
On April 17, 1997 Security Capital shareholders approved an amended and
restated charter which created Class A and Class B Shares. All outstanding
common stock as of April 18, 1997 was automatically changed to Class A Shares.
All references to Security Capital common stock are to Class A Shares unless
otherwise noted.
F-24
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TOR
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITIOND
- ----------------------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $ 15,500 $ 3,717 $ 21,076 $ 975
Balmoral
Village......... - 2,871 16,270 74
Cameron
Ashford......... - 3,672 20,841 399
Cameron
Briarcliff...... (b) 2,105 11,953 191
Cameron Brook... 19,500 3,318 18,784 326
Cameron Creek
I............... - 3,627 20,589 328
Cameron Crest... - 3,525 20,009 290
Cameron
Dunwoody........ - 2,486 14,114 252
Cameron Forest.. - 884 5,008 352
Cameron Place... - 1,124 6,372 579
Cameron Pointe.. - 2,172 12,306 413
Cameron
Station......... 14,500 2,338 13,246 496
Clairmont
Crest........... 11,600 1,603 9,102 315
The Greens...... 10,400 2,004 11,354 382
Lake Ridge...... - 2,001 11,359 4,012
Morgan's
Landing......... - 1,168 6,646 857
Old Salem....... - 1,053 6,144 919
Trolley Square.. - 2,031 11,528 347
Vinings
Landing......... - 1,363 7,902 714
WintersCreek.... 5,000 1,133 6,434 220
Woodlands....... - 3,785 21,471 485
Birmingham,
Alabama:
Cameron on the
Cahaba I........ - 1,020 5,784 352
Cameron on the
Cahaba II....... 8,021 1,688 9,580 501
Colony Woods I.. - 1,560 8,845 281
Morning Sun
Villas.......... - 1,260 7,309 732
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 5,979 1,203 6,808 381
Cameron Oaks.... - 2,255 12,800 306
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
---------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LAND IMPROVEMENTS (C) DEPRECIATION YEAR ACQUIRED
- ----------------------- -------- ------------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $ 3,717 $ 22,051 $ 25,768 $ 715 1987 1995
Balmoral
Village......... 2,871 16,344 19,215 73 1990 1996
Cameron
Ashford......... 3,672 21,240 24,912 1,551 1990 1994
Cameron
Briarcliff...... 2,105 12,144 14,249 897 1989 1994
Cameron Brook... 3,318 19,110 22,428 1,279 1988 1994
Cameron Creek
I............... 3,627 20,917 24,544 1,473 1988 1994
Cameron Crest... 3,525 20,299 23,824 1,426 1988 1994
Cameron
Dunwoody........ 2,486 14,366 16,852 1,050 1989 1994
Cameron Forest.. 884 5,360 6,244 145 1981 1995
Cameron Place... 1,124 6,951 8,075 185 1979 1995
Cameron Pointe.. 2,172 12,719 14,891 192 1987 1996
Cameron
Station......... 2,338 13,742 16,080 354 (c) 1995
Clairmont
Crest........... 1,603 9,417 11,020 626 1987 1994
The Greens...... 2,004 11,736 13,740 794 1986 1994
Lake Ridge...... 2,001 15,371 17,372 1,200 1979 1993
Morgan's
Landing......... 1,168 7,503 8,671 608 1983 1993
Old Salem....... 1,053 7,063 8,116 485 1968 1994
Trolley Square.. 2,031 11,875 13,906 911 1989 1994
Vinings
Landing......... 1,363 8,616 9,979 613 1978 1994
WintersCreek.... 1,133 6,654 7,787 233 1984 1995
Woodlands....... 3,785 21,956 25,741 761 (d) 1995
Birmingham,
Alabama:
Cameron on the
Cahaba I........ 1,020 6,136 7,156 281 1987 1995
Cameron on the
Cahaba II....... 1,688 10,081 11,769 463 1990 1995
Colony Woods I.. 1,560 9,126 10,686 676 1991 1994
Morning Sun
Villas.......... 1,260 8,041 9,301 554 1985 1994
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 1,203 7,189 8,392 137 1988 1996
Cameron Oaks.... 2,255 13,106 15,361 974 1989 1994
</TABLE>
F-25
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
--------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST COSTS DECEMBER 31, 1996
------------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LANDACQUIMPROVEMENTSISITION(C) DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... $ - $ 1,225 $ 6,961 $ 324 $ 1,225 $ 7,285 $ 8,510 $ 271
Park Place at
Turtle Run...... - 2,208 12,223 1,283 2,208 13,506 15,714 223
Parrot's Landing
I............... 15,835 2,691 15,276 684 2,691 15,960 18,651 1,072
The Pointe at
Bayberry Lake... - 2,508 14,210 303 2,508 14,513 17,021 222
Spencer Run..... (b) 2,852 16,194 425 2,852 16,619 19,471 1,133
Sun Pointe
Cove............ 8,500 1,367 7,773 229 1,367 8,002 9,369 550
Trails at Meadow
Lakes........... - 1,285 7,293 262 1,285 7,555 8,840 282
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 210 2,031 11,750 13,781 815
Greenville, South
Carolina:
Cameron Court... - 1,602 9,369 89 1,602 9,458 11,060 163
Jacksonville,
Florida:
Bay Club........ - 1,789 10,160 273 1,789 10,433 12,222 773
Memphis,
Tennessee:
Cameron Century
Center.......... - 2,382 13,496 50 2,382 13,546 15,928 60
Cameron at Kirby
Parkway......... - 1,386 7,959 829 1,386 8,788 10,174 686
Country Oaks.... 5,933 1,246 7,061 177 1,246 7,238 8,484 63
Stonegate....... - 985 5,608 483 985 6,091 7,076 360
Miami, Florida:
Park Hill....... - 1,650 9,377 (2,185)(e) 1,650 7,192 8,842 606
Nashville,
Tennessee:
Arbor Creek..... - -(f) 17,671 512 - 18,183 18,183 1,267
Enclave at
Brentwood....... - 2,263 12,847 1,016 2,263 13,863 16,126 605
Orlando, Florida:
Camden Springs.. - 2,477 14,072 808 2,477 14,880 17,357 1,056
Cameron Villas
I............... 6,343 1,087 6,317 609 1,087 6,926 8,013 473
Cameron Villas
II.............. (b) 255 1,454 64 255 1,518 1,773 56
Kingston
Village......... - 876 4,973 164 876 5,137 6,013 192
The Wellington.. (b) 1,155 6,565 282 1,155 6,847 8,002 466
Raleigh, North
Carolina:
Cameron Lake.... - 1,385 7,848 60 1,385 7,908 9,293 35
Cameron Ridge... 5,888 1,503 8,519 109 1,503 8,628 10,131 38
Cameron Square.. - 2,314 13,143 525 2,314 13,668 15,982 959
Emerald Forest.. - 2,202 12,478 - 2,202 12,478 14,680 -
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Park Place at
Turtle Run...... 1989 1996
Parrot's Landing
I............... 1986 1994
The Pointe at
Bayberry Lake... 1988 1996
Spencer Run..... 1987 1994
Sun Pointe
Cove............ 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Greenville, South
Carolina:
Cameron Court... 1991 1996
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron Century
Center.......... 1988 1996
Cameron at Kirby
Parkway......... 1985 1994
Country Oaks.... 1985 1996
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cameron Villas
I............... 1982 1994
Cameron Villas
II.............. 1981 1995
Kingston
Village......... 1982 1995
The Wellington.. 1988 1994
Raleigh, North
Carolina:
Cameron Lake.... 1985 1996
Cameron Ridge... 1985 1996
Cameron Square.. 1987 1994
Emerald Forest.. 1986 1996
</TABLE>
F-26
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS
- ----------------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... $ - $ 2,878 $ 16,339 $ 293
Potomac Hunt.... (b) 1,486 8,452 181
Sarasota,
Florida:
Camden at Palmer
Ranch........... - 3,534 20,057 607
Tampa, Florida:
Camden Downs.... - 1,840 10,447 305
Cameron
Bayshore........ - 1,607 9,105 -
Cameron Lakes... - 1,126 6,418 1,107
Country Place
Village I....... 2,004 567 3,219 140
Country Place
Village II...... - 644 3,658 94
Foxbridge on the
Bay............. 10,400 1,591 9,036 328
Summer Chase.... (b) 542 3,094 136
Washington, D.C.:
Camden at
Kendall Ridge... - 1,708 9,698 295
Cameron at
Saybrooke....... - 2,802 15,906 258
Sheffield
Forest.......... - 2,269 12,859 418
West Springfield
Terrace......... - 2,417 13,695 98
Less amounts
held in
principal
reserve
fund(g)......... (1,098) - - -
-------- -------- -------- --------
Total Operating
Communities
Acquired........ $155,790 $124,701 $726,004 $ 27,324
-------- -------- -------- --------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ - $ 1,254 $ - $ 9,261
Charlotte, North
Carolina:
Waterford
Hills........... - 1,508 - 11,109
Waterford Square
I............... - 1,890 - 17,763
Jacksonville,
Florida:
Cameron Lakes
I............... - 1,759 - 14,358
Raleigh, North
Carolina:
Waterford
Point........... - 985 - 14,854
-------- -------- -------- --------
Total Operating
Communities
Developed....... $ - $ 7,396 $ - $ 67,345
-------- -------- -------- --------
TOTAL OPERATING
COMMUNITIES..... $155,790 $132,097 $726,004 $ 94,669
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
------------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LANDACQUIMPROVEMENTSISITION(C) DEPRECIATION YEAR ACQUIRED
- ----------------------- ---------- ------------------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... $ 2,878 $ 16,632 $ 19,510 $ 1,240 1989 1994
Potomac Hunt.... 1,486 8,633 10,119 464 1987 1994
Sarasota,
Florida:
Camden at Palmer
Ranch........... 3,534 20,664 24,198 1,469 1988 1994
Tampa, Florida:
Camden Downs.... 1,840 10,752 12,592 780 1988 1994
Cameron
Bayshore........ 1,607 9,105 10,712 - 1984 1996
Cameron Lakes... 1,126 7,525 8,651 365 1986 1995
Country Place
Village I....... 567 3,359 3,926 125 1982 1995
Country Place
Village II...... 644 3,752 4,396 141 1983 1995
Foxbridge on the
Bay............. 1,591 9,364 10,955 652 1986 1994
Summer Chase.... 542 3,230 3,772 219 1988 1994
Washington, D.C.:
Camden at
Kendall Ridge... 1,708 9,993 11,701 755 1990 1994
Cameron at
Saybrooke....... 2,802 16,164 18,966 1,190 1990 1994
Sheffield
Forest.......... 2,269 13,277 15,546 374 1987 1995
West Springfield
Terrace......... 2,417 13,793 16,210 92 1978 1996
Less amounts
held in
principal
reserve
fund(g)......... - - - -
---------- ---------- ---------- -------
Total Operating
Communities
Acquired........ $ 124,701 $ 753,328 $ 878,029 $38,948
---------- ---------- ---------- -------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ 1,551 $ 8,964 $ 10,515 $ 365 1995 1994
Charlotte, North
Carolina:
Waterford
Hills........... 1,943 10,674 12,617 476 1995 1993
Waterford Square
I............... 2,053 17,600 19,653 436 1996 1994
Jacksonville,
Florida:
Cameron Lakes
I............... 1,959 14,158 16,117 216 1996 1995
Raleigh, North
Carolina:
Waterford
Point........... 1,493 14,346 15,839 519 1996 1994
---------- ---------- ---------- -------
Total Operating
Communities
Developed....... $ 8,999 $ 65,742 $ 74,741 $ 2,012
---------- ---------- ---------- -------
TOTAL OPERATING
COMMUNITIES..... $ 133,700 $ 819,070 $ 952,770 $40,960
---------- ---------- ---------- -------
</TABLE>
F-27
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITOIN
- ----------------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. $ - $ 2,730 $ - $ 16,602
Birmingham,
Alabama:
Cameron at the
Summit I........ - 2,774 - 5,709
Charlotte, North
Carolina:
Waterford Square
II.............. - 2,014 - 4,578
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. - 1,328 - 6,742
Jacksonville,
Florida:
Cameron
Deerwood........ - 2,331 - 12,173
Cameron Lakes
II.............. - 1,340 - 1,529
Cameron
Timberlin Parc
I............... - 2,167 - 13,280
Nashville,
Tennessee:
Cameron
Overlook........ - 2,659 - 4,679
Raleigh, North
Carolina:
Cameron Brooke.. - 1,353 - 8,717
Waterford
Forest.......... - 2,371 - 17,978
Richmond,
Virginia:
Cameron at
Wyndham......... - 2,038 - 2,366
Cameron Crossing
I & II.......... - 2,752 - 8,450
Washington, D.C.:
Cameron at
Milestone....... - 5,477 - 24,867
Woodway at
Trinity Center.. - 5,342 - 30,241
-------- -------- -------- --------
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ - $ 36,676 $ - $157,911
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
------------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LANDACQUIMPROVEMENTSISITION(C) DEPRECIATION YEAR ACQUIRED
- ----------------------- ---------- ------------------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. $ 2,897 $ 16,435 $ 19,332 $ 39 -(h) 1994
Birmingham,
Alabama:
Cameron at the
Summit I........ 2,778 5,705 8,483 - - 1996
Charlotte, North
Carolina:
Waterford Square
II.............. 2,065 4,527 6,592 - - 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. 1,367 6,703 8,070 - - 1994
Jacksonville,
Florida:
Cameron
Deerwood........ 2,332 12,172 14,504 - -(h) 1996
Cameron Lakes
II.............. 1,340 1,529 2,869 - - 1996
Cameron
Timberlin Parc
I............... 2,282 13,165 15,447 16 -(h) 1995
Nashville,
Tennessee:
Cameron
Overlook........ 2,659 4,679 7,338 - - 1996
Raleigh, North
Carolina:
Cameron Brooke.. 1,382 8,688 10,070 - - 1995
Waterford
Forest.......... 2,480 17,869 20,349 52 -(h) 1995
Richmond,
Virginia:
Cameron at
Wyndham......... 2,052 2,352 4,404 - - 1993
Cameron Crossing
I & II.......... 2,768 8,434 11,202 - - 1995(i)
Washington, D.C.:
Cameron at
Milestone....... 5,607 24,737 30,344 43 -(h) 1995
Woodway at
Trinity Center.. 5,584 29,999 35,583 56 -(h) 1994
---------- ---------- ---------- --------
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ 37,593 $ 156,994 $ 194,587 $ 206
---------- ---------- ---------- --------
</TABLE>
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS
- ----------------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ - $ 1,508 $ - $ 512
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ - 4,025 - 361
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. - 1,294 - 95
-------- -------- -------- --------
TOTAL
COMMUNITIES IN
PLANNING........ $ - $ 6,827 $ - $ 968
-------- -------- -------- --------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... - 2,008 - 75
-------- -------- -------- --------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ - $ 2,008 $ - $ 75
-------- -------- -------- --------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $155,790 $177,608 $726,004 $253,623
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
---------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LANDACIMPROVEMENTSQUISITIO(C)NDEPRECIATION YEAR ACQUIRED
- ----------------------- -------- ------------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ 1,508 $ 512 $ 2,020 $ - - 1996
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ 4,029 357 4,386 - - 1996
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. 1,294 95 1,389 - - 1995
-------- -------- ---------- -------
TOTAL
COMMUNITIES IN
PLANNING........ $ 6,831 $ 964 $ 7,795 $ -
-------- -------- ---------- -------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... 2,083 - 2,083 - - 1996
-------- -------- ---------- -------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ 2,083 $ - $ 2,083 $ -
-------- -------- ---------- -------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $180,207 $977,028 $1,157,235 $41,166
-------- -------- ---------- -------
</TABLE>
F-29
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST DECEMBER 31, 1996
--------------------- COSTS -------------------------------------
EXTENDED-STAY CAPITALIZED
LODGING ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C)
------------- ------- ------- ------------- ------------- ---------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (l) $ 770 $ - $ 1,489 $ 776 $ 1,483 $ 2,259
Osuna/North I-
25.............. (l) 832 - 4,598 840 4,590 5,430
Atlanta, Georgia:
Cumberland...... (m) 1,321 524 2,419 1,321 2,943 4,264
Gwinnett Place.. (m) 743 - 241 790 194 984
North Druid
Hills........... (m) 1,814 144 1,064 1,814 1,208 3,022
Peachtree....... (m) 1,091 5,085 87 1,095 5,168 6,263
Perimeter....... (m) 2,356 982 2,100 2,381 3,057 5,438
Roswell......... (m) 1,923 110 829 1,923 939 2,862
Austin, Texas:
Burnet Road..... (l) 525 - 3,616 723 3,418 4,141
Midtown......... (l) 600 - 4,085 643 4,042 4,685
Pavillion....... (l) 633 - 4,459 633 4,459 5,092
Round Rock...... (l) 483 - 351 506 328 834
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... - 1,500 - 366 1,524 342 1,866
Dallas, Texas:
Coit Road/North
Central......... (l) 425 - 3,051 496 2,980 3,476
Ft.
Worth/Downtown
Freeway......... (l) 350 - 2,653 384 2,619 3,003
Las
Colinas/Irving.. (l) 800 - 3,900 805 3,895 4,700
North
Arlington/Six
Flags Hills..... (l) 340 - 3,487 407 3,420 3,827
North Richland
Hills Road...... (l) 470 - 3,113 544 3,039 3,583
South Arlington. (l) 550 - 3,371 642 3,279 3,921
Skillman/Northwest. (l) 400 - 2,765 400 2,765 3,165
Stemmons/NW
Highway Worth... (l) 356 - 4,275 424 4,207 4,631
Tollway/Addison
Colinas......... (l) 275 - 2,529 353 2,451 2,804
Denver, Colorado:
Cherry Creek.... (l) 1,070 - 1,677 1,078 1,669 2,747
Bellview/Denver
Tech Center..... (l) 876 - 5,318 942 5,252 6,194
Iliff/Aurora.... (l) 615 - 4,543 624 4,534 5,158
Inverness....... (l) 1,041 - 2,110 1,064 2,087 3,151
Houston, Texas:
Astrodome/Medical
Center.......... (l) 1,530 - 3,902 1,669 3,763 5,432
Bammel/Cypress
Station......... (l) 516 - 3,112 595 3,033 3,628
Fuqua/Hobby
Airport......... (l) 416 - 3,034 491 2,959 3,450
Park Ten........ (l) 791 - 3,212 860 3,143 4,003
Stafford/Sugarland. (l) 575 - 3,127 665 3,037 3,702
West by
Northwest/Hwy
290............. (l) 519 - 2,997 568 2,948 3,516
Westheimer/Beltway. (l) 796 - 3,296 897 3,195 4,092
Willowbrook/Northwest. (l) 575 - 3,437 669 3,343 4,012
Jacksonville,
Florida:
JTB............. (m) 1,137 379 976 1,206 1,286 2,492
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
EXTENDED-STAY
LODGING ACCUMULATED CONSTRUCTION YEAR
PROPERTIES DEPRECIATION YEAR ACQUIRED
------------- ------------ ------------ --------
<S> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (j) (j) 1996
Osuna/North I-
25.............. 157 1996 1995
Atlanta, Georgia:
Cumberland...... (j) (j) 1996
Gwinnett Place.. (j) (j) 1996
North Druid
Hills........... (j) (j) 1996
Peachtree....... 45 1996 1996
Perimeter....... (j) (j) 1996
Roswell......... (j) (j) 1996
Austin, Texas:
Burnet Road..... 243 1995 1994
Midtown......... 109 1996 1995
Pavillion....... - 1996 1995
Round Rock...... (j) (j) 1995
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... (j) (j) 1996
Dallas, Texas:
Coit Road/North
Central......... 463 1994 1993
Ft.
Worth/Downtown
Freeway......... 82 1996 1994
Las
Colinas/Irving.. 126 1996 1994
North
Arlington/Six
Flags Hills..... 296 1995 1993
North Richland
Hills Road...... 464 1994 1993
South Arlington. 302 1995 1994
Skillman/Northwest. 373 1993 1992
Stemmons/NW
Highway Worth... 441 1995 1992
Tollway/Addison
Colinas......... 468 1993 1993
Denver, Colorado:
Cherry Creek.... (j) (j) 1996
Bellview/Denver
Tech Center..... 120 1996 1994
Iliff/Aurora.... 125 1996 1994
Inverness....... (j) (j) 1996
Houston, Texas:
Astrodome/Medical
Center.......... 236 1995 1994
Bammel/Cypress
Station......... 303 1994 1993
Fuqua/Hobby
Airport......... 412 1994 1993
Park Ten........ 320 1994 1993
Stafford/Sugarland. 332 1994 1993
West by
Northwest/Hwy
290............. 434 1994 1993
Westheimer/Beltway. 383 1994 1993
Willowbrook/Northwest. 250 1995 1994
Jacksonville,
Florida:
JTB............. (j) (j) 1996
</TABLE>
F-30
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED
AT
INITIAL COST COSTS DECEMBER 31, 1996
EXTENDED-STAY --------------------- CAPITALIZED ------------------------------
LODGING ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND ACCUMULATED CONSTRUCTION YEAR
PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
------------- ------ ------- ------------- ------------- ------- ------------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City,
Missouri:
Merriam......... (l) $ 871 $ - $ 3,136 $ 905 $ 3,102 $ 4,007 (j) (j) 1996
Plaza........... - 1,090 - 208 1,158 140 1,298 (j) (j) 1996
Los Angeles,
California:
Brea............ - 1,518 - 173 1,529 162 1,691 (j) (j) 1996
El Segundo...... (l) 2,233 - 425 2,255 403 2,658 (j) (j) 1996
Miami/Ft.
Lauderdale,
Florida:
Coral Springs-
Northpoint...... - 1,030 - 139 1,059 110 1,169 (j) (j) 1996
Fort Lauderdale. (m) 1,328 633 926 1,384 1,503 2,887 (j) (j) 1996
Miami Airport... (m) 2,238 679 997 2,326 1,588 3,914 (j) (j) 1996
Plantation...... (m) 1,562 358 118 1,636 402 2,038 (j) (j) 1996
Nashville,
Tennessee:
Cool Springs.... (m) 1,106 - 355 1,182 279 1,461 (j) (j) 1996
Nashville
Airport......... (m) 1,292 338 954 1,324 1,260 2,584 (j) (j) 1996
Orange County,
California:
Spectrum........ (l) 2,115 - 508 2,128 495 2,623 (j) (j) 1996
Phoenix, Arizona:
Dunlap/North
West Valley..... (l) 915 - 4,418 935 4,398 5,333 77 1996 1995
Mesa............ (l) 1,470 - 161 1,529 102 1,631 (j) (j) 1996
Tempe........... (l) 808 - 4,613 830 4,591 5,421 107 1996 1995
Scottsdale...... (l) 883 - 3,454 971 3,366 4,337 218 1995 1994
Union Hills..... (l) 810 - 3,963 821 3,952 4,773 - 1996 1996
Portland, Oregon:
Lake Oswego..... (l) 1,960 - 168 2,010 118 2,128 (j) (j) 1996
Sunset East..... (l) 1,289 - 250 1,308 231 1,539 (j) (j) 1996
Raleigh/Durham,
North Carolina:
Hwy 70.......... (m) 901 - 238 936 203 1,139 (j) (j) 1996
North Raleigh... (m) 1,163 301 935 1,197 1,202 2,399 (j) (j) 1996
RTP............. (m) 984 230 1,598 993 1,819 2,812 (j) (j) 1996
Richmond,
Virginia:
Upper Broad..... (m) 1,358 - 482 1,444 396 1,840 (j) (j) 1996
Salt Lake City,
Utah:
Ft. Union....... (l) 1,285 - 440 1,288 437 1,725 (j) (j) 1996
Redwood......... (l) 844 - 2,002 912 1,934 2,846 (j) (j) 1996
San Antonio,
Texas:
Bitters......... (l) 1,000 - 3,836 1,198 3,638 4,836 254 1995 1994
DeZavala/Six
Flags Fiesta.... (l) 844 - 3,731 983 3,592 4,575 258 1995 1994
Fredricksburg/Medical
Center.......... (l) 800 - 3,356 892 3,264 4,156 319 1994 1993
San Diego,
California:
Mission Valley.. (l) 1,603 - 418 1,618 403 2,021 (j) (j) 1996
San Francisco
(Bay Area),
California:
Milpitas........ (l) 1,136 - 3,413 1,143 3,406 4,549 (j) (j) 1996
Mountain View... (l) 1,805 - 675 1,849 631 2,480 (j) (j) 1996
San Jose........ (l) 1,770 - 434 1,776 428 2,204 (j) (j) 1996
San Mateo....... (l) 1,510 - 4,233 1,517 4,226 5,743 (j) (j) 1995
</TABLE>
F-31
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------
INITIAL COST COSTS
----------------------- CAPITALIZED
EXTENDED-STAY ENCUM- BUILDINGS AND SUBSEQUENT TO
LODGING PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION
- ------------------ -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
San Ramon....... (l) $ 1,327 $ - $ 402
Santa Clara..... - 1,423 - 25
Sunnyvale....... (l) 1,274 - 4,309
Seattle,
Washington:
Bellevue........ (l) 2,050 - 1,119
Mountain Lake
Terrace/N.
Seattle......... (l) 1,530 - 494
Redmond......... (l) 2,265 - 565
Tukwila......... (l) 900 - 465
Tampa Area,
Florida:
Brandon......... (m) 923 762 584
North Airport... (m) 615 1,142 1,883
St. Petersburg.. (m) 766 155 264
Washington, D.C.:
BWI............. (m) 940 - 486
Dulles-South.... (m) 690 - 237
Fair Oaks....... (m) 1,152 196 372
Merrifield...... (m) 1,500 - 276
Miscellaneous.... (k) 5,429 - 161
Less: Fair Value
in excess of
cost--Properties
acquired from
ATLANTIC......... (3,681) (2,623) -
-------- -------- --------
Total Extended-
Stay Lodging
Properties, held
by Homestead.... $ 89,638 $ 9,395 $157,988
-------- -------- -------- --------
Grand Total
Security
Capital......... $155,790 $267,246 $735,399 $411,611
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
----------------------------------
EXTENDED-STAY BUILDINGS AND ACCUMULATED CONSTRUCTION YEAR
LODGING PROPERTIES LAND IMPROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
- ------------------ -------- ------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
San Ramon....... $ 1,341 $ 388 $ 1,729 (j) (j) 1996
Santa Clara..... 1,428 20 1,448 - (n) 1996
Sunnyvale....... 1,278 4,305 5,583 (j) (j) 1995
Seattle,
Washington:
Bellevue........ 2,067 1,102 3,169 (j) (j) 1996
Mountain Lake
Terrace/N.
Seattle......... 1,589 435 2,024 (j) (j) 1996
Redmond......... 2,527 303 2,830 (j) (j) 1996
Tukwila......... 937 428 1,365 (j) (j) 1996
Tampa Area,
Florida:
Brandon......... 971 1,298 2,269 (j) (j) 1996
North Airport... 635 3,005 3,640 (j) (j) 1996
St. Petersburg.. 766 419 1,185 (j) (j) 1996
Washington, D.C.:
BWI............. 1,062 364 1,426 (j) (j) 1996
Dulles-South.... 722 205 927 (j) (j) 1996
Fair Oaks....... 1,157 563 1,720 (j) (j) 1996
Merrifield...... 1,511 265 1,776 (j) (j) 1996
Miscellaneous.... 5,589 1 5,590 - - 1995/1996
Less: Fair Value
in excess of
cost--Properties
acquired from
ATLANTIC......... (3,681) (2,623) (6,304) -
-------- ---------- ---------- -------
Total Extended-
Stay Lodging
Properties, held
by Homestead.... $ 93,687 $ 163,334 $ 257,021 $ 7,717
-------- ---------- ---------- -------
Grand Total
Security
Capital......... $273,894 $1,140,362 $1,414,256 $48,883
======== ========== ========== =======
</TABLE>
- ----
(a) For Federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1996 was $1,133,431,000.
(b) Pledged as additional collateral under credit enhancement agreement with
the Federal National Mortgage Association.
(c) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(d) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(e) A provision for possible loss of $2,500,000 was recognized in December 1996
to more properly reflect the fair value of this community.
(f) The land associated with this community is leased by ATLANTIC through the
year 2058 under an agreement with the Metropolitan Nashville Airport
Authority.
(g) The FNMA credit enhancement agreement requires payments to be made to a
principal reserve fund.
(h) This community is leasing completed units.
(i) 19.24 acres purchased in 1995; 9.86 acres purchased in 1996.
(j) As of December 31, 1996, these properties were under construction or in
planning and owned.
(k) Land held for sale.
(l) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and PTR.
At December 31, 1996 convertible mortgage notes in the amount of $112,639
were payable to PTR (carried at $101,309, net of unamortized discount, in
the accompanying financial statements).
(m) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and
ATLANTIC. At December 31, 1996 there were no amounts funded on the
convertible mortgage notes payable to ATLANTIC.
(n) Land held for future development.
F-32
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTE TO SCHEDULE III
AS OF DECEMBER 31, 1996
The following is a reconciliation of the carrying amount and related
accumulated depreciation of ATLANTIC's and Homestead's investment in real
estate, at cost (in thousands):
----------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
CARRYING AMOUNT 1996 1995 1994
--------------- ---------- --------- ---------
<S> <C> <C> <C>
Beginning balances $ 888,928 $631,260 $ 31,005
Acquisitions and renovation
expenditures 339,867 187,267 571,268
Development expenditures, including
land acquisitions 245,166 101,335 28,967
Recurring capital expenditures 2,783 - -
Provision for possible loss (2,500) - -
Dispositions (59,988) (30,934) -
---------- --------- ---------
Ending balances $1,414,256 $888,928 $831,260
========== ========= =========
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
ACCUMULATED DEPRECIATION 1996 1995 1994
------------------------ ---------- --------- ---------
<S> <C> <C> <C>
Beginning balances $ 23,561 $ 8,798 $ 28
Depreciation for the period 21,858 15,925 8,770
Accumulated depreciation of assets
acquired 6,683 - -
Accumulated depreciation--
dispositions (3,219) (1,152) -
---------- --------- ---------
Ending balances $ 48,883 $ 23,561 $ 8,798
========== ========= =========
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have audited the accompanying consolidated balance sheet of Security Capital
Group Incorporated and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Capital
Group Incorporated and Subsidiaries as of December 31, 1994, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 17, 1995
F-34
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Investment in Security Capital Realty Incorporated, at cost $57,110
Notes receivable 6,521
Cash and cash equivalents 4,939
Accounts receivable and accrued interest 3,520
Property and equipment, net 6,258
Intangible assets 11,816
Other assets 2,137
---------
Total assets $92,301
=========
<CAPTION>
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
<S> <C>
LIABILITIES:
Accounts payable and accrued expenses $15,902
Notes payable 250
Convertible subordinated debentures 70,178
---------
Total liabilities 86,330
---------
SHAREHOLDERS' EQUITY 5,971
---------
Total liabilities and shareholders' equity $92,301
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
INCOME:
Services Division revenues $38,900
Investment revenues 2,973
Interest and other income 1,534
---------
43,407
---------
EXPENSES:
General and administrative 43,768
Director fees 187
Depreciation and amortization 1,799
Interest expense 6,091
---------
51,845
---------
Net loss $(8,438)
=========
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
-------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CLASS A CLASS B
(VOTING) (NON-VOTING)
(325,000 SHARES (325,000 SHARES
AUTHORIZED) AUTHORIZED)
------------------ ------------------- ADDITIONAL TOTAL
NUMBER $.01 PAR NUMBER $.01 PAR PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL DEFICIT STOCK EQUITY
--------- -------- --------- -------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993 375 $0.004 25,616 $0.256 $27,194 $(10,449) $(2,071) $14,674
Purchase of treasury
shares - - (139) - - - (201) (201)
Issuance of shares - - 164 0.001 164 - - 164
Stock dividend 272 0.002 18,603 0.186 - - - -
Minority interest
acquired - - - - - (228) - (228)
Net loss - - - - - (8,438) - (8,438)
--- ------ ------ ------ ------- -------- ------- -------
Balances at December 31,
1994 647 $0.006 44,244 $0.443 $27,358 $(19,115) $(2,272) $ 5,971
=== ====== ====== ====== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (8,438)
Adjustments to reconcile net loss to net cash flow provided by
operating activities:
Depreciation and amortization 1,799
Decrease in accounts receivable and accrued interest 2,549
Increase in other assets (1,049)
Increase in accounts payable and accrued expenses 12,828
Decrease in accrued interest on debentures (2,331)
---------
Net cash provided by operating activities 5,358
---------
INVESTING ACTIVITIES:
Investments in Security Capital Realty Incorporated (17,791)
Sale of shares of Security Capital Realty Incorporated 8,089
Cash paid upon acquisition of businesses (7,500)
Advances under notes receivable (13,476)
Repayment of notes receivable 13,106
Increase in property and equipment (4,536)
Minority interest acquired (228)
---------
Net cash used by investing activities (22,336)
---------
FINANCING ACTIVITIES:
Advances under notes payable 250
Repayments of notes payable (4,175)
Net proceeds from issuance of debentures 9,612
Retirement of debentures (108)
Purchase of treasury stock (201)
Net proceeds from issuance of stock 164
---------
Net cash flow provided by financing activities 5,542
---------
Net decrease in cash and cash equivalents (11,436)
Cash and cash equivalents, beginning of year 16,375
---------
Cash and cash equivalents, end of year $ 4,939
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. GENERAL
Organization and Recent Merger:
A merger of Security Capital Group Incorporated ("GROUP") with and into
Security Capital Realty Incorporated ("REALTY") was approved by GROUP and
REALTY shareholders during the fourth quarter of 1994. The merger was effective
on January 1, 1995.
The merged entity ("Security Capital") is a private real estate company which
combines GROUP's and REALTY's two complementary businesses. The merged entity
owns controlling positions in three highly focused, fully integrated real
estate operating companies. The new entity also includes the Services Division,
which owns REIT Management and Property Management companies that direct these
operating businesses. The Services Division provides strategic guidance,
research, investment analysis, acquisition and development services, asset
management, property management, capital markets services and legal and
accounting services.
In August 1994, GROUP declared a dividend of .7242 shares to its stockholders.
The stock dividend was paid on August 22, 1994 to holders of record on August
12, 1994.
In the merger, each share of GROUP's outstanding stock was exchanged for 1.22
shares of REALTY stock. Also, each $1,000 principal amount of GROUP's 8.5%
convertible subordinated debentures was exchanged for $1,000 principal amount
of REALTY's convertible subordinated debentures due June 30, 2014 (the "2014
Convertible Debentures") plus 1.147 shares of REALTY stock (equaling 1.22
REALTY shares, on a fully converted basis, for each GROUP share into which the
GROUP debentures were convertible).
Each holder of an unexpired option or warrant to purchase GROUP stock or
debentures automatically received the right to exercise such option or warrant,
as the case may be (subject to the vesting provisions thereof and at the same
aggregate exercise price), for the securities of REALTY the holder could have
received pursuant to the merger had such option or warrant been exercised
immediately prior to the merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Financial Presentation:
The accompanying consolidated financial statements include the accounts of
GROUP and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Depreciation:
Depreciation of furniture and equipment is computed over the estimated useful
lives (generally 3 to 10 years) of the depreciable property on a straight-line
basis.
Goodwill:
Goodwill results from acquisitions of financial services companies and
represents acquisition costs in excess of net assets of the businesses
acquired. Goodwill, aggregating $12,540,111 at December 31, 1994, is included
in other assets in the accompanying consolidated balance sheets and is being
amortized on a straight-line basis over 15-20 years. Accumulated amortization
at December 31, 1994 was $723,806.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash in bank accounts and investments in
money market funds.
F-38
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SERVICES DIVISION
GROUP's Services Division owns REIT Management (defined below) and Property
Management companies which direct the operations and provide services to the
highly focused, fully integrated real estate operating companies REALTY owns.
Under the terms of separate agreements, GROUP's financial services subsidiaries
manage the operations of separate affiliated REITs ("REIT Managers") and
provide property management services to those REITs ("Property Managers"). Each
REIT Manager is paid a REIT Management fee based on a percentage of the REIT's
pre-management fee cash flow, after deducting regularly scheduled and assumed
mortgage principal payments, as defined in the REIT management agreements. The
fee is generally 16% of cash flow for operating REITs. The fee was 4% of cash
flow with respect to REALTY, except with respect to REALTY's cash flow from
affiliates in which it owns 90% or more of the common stock, as to which no fee
was paid by REALTY. The REIT and Property Management Agreements are generally
one year in term, renewable annually by the affiliated REIT and cancelable upon
sixty days' notice. Property management fees are at market rates and are paid
separately to GROUP's property management subsidiaries.
REIT and property management fees for the year ended December 31, 1994 were
earned from the following sources:
<TABLE>
<S> <C>
REIT management fees:
Security Capital Industrial Trust (NYSE: SCN), a publicly
held REIT which, at December 31, 1994, is 50.86% owned by
REALTY $ 8,673,200
Security Capital Pacific Trust (formerly Property Trust of
America) (NYSE: PTR), which acquired by merger Security
Capital Pacific Incorporated; at December 31, 1994, PTR,
a publicly held REIT, was 31.85% owned by REALTY and
Security Capital Pacific Incorporated, a private REIT,
was 97.61% owned by REALTY 14,878,295
Security Capital Atlantic Incorporated, a private REIT
subsidiary which, at December 31, 1994, was 72.16% owned
by REALTY 3,671,048
REALTY, a private REIT and an affiliate of GROUP 1,391,575
-----------
28,614,118
-----------
Property management fees:
Security Capital Industrial Trust 1,732,797
Security Capital Pacific Trust 6,736,532
Security Capital Atlantic Incorporated 1,316,842
-----------
10,286,171
-----------
Consolidated Services Division revenues $38,900,289
===========
</TABLE>
4. NOTES RECEIVABLE
The following is a summary of GROUP's notes receivable at December 31, 1994:
<TABLE>
<S> <C>
Directors' and officers'
investment notes $5,576,508
Other 944,916
----------
Total notes receivable $6,521,424
==========
</TABLE>
Directors and officers investment notes (used to fund a portion of the purchase
price of securities sold by GROUP and its affiliates) have a term of ten years,
bear interest at prime rate plus 1/4% (8.75% at December 31, 1994) and are
recourse to the respective borrowers.
F-39
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994:
<TABLE>
<S> <C>
Office furniture and equipment $ 7,439,119
Vehicles 132,938
Leasehold improvements 433,723
Other 51,824
-----------
8,057,604
Less accumulated depreciation (1,799,224)
-----------
Net property and equipment $ 6,258,380
===========
</TABLE>
Depreciation expense charged to operations was $1,004,837 for the year ended
December 31, 1994.
The useful lives of property and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Office furniture and equipment 5-10 Years
Vehicles 3-5 Years
Leasehold improvements 1-10 Years
Other 1-3 Years
</TABLE>
6. INVESTMENT IN REALTY
At December 31, 1994, GROUP's common stock investment in REALTY aggregated
$26,619,150, which represented 6.61% of REALTY's outstanding common stock.
Dividend income from REALTY for the year ended December 31, 1994 was
$1,153,419. This stock was cancelled in the GROUP/REALTY merger (see Note 1).
On June 5, 1994, REALTY declared a dividend distribution, payable to holders of
common stock of record on June 16, 1994, (the record date) of $757.50 principal
amount of 2014 Convertible Debentures for each share of common stock. These
debentures issued to GROUP in connection with such distribution were cancelled
in the GROUP/REALTY merger.
At December 31, 1994, the investment in REALTY, at cost, was as follows:
<TABLE>
<S> <C>
Common stock $26,619,150
2014 Convertible Debentures 30,490,844
-----------
Total Investment in REALTY $57,109,994
===========
</TABLE>
Total interest income recognized and received on the REALTY 2014 Convertible
Debentures for the year ended December 31, 1994 was $1,819,234.
On March 31, 1994, GROUP renewed a $20,000,000 loan facility to REALTY. As of
December 31, 1994 there was no outstanding balance under the loan facility.
Total interest income recognized on this loan for the year ended December 31,
1994 was $230,935.
7. LEASES
Minimum future rental payments under non-cancelable operating leases,
principally for office space having remaining terms in excess of one year as of
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
YEARS
ENDED
DECEMBER
31, AMOUNT
-------- ----------
<S> <C>
1995 $1,604,987
1996 1,440,372
1997 1,100,541
1998 572,090
1999 428,210
Thereafter 1,136,521
----------
$6,282,721
==========
</TABLE>
Lease expense for the year ended December 31, 1994 was $1,539,052. Included
above is a ten-year lease agreement, which began February 1, 1994, with
Security Capital Industrial Trust, an affiliate, with a total remaining
obligation of $2,528,000.
F-40
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONVERTIBLE SUBORDINATED DEBENTURES
The debentures bear interest at the rate of 8.5% per annum. GROUP may defer
annually interest at the rate of 4.5%, which is payable at the maturity of the
debentures (or earlier if the Board so directs). The balance of the interest
amount (4%) is payable to the extent of the net cash flow of GROUP and may be
deferred until payable out of net cash flow. Any amounts deferred accrue
interest at the rate of 8.5%. On January 1, 1995 all 8.5% convertible
subordinated debentures were exchanged for REALTY 2014 Convertible Debentures
and shares of REALTY stock (see Notes 1 and 6). In conjunction with the merger
with REALTY (see Note 1), all current and deferred accrued interest, amounting
to $8,284,407, was paid on December 31, 1994.
On March 31, 1994 GROUP issued $9,833,470 principal amount of 8.5% convertible
subordinated debentures, pursuant to a rights offering to existing
shareholders.
9. INCOME TAXES
GROUP has no significant deferred tax assets or deferred tax liabilities other
than its net operating loss carryforwards incurred from inception through
December 31, 1994. No tax benefits applicable to such operating losses have
been recognized, since GROUP would be unable to carry the operating loss back
to prior periods for federal income tax purposes. GROUP has net operating loss
carryforwards of approximately $18,310,000 at December 31, 1994. If not
previously utilized, the loss carryforwards will expire beginning 2005 through
2009. Subsequent to the merger (see Note 1), utilization of existing net
operating loss carryforwards may be limited by IRC Section 382 (limitation on
net operating loss carryforwards following ownership change) and the Separate
Return Limitation Year ("SRLY") rules.
10. SHARE OPTION PLAN
GROUP's Board of Directors has approved stock option plans and warrants for
officers and directors. The plans permit options to be granted to directors and
non-director employees to acquire units of Class B Common Non-voting Stock and
8.5% convertible subordinated debentures due 2006.
The securities reserved for options and warrant grants and the options and
warrants granted are summarized as follows:
<TABLE>
<CAPTION>
SHARES DEBENTURES
--------- -----------
<S> <C> <C>
Total options and
warrants reserved
for grants 20,833 $29,581,916
========= ===========
Options granted:
Directors 3,466 $ 4,928,802
Employees 12,488 17,733,503
Warrants 4,675 6,636,000
--------- -----------
Total options and
warrants granted 20,629 $29,298,305
========= ===========
</TABLE>
Due to the stock dividend, the option and warrant shares have been increased by
.7242 (see Note 1). All options and warrants had exercise prices of $580 per
share (adjusted to $475 per Security Capital share in the GROUP/REALTY merger)
for the common stock and par for the debentures and must be exercised in units
of both common stock and debentures.
Options granted to directors are one-half vested, with the balance to be fully
vested on January 1, 1996. These options expire December 31, 2002. Of the
options granted to employees, options for 2,664 shares and $3,785,503 of
debentures are fully vested and expire January 1, 1997. The remaining employee
options vest over a period from January 1, 1996 to December 31, 2002, and
expire December 31, 2002. Under the 1995 Option Plan, 1,311 shares
F-41
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $993,367 of debentures were granted to employees. The 1995 Option Plan is
subject to shareholder approval. If shareholder approval is not received,
options will convert to "phantom" options. If that conversion occurs, on the
option's expiration date the option holder will receive cash equal to the net
value of the option.
The Warrants granted to a director who is also an officer are fully vested and
expire on December 31, 2002. No options or warrants have been exercised.
11. BUSINESS ACQUISITIONS
On May 12, 1994, GROUP entered into an asset purchase agreement with Laing
Properties, Incorporated and Laing Management Company. The total purchase price
was $6,000,000 cash and the entire amount was recorded as goodwill. The
transaction occurred simultaneously with Security Capital Atlantic
Incorporated's acquisition of $336 million of multifamily real estate
properties. A subsidiary of GROUP is managing these properties.
On October 28, 1994, subsidiary of GROUP entered into an asset purchase
agreement with The Krauss/Schwartz Company. The total purchase price was
$1,500,000 cash and the entire amount was recorded as goodwill. The transaction
occurred simultaneously with Security Capital Industrial Trust's acquisition of
$89 million of industrial real estate properties. These properties are managed
by a subsidiary of GROUP.
In a series of transactions completed in January 1994, GROUP acquired all the
outstanding stock of WilsonSchanzer, Inc., a multifamily property management
company, and renamed it SCG Realty Services Incorporated ("REALTY SERVICES").
As part of the consideration, GROUP issued a $250,000 note payable and a three-
year option to purchase Class B common stock and debentures for an exercise
price of $270,000. The note payable bears interest at Texas Commerce Bank prime
rate plus 1/4% and is exchangeable for stock of REALTY. GROUP also acquired the
assignment of rights under a management agreement from the selling shareholders
for $560,000, payable in four equal, annual installments expiring January 31,
1997.
Goodwill applicable to these transactions is being amortized on a straight-line
basis over 15-20 years (see Note 2).
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have audited the balance sheets of SECURITY CAPITAL PACIFIC TRUST as of
December 31, 1996 and 1995 and the related statements of earnings,
shareholders' equity and cash flows for each of the years in the three-year
period ending December 31, 1996. In connection with our audits of the financial
statements, we also have audited Schedule III, Real Estate and Accumulated
Depreciation. These financial statements and financial statement schedule are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SECURITY CAPITAL PACIFIC TRUST
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 29, 1997, except as to Note 13which is as of March 10, 1997
F-43
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Real estate $2,153,363 $1,855,866
Less accumulated depreciation 97,574 81,979
---------- ----------
2,055,789 1,773,887
Homestead Notes 176,304 -
Other mortgage notes receivable 13,525 15,844
---------- ----------
Net investments 2,245,618 1,789,731
Cash and cash equivalents 5,643 26,919
Accounts receivable and accrued interest 4,157 3,318
Other assets 27,014 21,031
---------- ----------
Total assets $2,282,432 $1,840,999
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit $ 110,200 $ 129,000
Long-term debt 580,000 200,000
Mortgages payable 217,188 158,054
Distributions payable 24,537 22,437
Accounts payable 22,782 21,040
Accrued expenses and other liabilities 60,217 34,800
---------- ----------
Total liabilities 1,014,924 565,331
---------- ----------
Shareholders' equity:
Series A Preferred Shares (6,494,967 convertible
shares in 1996 and 9,200,000 in 1995; stated
liquidation preference of $25 per share) 162,374 230,000
Series B Preferred Shares (4,200,000 shares issued;
stated liquidation preference of $25 per share) 105,000 105,000
Common Shares (shares issued--75,510,986 in 1996 and
72,375,819 in 1995) 75,511 72,376
Additional paid-in capital 918,434 952,679
Unrealized holding gain on Homestead Notes 74,923 -
Distributions in excess of net earnings (68,734) (82,450)
Treasury shares (164,901 in 1995) - (1,937)
---------- ----------
Total shareholders' equity 1,267,508 1,275,668
---------- ----------
Total liabilities and shareholders' equity $2,282,432 $1,840,999
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental income $322,046 $262,473 $183,472
Interest income on Homestead Notes 2,035 - -
Other interest income 2,165 2,400 2,633
--------- --------- ---------
326,246 264,873 186,105
--------- --------- ---------
Expenses:
Rental expenses 89,550 73,808 55,772
Real estate taxes 26,962 21,326 16,093
Property management fees paid to affiliates 11,610 8,912 7,148
Depreciation 44,887 36,685 24,614
Interest 35,288 19,584 19,442
REIT management fee paid to affiliate 22,191 20,354 13,182
General and administrative 1,077 952 784
Provision for possible loss on investments - 420 1,600
Other 592 1,136 751
--------- --------- ---------
232,157 183,177 139,386
--------- --------- ---------
Earnings from operations 94,089 81,696 46,719
Gain on sale of investments, net 37,492 2,623 -
--------- --------- ---------
Net earnings before extraordinary item 131,581 84,319 46,719
Less extraordinary item-loss on early
extinguishment of debt 870 - -
--------- --------- ---------
Net earnings 130,711 84,319 46,719
Less Preferred Share dividends 24,167 21,823 16,100
--------- --------- ---------
Net earnings attributable to Common Shares $106,544 $ 62,496 $ 30,619
========= ========= =========
Weighted-average Common Shares outstanding 73,057 67,052 46,734
========= ========= =========
Per Common Share amounts
Net earnings before extraordinary item $ 1.47 $ 0.93 $ 0.66
========= ========= =========
Net earnings $ 1.46 $ 0.93 $ 0.66
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
-----------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST, $1.00 PAR VALUE
--------------------------------
SERIES A SERIES B
PREFERRED PREFERRED
SHARES AT SHARES AT COMMON
AGGREGATE AGGREGATE SHARES ADDITIONAL UNREALIZED DISTRIBUTIONS
LIQUIDATION LIQUIDATION AT PAR PAID-IN HOLDING IN EXCESS OF TREASURY
PREFERENCE PREFERENCE VALUE CAPITAL GAINS NET EARNINGS SHARES TOTAL
----------- ----------- ------- ---------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993 $230,000 $ - $44,809 $523,053 $ - $(40,916) $(1,929) $ 755,017
Net earnings - - - - - 46,719 - 46,719
Common Share
distributions paid - - - - - (46,121) - (46,121)
Redemption of
shareholder purchase
rights - - - - - (448) - (448)
Net increase in Common
Share distributions
accrued - - - - - (3,345) - (3,345)
Preferred Share
dividends paid - - - - - (16,100) - (16,100)
Sale of shares, net of
expenses - - 5,594 95,482 - - - 101,076
Dividend Reinvestment
and Share Purchase
Plan, net - - 216 3,607 - - - 3,823
Exercise of stock
options, net - - 2 19 - - - 21
-------- -------- ------- -------- ------- -------- ------- ----------
Balances at December 31,
1994 230,000 - 50,621 622,161 - (60,211) (1,929) 840,642
Net earnings - - - - - 84,319 - 84,319
Common Share
distributions paid - - - - - (76,804) - (76,804)
Net increase in Common
Share distributions
accrued - - - - - (7,931) - (7,931)
Preferred Share
dividends paid - - - - - (21,823) - (21,823)
Issuance of shares, net
of expenses - 105,000 21,694 329,591 - - - 456,285
Dividend Reinvestment
and Share Purchase
Plan, net - - 61 927 - - - 988
Cost of treasury shares
purchased - - - - - - (8) (8)
-------- -------- ------- -------- ------- -------- ------- ----------
Balances at December 31,
1995 230,000 105,000 72,376 952,679 - (82,450) (1,937) 1,275,668
Net earnings - - - - - 130,711 - 130,711
Common Share
distributions paid - - - - - (90,728) - (90,728)
Net increase in Common
Share distributions
accrued - - - - - (2,100) - (2,100)
Preferred Share
dividends paid - - - - - (24,167) - (24,167)
Conversion of Series A
Preferred shares into
Common Shares (67,626) - 3,294 64,332 - - - -
Distribution of
Homestead common stock
and warrants at book
value, net of
transaction expenses - - - (96,914) - - - (96,914)
Unrealized holding gain
on Homestead Notes - - - - 74,923 - - 74,923
Cost of treasury shares
purchased - - - - - - (1) (1)
Retirement of 164,957
treasury shares - - (165) (1,773) - - 1,938 -
Exercise of stock
options, net - - 6 110 - - - 116
-------- -------- ------- -------- ------- -------- ------- ----------
Balances at December 31,
1996 $162,374 $105,000 $75,511 $918,434 $74,923 $(68,734) $ - $1,267,508
======== ======== ======= ======== ======= ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 130,711 $ 84,319 $ 46,719
Adjustments to reconcile net earnings to
net cash flow provided by operating
activities:
Depreciation and amortization 46,911 38,228 26,517
Provision for possible loss on
investments - 420 1,600
Gain on sale of investments, net (37,492) (2,623) -
Increase in accounts payable 565 2,719 3,463
(Decrease) increase in accrued real
estate taxes (2,168) 2,167 7,874
Increase in accrued interest on long-
term debt 9,214 - 5,391
Increase in accrued expenses and other
liabilities 4,240 4,857 4,264
Increase in other operating assets (8,042) (8,292) (1,203)
--------- --------- ---------
Net cash flow provided by operating
activities 143,939 121,795 94,625
--------- --------- ---------
Investing activities:
Real estate investments (628,640) (311,619) (380,688)
Advances on Homestead Notes (25,242) - -
Mortgage notes receivable - (1,538) (162)
Principal repayments on other mortgage
notes receivable 2,319 7,701 189
Proceeds from dispositions, net of
closing costs 291,056 10,968 12,146
Operating cash contributed in Homestead
transaction (428) - -
--------- --------- ---------
Net cash flow used in investing
activities (360,935) (294,488) (368,515)
--------- --------- ---------
Financing activities:
Proceeds from sale of shares, net of
expenses - 317,614 101,076
Proceeds from lines of credit 510,985 278,000 266,250
Principal payments on lines of credit (529,785) (302,900) (215,750)
Proceeds from Dividend Reinvestment and
Share Purchase Plan, net - 988 3,823
Proceeds from long-term debt 380,000 - 200,000
Debt issuance costs incurred (5,659) (1,496) (4,422)
Cash distributions paid on Common Shares (90,728) (76,804) (46,121)
Cash dividends paid on Preferred Shares (24,167) (21,823) (16,100)
Redemption of shareholder purchase
rights - - (448)
Regularly scheduled principal payments
on mortgages payable (2,037) (1,748) (1,398)
Principal prepayment of mortgages
payable (43,005) (303) (10,474)
Proceeds from exercise of stock options 116 (8) 21
--------- --------- ---------
Net cash flow provided by financing
activities 195,720 191,520 276,457
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (21,276) 18,827 2,567
Cash and cash equivalents at beginning of
year 26,919 8,092 5,525
--------- --------- ---------
Cash and cash equivalents at end of year $ 5,643 $ 26,919 $ 8,092
========= ========= =========
Non-cash investing and financing
activities:
Assumption of mortgages payable upon
purchase of multifamily communities $ 104,176 $ 12,078 $ 56,624
Series A Preferred Shares converted to
Common Shares $ 67,626 $ - $ -
Accrual of Common Share distributions $ 24,537 $ 22,437 $ 14,506
Fair market value adjustment related to
Homestead Notes $ 74,923 $ - $ -
Other:
Homestead transaction--See description
in Note 2
Merger with Security Capital Pacific
Incorporated--See description in Note 3
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Security Capital Pacific Trust (New York Stock Exchange Symbol: "PTR") is an
equity real estate investment trust ("REIT") organized in 1963 under the laws
of the state of Maryland, which primarily owns, develops, acquires and operates
income-producing multifamily communities in the western United States.
Principles of Financial Presentation
The accounts of PTR and its majority-owned subsidiaries are consolidated in the
accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affected the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual amounts realized or paid could differ from those estimates.
Cash and Cash Equivalents
PTR considers all cash on hand, demand deposits with financial institutions and
short-term, highly liquid investments with original maturities of three months
or less to be cash equivalents.
Real Estate and Depreciation
Real estate is carried at depreciated cost, which is not in excess of estimated
fair market value.
Costs directly related to the acquisition (including costs related to certain
planned renovations identified during PTR's pre-acquisition due diligence),
development or improvement of real estate, and certain indirect costs related
to developments are capitalized. Costs incurred in connection with the pursuit
of unsuccessful acquisitions or developments are expensed at the time the
pursuit is abandoned.
Depreciation is computed over the expected useful lives of depreciable property
on a straight-line basis. Real estate assets are depreciated principally over
the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements 20-40 years
Furnishings and other 2-10 years
</TABLE>
Make-Ready and Repairs and Maintenance
Make-ready (expenditures incurred in preparing a vacant multifamily unit for
the next tenant) and repairs and maintenance expenditures, other than
acquisition-related renovation costs identified during PTR's pre-acquisition
due diligence, are expensed as incurred. PTR generally expenses carpet and
appliance repairs and replacements after any planned acquisition-related
renovation expenditures for such items have been incurred.
Interest
During 1996, 1995 and 1994, the total interest paid in cash on all outstanding
debt, net of interest capitalized, was $23,631,000, $17,674,000 and
$11,949,000, respectively.
PTR capitalizes interest incurred during the construction period as part of the
cost of multifamily communities under development. Interest capitalized during
1996, 1995 and 1994 aggregated $16,941,000, $11,741,000 and $6,029,000,
respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of equity securities are
deducted from shareholders' equity. Costs incurred in connection with the
issuance or renewal of debt are capitalized as other assets and amortized over
the term of the related loan or the renewal period. Amortization of loan costs
included in interest expense for 1996, 1995 and 1994 was $2,233,000, $1,543,000
and $1,903,000, respectively.
F-48
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Interest Rate Contracts
From time to time, PTR utilizes derivative financial instruments as hedges in
anticipation of future debt offerings to manage well-defined interest rate
risk. Unrealized changes in the market value of interest rate contracts are
deferred until the hedged transaction is consummated and realized gains and
losses resulting from changes in the market value of these contracts are
deferred and amortized into interest expense over the life of the related debt
issuance.
Revenue and Gain Recognition
PTR leases its multifamily units under operating leases with terms of generally
less than one year. Rental income is recognized according to the terms of the
underlying leases which approximates the revenue which would be recognized if
spread evenly over the lease term.
Gains on sales of real estate are recorded when the recognition criteria set
forth by generally accepted accounting principles have been met.
Rental Expenses
Rental expenses shown on the accompanying Statement of Earnings include costs
of on-site personnel, utilities, repairs and maintenance, make-ready, property
insurance, marketing, landscaping, property management fees paid to
unaffiliated companies, and other on-site administrative costs.
Federal Income Taxes
PTR has made an election to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended. PTR believes it qualifies as a REIT and, accordingly, no
provisions have been made for federal income taxes in the accompanying
financial statements.
Per Share Data
Primary earnings per share is computed based on the weighted-average number of
common shares of beneficial interest, par value $1.00 per share ("Common
Shares"), outstanding. Fully diluted earnings per Common Share is calculated
from the weighted-average Common Shares outstanding plus the Common Shares that
would be outstanding assuming conversion of all outstanding cumulative
convertible Series A Preferred Shares of Beneficial Interest, par value $1.00
per share ("Series A Preferred Shares"), outstanding Trustee options and
certain warrants exercisable by third parties (Note 8). For purposes of the
fully diluted earnings per share calculation, dividends on the Series A
Preferred Shares are added back to net earnings attributable to Common Shares.
Primary earnings per share and fully diluted earnings per share were
approximately the same for each of the three years presented, although there
was reportable dilution for the third quarter of 1996. See Note 10.
Reclassifications
Certain of the 1995 and 1994 amounts have been reclassified to conform to the
1996 presentation.
F-49
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) HOMESTEAD TRANSACTION
On October 17, 1996, PTR, Security Capital Atlantic Incorporated ("ATLANTIC"),
Security Capital Group Incorporated ("Security Capital") and Homestead Village
Incorporated ("Homestead") consummated a merger agreement pursuant to which
each of PTR, ATLANTIC and Security Capital contributed, through a series of
merger transactions, all of their respective assets related to their Homestead
Village(R) extended-stay lodging assets to Homestead, a newly formed company.
In connection with the transaction, PTR and ATLANTIC entered into funding
commitment agreements to finance the development of certain Homestead
properties.
PTR contributed 54 Homestead Village(R) properties (or the rights to acquire
such properties) ("Homestead Assets") to Homestead in exchange for 9,485,727
shares of Homestead common stock. Simultaneously, PTR received 6,363,789
warrants to acquire additional shares of Homestead common stock at a price of
$10.00 per share in exchange for entering into a funding commitment agreement.
In this agreement PTR agreed to provide up to $198.8 million in secured
financing for developments to Homestead in exchange for up to $221.3 million in
convertible mortgage notes ("Homestead Notes"), including those existing on the
properties at the transaction date. See Note 5 for information on the Homestead
Notes.
Upon full funding of the Homestead Notes and after giving effect to the
Homestead Distribution described below, PTR's conversion rights would represent
a 34.7% ownership interest in Homestead. This ownership interest assumes no
further equity offerings by Homestead, conversion of all Homestead Notes by PTR
and ATLANTIC and exercise of all outstanding warrants.
PTR's Homestead common stock and warrants to acquire additional common stock
were distributed on November 12, 1996 to holders of record of Common Shares on
October 29, 1996 (the "Homestead Distribution"). Each PTR shareholder received
0.125694 shares of Homestead common stock and 0.084326 warrants per PTR Common
Share plus cash for fractional shares and warrants.
As of October 17, 1996, the Homestead Assets owned by PTR constituted 7.1% of
PTR's total assets, and PTR's investment in its wholly owned Homestead Village
subsidiaries, including intercompany advances, constituted less than 1% of
PTR's total assets. PTR's Homestead Village(R) operations accounted for
approximately 8.2% of PTR's total earnings from operations from January 1, 1996
to October 17, 1996.
The Homestead transaction had the following impact on PTR's balance sheet as of
October 17, 1996, after giving effect to the Homestead Distribution (in
thousands):
<TABLE>
<S> <C>
Real estate contributed, net $154,731
Other non-cash operating assets and liabilities contributed,
net 3,001
Operating cash contributed 428
Deferred revenue (included in accrued expenses) relating to
PTR's funding commitment 14,700
---------
$172,860
=========
Homestead Notes received (funded amount) $ 75,946
Homestead common stock and warrants distributed to PTR common
shareholders (recorded as a reduction of additional paid-in
capital) 96,914
---------
$172,860
=========
</TABLE>
F-50
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) 1995 MERGER OF SECURITY CAPITAL PACIFIC INCORPORATED AND CONCURRENT
SUBSCRIPTION OFFERING
On March 23, 1995, PTR consummated a merger (the "Merger") of Security Capital
Pacific Incorporated ("PACIFIC"), a Maryland corporation, with and into PTR.
PACIFIC was a private multifamily REIT controlled by Security Capital, PTR's
principal shareholder. PACIFIC's portfolio consisted primarily of 17 operating
multifamily communities aggregating 5,579 units. In the Merger, each
outstanding share of PACIFIC common stock was converted into the right to
receive 0.611 Common Shares. As a result, 8,468,460 of PTR's Common Shares
valued at $138.7 million ($16.375 per share) were issued in the Merger in
exchange for all of the outstanding shares of PACIFIC common stock. In
addition, PTR assumed $51.9 million on PACIFIC's line of credit and $54.4
million of mortgage debt. The Merger has been accounted for as a purchase and,
accordingly, the results of operations of PACIFIC have been included in PTR's
financial statements from March 23, 1995.
The following summarized pro forma (unaudited) information assumes the Merger
occurred on January 1, 1994, and represents the combined historical operating
results of PTR and PACIFIC for the respective pro forma periods. No material
pro forma adjustments to revenue and expenses were required. The weighted-
average Common Shares outstanding have been adjusted to reflect the Merger
conversion rate (0.611 Common Shares for each share of PACIFIC common stock).
The pro forma financial information does not necessarily reflect the results of
operations that would have occurred had PACIFIC and PTR constituted a single
entity during such periods (in thousands, except per share amounts).
------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------- ---------
<S> <C> <C>
Rental Income $271,091 $204,337
========= =========
Net earnings attributable to Common Shares $ 64,152 $ 36,512
========= =========
Weighted-average Common Shares outstanding 68,955 52,846
========= =========
Per Common Share amounts:
Net earnings attributable to Common Shares $ 0.93 $ 0.69
========= =========
</TABLE>
Concurrently with the consummation of the Merger, PTR completed a subscription
offering of 13.2 million Common Shares pursuant to which PTR received net
proceeds of $216.3 million. The subscription offering was designed to allow
shareholders of PTR to purchase Common Shares at the same price at which
PACIFIC shareholders acquired Common Shares in the Merger ($16.375 per Common
Share). Security Capital purchased $50 million (3.1 million Common Shares at
$16.375 per Common Share) in the subscription offering pursuant to the
oversubscription privilege.
F-51
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) REAL ESTATE
Investments
Equity investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
---------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995
--------------------- ---------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities $1,861,561 42,702 $1,507,458 38,737
Communities under
construction 186,710 5,479(1) 160,487 5,424(1)
Development communities
in planning:
Development communities
owned 48,504 3,351(1) 19,921 2,047(1)
Development communities
under control (2) 3,737(1) (2) 2,408(1)
---------- --------- ---------- ---------
Total development
communities 48,504 7,088 19,921 4,455
---------- --------- ---------- ---------
Land held for future
development 30,043 - 28,796 -
---------- --------- ---------- ---------
Total multifamily 2,126,818 55,269 1,716,662 48,616
---------- --------- ---------- ---------
Homestead Assets - 108,460
Other non-multifamily 26,545 30,744
---------- ----------
Total real estate $2,153,363 $1,855,866
========== ==========
</TABLE>
- --------
(1) Unit information is based on management's estimates and is unaudited.
(2) PTR's investment as of December 31, 1996 and 1995 for developments in
planning and under control was $1.6 million and $2.2 million, respectively, and
is reflected in the "other assets" caption of PTR's balance sheets.
The change in investments in real estate, at cost, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $1,855,866 $1,296,288 $ 872,610
---------- ---------- ----------
Multifamily:
Acquisitions and renovations
expenditures 463,935 385,356 270,024
Development expenditures, excluding
land
acquisitions 187,377 117,980 111,184
Acquisition and improvement of land
held for current or future
development 20,880 11,255 16,789
Recurring capital expenditures 7,992 5,119 3,746
Dispositions (269,693) (6,166) (11,902)
---------- ---------- ----------
Net multifamily activity subtotal 410,491 513,544 389,841
---------- ---------- ----------
Non-multifamily:
Homestead development expenditures,
including land acquisitions 54,883 48,247 35,943
Contribution of Homestead Assets
(Note 2) (161,370) - -
Non-multifamily dispositions (6,527) (2,235) (331)
Provisions for possible losses - (220) (1,600)
Other 20 242 (175)
---------- ---------- ----------
Balance at December 31 $2,153,363 $1,855,866 $1,296,288
========== ========== ==========
</TABLE>
F-52
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At January 29, 1997, PTR had contingent contracts or letters of intent, subject
to PTR's final due diligence, to acquire land for the near term development of
an estimated 3,507 multifamily units with an aggregate estimated development
cost of $264.5 million. At the same date, PTR also had contingent contracts or
letters of intent, subject to final due diligence, for the acquisition of 964
additional operating multifamily units with a total expected investment of
$77.2 million, including planned renovations.
At January 29, 1997, PTR had unfunded development commitments for developments
under construction of $158.8 million.
Pre-Sale Agreements and Development Subsidiary
To enhance its flexibility in developing and acquiring multifamily communities
which meet PTR's investment criteria, PTR has and will enter into presale
agreements with third-party owner/developers to acquire communities developed
by such owner/developers. PTR has and will fund such developments through
mortgage loans on the communities. For financial reporting purposes, these
transactions are recorded as real estate developments rather than mortgage
loans due to PTR's commitment to acquire these properties upon completion.
In addition, to provide greater flexibility for the use of land acquired for
development and to facilitate disposition of excess parcels, PTR has and will
make mortgage loans to PTR Development Services Incorporated ("PTR Development
Services") to purchase land for development. PTR may also fund developments of
multifamily communities by PTR Development Services where the particular
community or submarket does not meet PTR's objectives for long-term ownership
but presents an attractive investment opportunity. PTR owns all of the
preferred stock of PTR Development Services, which entitles PTR to
substantially all of the net operating cash flow (95%) of PTR Development
Services. An unaffiliated trust owns all of the common stock of PTR Development
Services. The common stock is entitled to receive the remaining 5% of net
operating cash flow.
As of December 31, 1996, the outstanding balance of development and mortgage
loans made by PTR to third-party owner/developers and PTR Development Services
aggregated $127.3 million and $18.8 million, respectively. The activities of
third-party owner/developers and PTR Development Services are consolidated with
PTR's activities and all intercompany transactions have been eliminated in
consolidation.
Gains and Provision for Loss on Real Estate and Investments
Each year, REIT Management formulates operating and capital plans based on an
ongoing active review of PTR's portfolio. Based in part upon the market
research provided by Security Capital Investment Research Incorporated and in
an effort to optimize its portfolio composition, PTR may from time to time seek
to dispose of assets that in management's view no longer meet PTR's long-term
investment objectives. The proceeds from these selected dispositions will be
redeployed, typically through tax-deferred exchanges, into assets that in PTR's
view offer better long-term cash flow growth prospects. As a result of this
asset optimization strategy, PTR disposed of 22 multifamily communities and one
industrial building during 1996, representing aggregate net proceeds of $291.1
million, and disposed of one multifamily property in the fourth quarter of
1995, representing net proceeds of $8.8 million. For federal income tax
purposes, the majority of the dispositions were structured as tax-deferred
exchanges which deferred gain recognition. For financial reporting purposes,
however, the transactions qualified for profit recognition and aggregate gains
of $37.5 million and $2.6 million were recorded for 1996 and 1995,
respectively.
Statement of Financial Accounting Standards No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of
("SFAS No. 121"), adopted by PTR effective January 1, 1996, establishes
accounting standards for the review of long-lived assets to be held and used
for impairment whenever the carrying amount of an asset may not be recoverable.
SFAS No. 121 also requires that certain long-lived assets to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell, PTR
did not recognize any losses on the date it adopted SFAS No. 121.
As part of PTR's asset optimization strategy, 19 communities and two non-
multifamily properties were held for disposition as of December 31, 1996. The
aggregate carrying value of properties held for disposition was $178.9 million
at December 31, 1996. Each property's carrying value is less than or equal to
its estimated fair market
F-53
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
value, net of estimated costs to sell. Such properties are not depreciated
during the period for which they are determined to be held for disposition.
Subject to normal closing risks, PTR expects to complete the disposition of all
properties during 1997 and redeploy the net proceeds from such dispositions
through tax-deferred exchanges into the acquisition of multifamily communities.
The earnings from operations for properties held for dispositions which are
included in PTR's earnings from operations for 1996, 1995 and 1994 were $15.8
million, $15.3 million and $10.5 million, respectively.
PTR's other real estate investments are periodically evaluated for impairment
and provisions for possible losses are made if required. As a result of such
evaluation, PTR recorded a provision for possible loss of $220,000 and
$1,600,000 during 1995 and 1994, respectively, relating to a non-multifamily
investment which was subsequently sold in October 1995. Also, during 1995 it
was determined that PTR could potentially be liable for certain maintenance
items under the terms of a 1993 master lease agreement on a non-multifamily
property which resulted in the recording of an estimated provision for loss of
$200,000. The recording of a provision for loss has no impact on cash flow from
operating activities. As of December 31, 1996, PTR's real estate investments
were carried at depreciated cost, which is not in excess of estimated fair
market value.
(5) MORTGAGE NOTES RECEIVABLE
Homestead Convertible Mortgage Notes
In connection with the Homestead transaction described in Note 2 and pursuant
to fundings which have occurred under the funding commitment agreement, PTR
holds Homestead Notes. The Homestead Notes were created under a master facility
providing for aggregate fundings of up to $198.8 million in exchange for
Homestead Notes with a face amount of up to $221.3 million. Under the terms of
the funding commitment agreement, PTR receives approximately $1.00 in principal
amount of Homestead Notes for every $.90 funded (i.e., the Homestead Notes are
issued at a discount). The discount is amortized into interest income over the
term of the Homestead Notes using a method which approximates the effective
interest method. Maximum fundings are established for each individual
development project and specific liens are recorded to secure payment. The
Homestead Notes are cross-collateralized, which enables PTR to foreclose or
take possession of any one or more of the underlying properties upon the
occurrence of an event of default. The Homestead Notes require semi-annual
interest-only payments at 9% per annum of the face amount of the Homestead
Notes outstanding, are callable at the option of Homestead after 5 years and
mature on October 31, 2006.
The Homestead Notes are convertible into Homestead common stock after March 31,
1997 on the basis of one share of Homestead common stock for every $11.50 of
principal amount outstanding, subject to adjustment. The initial value
attributed to the conversion feature has been recorded as an additional
component of the Homestead Notes' balance and the corresponding discount is
being amortized into interest income over the term of the Homestead Notes using
a method which approximates the effective interest method. The difference
between the fair value of the Homestead Notes (assuming conversion), based upon
the trading price of Homestead's common stock on the American Stock Exchange at
December 31, 1996, ($18.00) and the amortized cost of the Homestead Notes is
reflected as an additional component of the Homestead Notes' balance and as an
unrealized holding gain in Shareholders' Equity.
As described in Note 2, PTR also received Homestead warrants in exchange for
entering into the funding commitment agreement. The warrants were distributed
to PTR shareholders with the Homestead common stock. The value associated with
the receipt of the Homestead warrants has been recorded as deferred revenue
which is included in accrued expenses and other liabilities in the accompanying
1996 Balance Sheet and is being amortized into interest income using a method
which approximates the effective interest method over the term of the Homestead
Notes.
The effective interest rate on the Homestead Notes as a percentage of the
"funded" balance, including amortization of discount and deferred revenue, is
approximately 12.4% per annum (10.7% excluding conversion feature and warrant-
related amortization).
F-54
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Following is a reconciliation of the Homestead Notes' components described
above to the amount reflected in the accompanying 1996 Balance Sheet (in
thousands).
<TABLE>
<S> <C>
Face amount of Homestead Notes $ 112,639
Original issue discount (11,451)
---------
Amount funded 101,188
Amortization of original issue discount 121
Conversion feature--initial value 7,933
Unamortized discount on conversion feature (7,861)
Fair value adjustment 74,923
---------
Carrying value at December 31, 1996 $ 176,304
=========
</TABLE>
As of December 31, 1996, PTR had funded $101.2 million of its funding
commitment. This leaves a remaining commitment under the funding commitment
agreement of approximately $97.6 million, which will be provided to Homestead
to fund developments as needed on development properties contributed by PTR.
Other Mortgage Notes Receivable
The change in investments in other mortgage notes receivable which primarily
originated in connection with PTR's sale of non-multifamily communities
consisted of the following (in thousands):
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balances at January 1 $ 15,844 $ 22,597 $ 22,624
Notes originated - 1,538 162
Reduction of principal (2,319) (8,291) (189)
--------- --------- ---------
Balances at December 31 $ 13,525 $ 15,844 $ 22,597
========= ========= =========
</TABLE>
Interest rates on mortgage notes receivable range from 7.00% to 10.00% with a
weighted-average rate of 8.4%. Maturity dates on mortgage notes receivable
range from 1998 to 2008.
(6) BORROWINGS
Credit Facilities
PTR has a $350 million unsecured revolving line of credit with Texas Commerce
Bank, National Association ("TCB"), as agent for a group of financial
institutions (collectively, the "Lenders"). The line matures August 1998 and
may be extended annually for an additional year with the approval of the
Lenders. The line of credit bears interest at the greater of prime (8.25% at
December 31, 1996) or the federal funds rate plus 0.50% or at PTR's option,
LIBOR (5.50% at December 31, 1996) plus 1.125% (6.625% at December 31, 1996).
The spread over LIBOR can vary from LIBOR plus 0.75% to LIBOR plus 1.50% based
upon the rating of PTR's senior unsecured debt. Additionally, there is a
commitment fee on the average unfunded line of credit balance. The commitment
fee was $396,000, $502,000 and $224,000 for 1996, 1995 and 1994, respectively.
A summary of PTR's line of credit borrowings is as follows (dollars in
thousands):
----------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Total line of credit $ 350,000 $ 350,000 $ 275,000
Borrowings outstanding at December 31 99,750 129,000 102,000
Weighted-average daily borrowings 112,248 51,858 59,890
Maximum borrowings outstanding at any
month end 188,750 138,000 124,000
Weighted-average daily nominal interest
rate 7.3% 8.0% 7.0%
Weighted-average daily effective
interest rate 8.8% 11.1% 10.6%
Weighted-average nominal interest rate
at
December 31 6.6% 7.3% 7.8%
</TABLE>
F-55
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing
agreement with TCB. The loan matures September 9, 1997 and bears interest at
an overnight rate, which has ranged from 5.80% to 7.50%. At December 31, 1996,
there was $10.5 million of borrowings outstanding under this agreement.
Long-Term Debt
As of December 31, 1996, PTR has issued a total of $580 million of long-term
unsecured senior notes ("Notes"), which bear interest at specified rates per
annum, payable semi-annually. Funds from such issuances were used primarily
for acquisition, development and renovation of multifamily communities and to
repay revolving credit balances incurred for such purposes. The following
table summarizes the Notes:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUANCE AVERAGE EFFECTIVE
AND INTEREST RATE,
OUTSTANDING INCLUDING OFFERING ORIGINAL PRINCIPAL
PRINCIPAL COUPON DISCOUNTS AND MATURITY LIFE PAYMENT
DATE OF ISSUANCE AMOUNT RATE ISSUANCE COSTS DATE (YEARS) REQUIREMENT
- ---------------- ------------ ------ ------------------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
10/21/96 $ 15 million 6.600% 7.030% 10/15/99 3.00 (1)
10/21/96 20 million 6.950 7.400 10/15/02 6.00 (1)
10/21/96 20 million 7.150 7.500 10/15/03 7.00 (1)
10/21/96 20 million 7.250 7.630 10/15/04 8.00 (1)
10/21/96 20 million 7.300 7.640 10/15/05 9.00 (1)
10/21/96 20 million 7.375 7.685 10/15/06 10.00 (1)
10/21/96 15 million 6.500 6.750 10/15/26 30.00 (1)
------------ ------ ------ -----
Subtotal/Average $130 million 7.350% 7.500% 6.85
------------ ------ ------ -----
8/6/96 $ 20 million 7.550% 7.680% 8/1/08 12.00 (1)
8/6/96 20 million 7.625 7.730 8/1/09 13.00 (1)
8/6/96 20 million 7.650 7.770 8/1/10 14.00 (1)
8/6/96 20 million 8.100 8.210 8/1/15 19.00 (1)
8/6/96 20 million 8.150 8.250 8/1/16 20.00 (1)
------------ ------ ------ -----
Subtotal/Average $100 million 7.840% 7.950% 15.60
------------ ------ ------ -----
2/23/96 $ 50 million 7.150% 7.300% 2/15/10 10.50 (2)
2/23/96 100 million 7.900 8.030 2/15/16 18.00 (3)
------------ ------ ------ -----
Subtotal/Average $150 million 7.710% 7.840% 15.50
------------ ------ ------ -----
2/8/94 $100 million 6.875% 6.978% 2/15/08 10.50 (4)
2/8/94 100 million 7.500 7.653 2/15/14 18.00 (5)
------------ ------ ------ -----
Total/Average $200 million 7.240% 7.370% 14.25
------------ ------ ------ -----
Grand
Total/Average $580 million 7.500% 7.620% 12.03
============ ====== ====== =====
</TABLE>
- --------
(1) Entire principal amount due at maturity.
(2) These Notes require aggregate annual principal payments of $6.25 million
commencing in 2003.
(3) These Notes require aggregate annual principal payments of $10 million in
2011, $12.5 million in 2012, $15 million in 2013, $17.5 million in 2014, $20
million in 2015 and $25 million in 2016.
(4) These Notes require annual principal payments of $12.5 million commencing
in 2001.
(5) These Notes require aggregate annual principal payments of $10 million in
2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20
million in 2013, and $25 million in 2014.
The Notes, other than the $15 million of 6.500% Notes issued October 21, 1996
and due 2026 (the "6.500% Notes"), are redeemable any time at the option of
PTR, in whole or in part, at a redemption price equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date plus an adjustment, if any, based on the yield to maturity
relating to market yields available at redemption. The 6.500% Notes may be
repaid on October 15, 1999 at the option of the holders at their full
principal amount together with accrued interest. If the holders do not
exercise their right to require PTR to repay the 6.500% Notes on October 15,
F-56
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1999, they may be repaid at the option of PTR, in whole or in part, at a
redemption price equal to the sum of the principal amount of the Notes being
redeemed plus accrued interest thereon to the redemption date plus an
adjustment, if any, based on the yield to maturity relating to market yields
available at redemption. The Notes are governed by the terms and provisions of
an indenture agreement.
Mortgages Payable
Mortgages payable at December 31, 1996 consisted of the following (dollar
amounts in thousands):
----------------------------------------------------------
<TABLE>
<CAPTION>
BALLOON PRINCIPAL PRINCIPAL
EFFECTIVE SCHEDULED PERIODIC PAYMENT BALANCE AT BALANCE AT
INTEREST MATURITY PAYMENT DUE AT DECEMBER 31, DECEMBER 31,
COMMUNITY RATE(1) DATE TERMS MATURITY 1996 1995
--------- --------- --------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CONVENTIONAL FIXED RATE:
Knight's Castle N/A 10/01/96 (7) N/A $ - $ 7,609
Tigua Village 9.90% 05/01/97 (2) 677 683 694
Chasewood N/A 06/01/97 (7) N/A - 9,485
Presidio at South
Mountain N/A 10/01/97 (7) N/A - 14,593
Silvercliff 7.66 11/10/97 (2) 7,304 7,382 7,469
Braeswood Park 7.51 01/01/98 (2) 6,635 6,761 6,889
Seahawk 8.05 01/10/98 (2) 5,350 5,427 5,505
La Tierra at the Lakes 7.89 12/01/98 (2) 25,105 26,019 26,444
Windsail 8.88 02/01/99 (2) 4,675 4,798 4,843
Clubhouse 8.75 12/01/99 (2) 5,501 5,831 -
Greenpointe 8.50 03/01/00 (3) 3,410 3,638 3,696
Mountain Shadow 8.50 03/01/00 (3) 3,130 3,340 3,394
Sunterra 8.25 03/01/00 (3) 7,612 8,138 8,274
Brompton Court 8.39 09/01/00 (2) 13,340 14,318 14,543
Spring Park N/A 09/27/00 (7) N/A - 4,293
Park Place I N/A 11/01/00 (7) N/A - 3,515
Park Place II N/A 11/01/00 (7) N/A - 3,517
Treat Commons 7.50 09/14/01 (2) 6,578 7,192 7,296
El Dorado 7.59 10/01/02 (2) 15,527 16,718 -
Ashton Place 7.75 10/01/23 (3) N/A 47,342 -
Double Tree II 8.25 05/01/33 (3) N/A 4,750 4,770
--------- ---------
162,337 136,829
TAX-EXEMPT FIXED RATE(4):
Cherry Creek 8.11 11/01/01 (2) 2,630 4,000 4,210
Fox Creek 8.71 05/01/97 (2) 4,246 4,236 -
Summertree 6.65 12/15/18 (2) 4,435 4,435 -
Redwood Shores 5.53 10/01/08 (2) 16,820 25,220 -
--------- ---------
37,891 4,210
TAX-EXEMPT FLOATING
RATE(4):
Apple Creek 6.48 09/01/07 (5) 11,100 11,100 11,100
COMBINED(6):
Las Flores 8.42 06/01/24 (3) N/A 5,860 5,915
--------- ---------
Total/Average Mortgage
Debt 7.60% $217,188 $158,054
==== ========= =========
</TABLE>
F-57
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------
(1) Represents the effective interest rate, including loan cost amortization
and other ongoing fees and expenses, as of December 31, 1996.
(2) Amortizing monthly with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Tax-exempt rates include credit enhancement and other bond-related costs,
where applicable.
(5) Monthly payments are interest only until maturity and the interest rate is
adjusted weekly by the remarketing agent. Weighted-average daily interest rate
was 5.97% for 1996. Mortgage is secured by a letter of credit of $11.4 million.
The fee for this letter of credit is 5.05% per annum of the outstanding
mortgage payable balance.
(6) In 1990, the Las Flores apartments were refinanced pursuant to multifamily
bonds aggregating $6.2 million. The bonds consist of $4.5 million Series A tax
exempt fixed rate bonds and $1.7 million Series B taxable fixed rate bonds. The
bonds are guaranteed by the GNMA mortgage-backed securities program.
(7) Mortgage was prepaid during 1996.
The changes in mortgages payable during the past three years consisted of the
following (in thousands):
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balances at January 1 $158,054 $ 93,624 $48,872
Notes originated or assumed 104,176 66,481 56,624
Principal payments and prepayments (45,042) (2,051) (11,872)
--------- --------- ---------
Balances at December 31 $217,188 $158,054 $93,624
========= ========= =========
</TABLE>
Scheduled Debt Maturities
Approximate principal payments due during each of the years in the 20-year
period ending December 31, 2016 are as follows (in thousands):
------------------------------------------------
<TABLE>
<CAPTION>
UNSECURED SHORT TERM
LONG-TERM UNSECURED BORROWING
MORTGAGES DEBT LINE OF CREDIT AGREEMENT TOTAL
--------- --------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 $ 15,266 $ - $ - $10,450 $ 25,716
1998 40,012 - 99,750 - 139,762
1999 12,790 30,000 - - 42,790
2000 29,799 - - - 29,799
2001 11,280 12,500 - - 23,780
2002 17,348 32,500 - - 49,848
2003 1,752 38,750 - - 40,502
2004 1,903 38,750 - - 40,653
2005 2,066 38,750 - - 40,816
2006 2,241 38,750 - - 40,991
2007 13,528 18,750 - - 32,278
2008 18,863 38,750 - - 57,613
2009 1,603 36,250 - - 37,853
2010 1,732 38,750 - - 40,482
2011 1,871 25,000 - - 26,871
2012 2,022 30,000 - - 32,022
2013 2,185 35,000 - - 37,185
2014 2,361 42,500 - - 44,861
2015 2,551 40,000 - - 42,551
2016 2,756 45,000 - - 47,756
Thereafter 33,259 - - - 33,259
--------- --------- --------- --------- ---------
Total: $217,188 $580,000 $99,750 $10,450 $907,388
========= ========= ========= ========= =========
</TABLE>
F-58
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Covenants
PTR's debt instruments generally contain certain covenants common to the type
of facility or borrowing, including financial covenants establishing minimum
debt service coverage ratios and maximum loan to value ratios. PTR was in
compliance with all covenants pertaining to its debt instruments at December
31, 1996.
(7) DISTRIBUTIONS
PTR's distribution strategy is to distribute what it believes is a conservative
percentage of cash flow while maintaining its status as a REIT which generally
requires annual distributions of at least 95% of PTR's taxable income.
PTR announces the following year's projected annual distribution level after
the Board's annual budget review and approval in December of each year. At its
December 10, 1996 Board meeting, the Board announced an increase in the annual
distribution level from $1.24 to $1.30 per Common Share and declared the first
quarter 1997 distribution of $0.325 per Common Share. The first quarter
distribution was paid on February 20, 1997 to shareholders of record on
February 7, 1997. The payment of distributions is subject to the discretion of
the Board and is dependent upon the financial condition and operating results
of PTR.
Pursuant to the terms of the Preferred Shares, PTR is restricted from declaring
or paying any distribution with respect to its Common Shares unless all
cumulative distributions with respect to the Preferred Shares have been paid
and sufficient funds have been set aside for Preferred Share distributions that
have been declared.
PTR made total cash distributions of $1.24 per Common Share in 1996, $1.15 per
Common Share in 1995 and $1.00 per Common Share in 1994. In addition, on
November 12, 1996, PTR distributed 0.125694 shares of Homestead common stock
and warrants to purchase 0.084326 shares of Homestead common stock per Common
Share in the Homestead Distribution to each holder of record of Common Shares
on October 29, 1996.
For federal income tax purposes, the following summarizes the taxability of
cash distributions paid on the Common Shares in 1995 and 1994 and the estimated
taxability for 1996:
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Per Common Share
Ordinary income $0.61 $0.92 $0.68
Capital gains 0.11 - -
Return of capital 0.52 0.23 0.32
--------- --------- ---------
Total $1.24 $1.15 $1.00
========= ========= =========
</TABLE>
The Homestead securities distributed by PTR to each holder of Common Shares in
the Homestead Distribution were valued at $2.16 per PTR Common Share for
federal income tax purposes, of which $1.06 was taxable as ordinary income,
$0.19 was taxable as a capital gain and $0.91 was treated as a return of
capital.
On July 21, 1994, in addition to the normal Common Share distributions paid,
PTR redeemed the shareholder purchase rights issued pursuant to the Rights
Agreement dated as of February 23, 1990, as amended. Pursuant to the
redemption, each holder of record at the close of business on July 21, 1994 was
entitled to receive $0.01 per shareholder purchase right. The redemption price
was paid on August 12, 1994 and was taxable as ordinary income for federal
income tax purposes.
F-59
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For federal income tax purposes, the following summaries reflect the taxability
of dividends paid on Series A Preferred Shares and Series B Cumulative
Redeemable Preferred Shares ("Series B Preferred Shares"), respectively, for
periods prior to 1996 and the estimated taxability for 1996. The Series A and
Series B Preferred Shares are discussed in Note 8.
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Per Series A Preferred Share:
Ordinary income $1.47 $1.75 $1.75
Capital gains 0.28 - -
Return of capital - - -
--------- --------- ---------
Total $1.75 $1.75 $1.75
========= ========= =========
<CAPTION>
DATE OF
ISSUANCE
TO
1996 12/31/95
--------- ---------
<S> <C> <C> <C>
Per Series B Preferred Share:
Ordinary income $1.89 $1.3625
Capital gains 0.36 -
--------- ---------
Total $2.25 $1.3625
========= =========
</TABLE>
Due to the increase in the conversion ratio (Note 8) resulting from the
Homestead Distribution to holders of Common Shares, holders of Series A
Preferred Shares were deemed to have received a distribution of $2.43 on
November 12, 1996 for federal income tax purposes. Of this amount, $1.19 was
taxable as ordinary income, $0.22 was taxable as a capital gain and $1.02 was
treated as a return of capital.
PTR's tax return for the year ended December 31, 1996 has not been filed, and
the taxability information for 1996 is based upon the best available data.
PTR's tax returns for prior years have not been examined by the Internal
Revenue Service and, therefore, the taxability of the dividends is subject to
change.
(8) SHAREHOLDERS' EQUITY
Shares of Beneficial Interest
At December 31, 1996, 150,000,000 shares of beneficial interest, par value
$1.00 per share, were authorized. The Board is authorized to issue, from the
authorized but unissued shares of PTR, preferred shares in series and to
establish from time to time the number of preferred shares to be included in
such series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms and conditions of redemption of the shares of each
series.
Series A Preferred Shares
The Series A Preferred Shares issued in November 1993 have a liquidation
preference of $25.00 per share for an aggregate liquidation preference at
December 31, 1996 of $162.4 million plus any accrued but unpaid distributions.
Holders of the Series A Preferred Shares are entitled only to limited voting
rights under certain conditions. During 1996, 2,705,000 of PTR's Series A
Preferred Shares were converted, at the option of the holders, into 3,294,000
Common Shares (an implied conversion ratio of 1.2178 Common Shares for each
Series A Preferred Share, which is a combination of the original conversion
ratio of 1.2162 and the adjusted ratio discussed below).
As a result of the Homestead Distribution, PTR adjusted the conversion price of
its Series A Preferred Shares, effective as of the opening of business on
October 30, 1996, from $20.556 to $18.561 per Common Share (a conversion ratio
of 1.3469 Common Shares for each Series A Preferred Share), as required by the
Articles Supplementary governing the Series A Preferred Shares. Distributions
on the Series A Preferred Shares are cumulative in an amount per share equal to
the greater of $1.75 per annum or the annualized quarterly PTR distribution
rate on the Common Shares into which the Series A Preferred Shares are
convertible. The Series A Preferred Share dividends are payable quarterly in
arrears on the last day of March, June, September and December
F-60
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of each year. Based on the projected 1997 distribution level of $1.30 per
Common Share, the projected 1997 dividend on the Series A Preferred Shares is
$1.751 per share. The Series A Preferred Shares are redeemable at the option of
PTR after November 30, 2003.
Series B Preferred Shares
The Series B Preferred Shares issued in May 1995 have a liquidation preference
of $25.00 per share for an aggregate liquidation preference of $105.0 million
plus any accrued but unpaid distributions. The net proceeds (after underwriting
commissions and other offering costs) to PTR from the sale of the Series B
Preferred Shares were $101.4 million. On and after May 24, 2000, the Series B
Preferred Shares may be redeemed for cash at the option of PTR, in whole or in
part, at a redemption price of $25.00 per share plus accrued and unpaid
distributions, if any, to the redemption date. The redemption price (other than
the portion thereof consisting of accrued and unpaid distributions) is payable
solely out of the sale proceeds of other capital shares of PTR, which may
include shares of other series of preferred shares. The holders of the Series B
Preferred Shares have no preemptive rights with respect to any shares of the
capital securities of PTR or any other securities of PTR convertible into or
carrying rights or options to purchase any such shares. The Series B Preferred
Shares have no stated maturity and are not subject to any sinking fund or other
obligation of PTR to redeem or retire the Series B Preferred Shares and are not
convertible into any other securities of PTR. In addition, holders of the
Series B Preferred Shares are entitled to receive, when and as declared by the
Board, out of funds legally available for the payment of distributions,
cumulative preferential cash distributions at the rate of 9% of the liquidation
preference per annum (equivalent to $2.25 per share). Such distributions are
cumulative from the date of original issue and are payable quarterly in arrears
on the last day of each March, June, September and December.
Series A Preferred Shares and Series B Preferred Shares are collectively
referred to as "Preferred Shares." The net proceeds from the sale of Preferred
Shares were used primarily for the acquisition, development and renovation of
multifamily communities, and to repay revolving credit balances incurred for
such purposes.
Both series of Preferred Shares rank on a parity as to distributions and
liquidation proceeds.
All dividends due and payable on Preferred Shares have been accrued and paid as
of the end of each fiscal year and, accordingly, are reflected in the
accompanying financial statements.
Option Plan
In January 1987, PTR adopted its Share Option Plan for Outside Trustees (the
"1987 Plan"). There are 200,000 Common Shares reserved for issuance upon
exercise of options which could have been granted to independent Trustees under
the 1987 Plan. All options granted are for a term of five years and are
exercisable in whole or in part. The exercise price of the options granted may
not be less than the fair market value on the date of grant. At December 31,
1996, there were 32,000 options for Common Shares outstanding and exercisable
under the 1987 Plan at exercise prices ranging from $10.625 to $21.50 per
Common Share. No further options may be granted under the 1987 Plan.
Outstanding Warrants
As a result of the Merger discussed in Note 3, warrants to acquire 140,530
Common Shares at an exercise price of $14.21 per share were outstanding as of
December 31, 1996. These warrants are subject to adjustment to prevent dilution
and expire on November 8, 1999.
Ownership Restrictions and Significant Shareholder
PTR's Restated Declaration of Trust and the Articles Supplementary governing
the Preferred Shares restrict beneficial ownership (or ownership generally
attributed to a person under the REIT tax rules) of PTR's outstanding shares by
a single person, or persons acting as a group, to 9.8% of the Common Shares and
25% of each series of Preferred Shares. The purpose of these provisions are to
assist in protecting and preserving PTR's REIT status and to protect the
interests of shareholders in takeover transactions by preventing the
acquisition of a substantial block of shares unless the acquiror makes a cash
tender offer for all outstanding shares. For PTR to qualify as a REIT under the
Internal Revenue Code of 1986, as amended, not more than 50% in value of its
outstanding capital shares
F-61
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
may be owned by five or fewer individuals at any time during the last half of
PTR's taxable year. The provision permits five persons to acquire up to a
maximum of 9.8% each of the Common Shares, or an aggregate of 49% of the
outstanding Common Shares, and thus assists the Trustees in protecting and
preserving PTR's REIT status for tax purposes.
Common Shares owned by a person or group of persons in excess of the 9.8% limit
are subject to redemption by PTR. The provision does not apply where a majority
of the Board, in its sole and absolute discretion, waives such limit after
determining that the eligibility of PTR to qualify as a REIT for federal income
tax purposes will not be jeopardized or the disqualification of PTR as a REIT
is advantageous to the shareholders.
The Board has permitted Security Capital, the owner of the REIT Manager (see
Note 9), to acquire up to 49% of PTR's fully converted Common Shares. Security
Capital Group's ownership of Common Shares is attributed for tax purposes to
its shareholders. Security Capital Group owned 36.3% of PTR's total outstanding
Common Shares at December 31, 1996. Pursuant to an agreement between Security
Capital Group and PTR, Security Capital Group has agreed to acquire no more
than 49% of the fully converted Common Shares except pursuant to an all-cash
tender offer for all Common Shares held open for 90 days. Security Capital
Group would have no limitation on making a tender offer if an unrelated third
party commences such a tender offer.
Purchase Rights
In 1994, the Board authorized the distribution of one preferred share purchase
right (a "Purchase Right") for each Common Share outstanding at the close of
business on July 21, 1994. Holders of additional Common Shares issued after
July 21, 1994 and prior to the expiration of the Purchase Rights on July 21,
2004 will be entitled to one Purchase Right for each additional Common Share.
Each Purchase Right entitles the holder under certain circumstances to purchase
from PTR one one-hundredth of a share of a series of Junior Participating
Preferred Shares, par value $1.00 per share (the "Participating Preferred
Shares"), at a price of $60.00 per one-hundredth of a Participating Preferred
Share, subject to adjustment. Purchase Rights are exercisable when a person or
group of persons acquires beneficial ownership of 20% or more of the fully
converted Common Shares (49% in the case of Security Capital Group and certain
defined affiliates), commences or announces a tender offer or exchange offer
which would result in the beneficial ownership by a person or group of persons
of 25% or more of the outstanding Common Shares (49% in the case of Security
Capital Group and certain defined affiliates) or files or announces their
intention to file with any regulatory authority an application seeking approval
of any transaction which would result in the beneficial ownership by a person
of 25% or more of the outstanding Common Shares (49% in the case of Security
Capital Group and certain defined affiliates). Under certain circumstances,
each Purchase Right entitles the holder to purchase, at the Purchase Right's
then current exercise price, a number of Common Shares having a market value of
twice the Purchase Right's exercise price. The acquisition of PTR pursuant to
certain mergers or other business transactions would entitle each holder to
purchase, at the Purchase Right's then current exercise price, a number of the
acquiring company's common shares having a market value at that time equal to
twice the Purchase Right's exercise price. The Purchase Rights will expire in
July 2004 and are subject to redemption in whole, but not in part, at a price
of $0.01 per Purchase Right payable in cash, shares of PTR or any other form of
consideration determined by the Board.
Shelf Registration
On September 27, 1996, PTR filed a $300 million shelf registration statement
with the Securities and Exchange Commission. These securities can be issued in
the form of unsecured debt and preferred shares of beneficial interest on an
as-needed basis, subject to PTR's ability to effect an offering on satisfactory
terms. As of December 31, 1996, $170 million in securities were available to be
issued under this shelf registration.
F-62
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective March 1, 1991, PTR entered into a REIT management agreement (the
"REIT Management Agreement") with Security Capital Pacific Incorporated (the
"REIT Manager"), pursuant to which the REIT Manager assumed day-to-day
management of PTR. All officers of PTR are employees of the REIT Manager and
PTR currently has no employees. The REIT Manager provides both strategic and
day-to-day management services to PTR, including research, investment analysis,
acquisition, development, dispositions, property management, capital markets,
legal, accounting and other administrative services. The REIT Manager is a
wholly owned subsidiary of Security Capital Group (see Note 8).
The REIT Management Agreement requires PTR to pay a base annual fee of $855,000
plus 16% of cash flow as defined in the REIT Management Agreement in excess of
$4,837,000, payable monthly. In the REIT Management Agreement, cash flow is
calculated by reference to PTR's cash flow from operations plus (i) fees paid
to the REIT Manager, (ii) extraordinary expenses incurred at the request of the
independent Trustees of PTR and (iii) 33% of any interest paid by PTR on
convertible subordinated debentures (of which there has been none since
inception of the REIT Management Agreement); and after deducting (i) regularly
scheduled principal payments (excluding prepayments or balloon payments) for
debt with commercially reasonable amortization schedules, (ii) actual or
assumed principal and interest payments on long-term debt, (iii) interest
income received in connection with the Homestead Notes resulting from the
Homestead transaction discussed in Notes 2 and 5 and (iv) distributions
actually paid with respect to any nonconvertible preferred shares of beneficial
interest of PTR. The REIT Management Agreement provides that the long-term
unsecured debt described in Note 6 is treated as if it had regularly scheduled
principal and interest payments similar to a 20-year, level monthly payment,
fully amortizing mortgage, and the assumed principal and interest payments are
deducted from cash flow in determining the fee. Cash flow does not include
dividend and interest income from PTR Development Services, realized gains or
losses from dispositions of investments or income from cash equivalent
investments. The REIT Manager also receives a fee of 0.25% per year on the
average daily balance of cash equivalent investments.
PTR is obligated to reimburse the REIT Manager for certain expenses incurred by
the REIT Manager on behalf of PTR relating to PTR's operations, consisting
primarily of external professional fees, offering costs and travel expenses.
The REIT Management Agreement is renewable by PTR annually, subject to a
determination by the independent Trustees (who receive performance benchmark
information verified by an independent third party) that the REIT Manager's
performance has been satisfactory and that the compensation payable to the REIT
Manager is fair. Each of PTR and the REIT Manager may terminate the REIT
Management Agreement on 60 days' notice.
SCG Realty Services Incorporated ("SCG Realty Services"), a subsidiary of
Security Capital, has managed and currently manages a substantial majority of
PTR's operating multifamily communities (91.3% as of January 29, 1997, based on
total expected investment). Homestead Realty Services Incorporated ("Homestead
Realty Services"), a subsidiary of Security Capital, managed all of PTR's
operating Homestead Village(R) extended-stay lodging assets through October 17,
1996 (See Note 2).
PTR recently announced that it received a proposal from Security Capital to
exchange the REIT Manager and SCG Realty Services for Common Shares. As a
result of the proposed transaction, PTR would become an internally managed REIT
and Security Capital would remain PTR's largest shareholder. The Board has
formed a special committee comprised of independent Trustees to review the
proposed transaction. The proposed transaction is subject to approval by both
the special committee and the full Board. If the Board approves the
transaction, a proxy statement, subject to review by the Securities and
Exchange Commission, will be mailed to PTR's common shareholders prior to a
shareholder vote on the proposed transaction.
F-63
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per share amounts) for
1996 and 1995 is as follows:
------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR
------------------------------------------- ENDED
3-31 6-30 9-30 12-31 12-31
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1996:
Rental income $75,809 $79,491 $84,802 $81,944 $322,046
========= ========= ========= ========= =========
Earnings from
operations $22,920 $24,462 $24,718 $21,989 $ 94,089
Gain on sale of
investments, net 2,923 5,160 25,257 4,152 37,492
Less extraordinary
item--loss on early
extinguishment of
debt - 870 - - 870
Less preferred share
dividends 6,388 6,386 6,182 5,211 24,167
--------- --------- --------- --------- ---------
Net earnings
attributable to
Common Shares $19,455 $22,366 $43,793 $20,930 $106,544
========= ========= ========= ========= =========
Net earnings per
Common Share:
Primary $ 0.27 $ 0.31 $ 0.60 $ 0.28 $ 1.46
========= ========= ========= ========= =========
Fully-diluted $ - $ - $ .57 $ - $ -
========= ========= ========= ========= =========
Weighted-average
Common Shares:
Primary 72,211 72,223 72,628 75,147 73,057
========= ========= ========= ========= =========
Fully-diluted - - 83,217 - -
========= ========= ========= ========= =========
1995:
Rental income $53,518 $65,719 $70,176 $73,060 $262,473
========= ========= ========= ========= =========
Earnings from
operations $14,540 $20,806 $23,203 $23,147 $ 81,696
Gain on sale of
investments, net - - - 2,623 2,623
Less preferred share
dividends 4,025 5,023 6,387 6,388 21,823
--------- --------- --------- --------- ---------
Net earnings
attributable to
Common Shares $10,515 $15,783 $16,816 $19,382 $ 62,496
========= ========= ========= ========= =========
Primary and fully-
diluted net earnings
per Common Shares $ 0.20 $ 0.22 $ 0.23 $ 0.27 $ 0.93
========= ========= ========= ========= =========
Weighted-average
Common Shares
outstanding 51,485 72,027 72,211 72,211 67,052
========= ========= ========= ========= =========
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
PTR is a party to various claims and routine litigation arising in the ordinary
course of business. PTR does not believe that the results of any of such claims
and litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
PTR is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence investigation procedures, PTR has conducted Phase I environmental
assessments on each property prior to acquisition since 1984. The cost of
complying with environmental regulations was not material to PTR's results of
operations for any of the years in the three-year period ended December 31,
1996. PTR is not aware of any environmental condition on any of its communities
which is likely to have a material adverse effect on PTR's financial condition
or results of operations.
See Notes 4 and 5 for development and acquisition commitments.
F-64
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value of financial instruments was
determined by PTR based on available market information and valuation
methodologies believed to be appropriate for these purposes. Considerable
judgment and a high degree of subjectivity are involved in developing these
estimates and, accordingly, they are not necessarily indicative of amounts that
PTR could realize upon disposition.
As of December 31, 1996 and 1995, the carrying amount of certain financial
instruments employed by PTR, including cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses were representative of their
fair values because of the short-term maturity of these instruments. Similarly,
the carrying value of lines of credit balances approximates fair value as of
those dates since the interest rate fluctuates based on published market rates.
As discussed in Note 5, the Homestead Notes outstanding at December 31, 1996
are reflected at fair value in the accompanying balance sheet. PTR believes the
carrying value of the other mortgage notes receivable approximates fair value.
As of December 31, 1996 and 1995, based on the borrowings available to PTR, the
carrying value of the long-term debt and mortgages was a reasonable estimation
of their fair values.
Derivative Financial Instruments
PTR has only limited involvement with derivative financial instruments and does
not use them for trading purposes. PTR occasionally utilizes derivative
financial instruments as hedges in anticipation of future transactions to
manage well-defined interest rate risk.
In anticipation of a 1997 debt offering, PTR entered into interest rate
contracts in 1996 with notional amounts aggregating $50 million which PTR plans
to terminate when the anticipated offering is completed. As of December 31,
1996, the fair value of these interest rate contracts was an unrealized loss of
approximately $831,000 (approximately $69,250 as of March 10, 1997) based on
quoted market prices or estimates obtained from brokers. There were no
derivative financial instruments outstanding as of December 31, 1995.
(13) SUBSEQUENT EVENT
On March 10, 1997, PTR borrowed $60 million under a short-term borrowing
agreement with a financial institution. The loan matures on September 10, 1997,
but provides for early repayment at PTR's option on the 10th day of each month
during the term. Interest is payable monthly at an annual rate of LIBOR plus
0.60% (6.0375% at March 10, 1997). These proceeds were used to pay down PTR's
$350 million line of credit which had an outstanding balance of $151.5 million
after the paydown on March 10, 1997.
F-65
<PAGE>
SCHEDULE III
SECURITY CAPITAL PACIFIC TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
--------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31,
INITIAL COST TO PTR COSTS 1996
------------------- CAPITALIZED ---------------------------
BUILDINGS SUBSE- BUILDINGS ACCUMU- CON-
ENCUM- AND QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- ------- ------ ------------ ----------- ------ ------------ ------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MULTIFAMILY:
Albuquerque, New
Mexico:
Commanche Wells $ - $ 719 $ 4,072 $ 374 $ 719 $ 4,445 $ 5,164 $ 331 1985 1994
Corrales Pointe - 944 5,351 516 944 5,867 6,811 507 1986 1993
Entrada Pointe - 1,014 5,744 918 1,014 6,662 7,676 518 1986 1994
La Paloma - 4,135 - 19,039 4,135 19,039 23,174 1,073 1996 1993
La Ventana - 2,210 - 13,117 2,657 12,670 15,327 387 1996 1994
Pavilions - 2,182 7,624 5,632 2,182 13,256 15,438 1,864 (a) (a)
Sandia Ridge - 1,339 5,358 959 1,339 6,317 7,656 898 1986 1992
Vistas at Seven Bar
Ranch (g) - 2,597 - 19,277 2,597 19,277 21,874 243 1996 1994
Vista Del Sol - 1,105 4,419 544 1,105 4,963 6,068 165 1987 1993
Wellington Place - 1,881 7,523 1,052 1,881 8,575 10,456 701 1981 1993
Telegraph Hill - 1,216 6,889 140 1,216 7,029 8,245 48 1986 1996
Austin, Texas:
Anderson Mill Oaks - 1,794 10,165 600 1,794 10,764 12,558 912 1984 1993
Cannon Place - 1,220 4,879 747 1,220 5,626 6,846 459 1984 1993
Estates of Gracy
Farms (g) - 788 - 453 788 453 1,241 (b) (b) 1993
Hunters' Run - 1,400 - 10,080 1,400 10,080 11,480 516 1995 1993
Hunters' Run II - 797 - 7,479 797 7,479 8,276 115 1996 1995
Monterey Ranch
Village II - 1,151 - 22,889 1,151 22,889 24,040 291 1996 1993
The Ridge - 1,669 6,675 2,296 1,669 8,971 10,640 826 1978 1993
Rock Creek - 1,311 7,431 1,504 1,311 8,935 10,246 741 1979 1993
Saddlebrook - 800 - 12,521 800 12,521 13,321 1,184 1994 1992
Shadowood - 1,197 4,787 638 1,197 5,425 6,622 476 1985 1993
Dallas, Texas:
Apple Ridge - 1,986 7,942 1,223 1,986 9,165 11,151 736 1984 1993
Custer Crossing - 1,532 8,683 340 1,532 9,023 10,555 758 1985 1993
Park Meadows (g) - 1,373 - 4,625 1,373 4,624 5,997 (b) (b) 1996
Post Oak Ridge - 2,137 12,111 1,024 2,137 13,135 15,272 1,096 1983 1993
Quail Run - 1,613 9,140 459 1,613 9,599 11,212 801 1983 1993
Summerstone - 1,028 5,823 251 1,028 6,074 7,102 516 1983 1993
Timber Ridge - 997 5,651 470 997 6,121 7,118 363 1984 1994
Timber Ridge II (g) - 675 - 567 675 567 1,242 (b) (b) 1996
Woodland Park - 1,386 5,543 435 1,386 5,978 7,364 482 1986 1993
Denver, Colorado:
Cambrian - 2,256 9,026 877 2,256 9,903 12,159 909 1983 1993
The Cedars - 3,128 12,512 1,785 3,128 14,297 17,425 1,330 1984 1993
Fox Creek I - 1,167 4,669 615 1,167 5,284 6,451 423 1984 1993
Fox Creek II - - - 217 - 217 217 (b) (b) 1995
Hickory Ridge - 4,402 17,607 1,578 4,402 19,185 23,587 2,112 1984 1992
Reflections I - 1,591 6,362 940 1,591 7,301 8,892 675 1980 1993
Reflections II - 805 - 11,530 805 11,530 12,335 335 1996 1993
Silvercliff 7,382 2,410 13,656 332 2,410 13,988 16,398 1,031 1991 1994
Sunwood - 1,030 4,596 606 1,030 5,202 6,232 570 1981 1992
El Paso, Texas:
Acacia Park - 1,130 - 13,151 1,130 13,151 14,281 760 1995 1993
Cielo Vista - 1,111 4,445 3,368 1,111 7,813 8,924 519 1962 1993
The Crest at Shadow
Mountain - 865 - 7,152 865 7,152 8,017 1,106 1991 1992
Double Tree - 1,106 4,423 708 1,106 5,130 6,236 488 1980 1993
Las Flores 5,860 625 6,624 1,253 625 7,877 8,502 3,368 (c) (c)
Mountain Village - 1,203 4,824 1,410 1,203 6,234 7,437 991 1982 1992
The Patriot - 1,027 - 11,204 1,027 11,204 12,231 485 1996 1993
</TABLE>
F-66
<PAGE>
---------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COST TO PTR COSTS CARRIED AT DECEMBER 31, 1996
-------------------- CAPITALIZED ----------------------------
BUILDINGS SUBSE- BUILDINGS ACCUMU- CON-
ENCUM- AND QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- ------- ------- ------------ ----------- ------- ------------ ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Park Place $ - $ 992 $ 7,409 $ 416 $ 992 $ 7,825 $ 8,817 $1,708 (d) (d)
The Phoenix - 454 - 10,234 454 10,234 10,688 1,136 1993 1993
Shadow Ridge - 1,524 3,993 6,864 1,524 10,857 12,381 1,190 (e) (e)
Tigua Village 683 161 146 2,109 161 2,255 2,416 1,228 (f) (f)
Houston, Texas:
American Rice - 13,162 - 254 13,162 254 13,416 (b) (b) 1996
Beverly Palms - 1,393 7,893 919 1,393 8,812 10,205 647 1970 1994
Braeswood Park 6,761 1,861 10,548 195 1,861 10,743 12,604 912 1984 1993
Brompton Court 14,318 4,058 22,993 4,393 4,058 27,386 31,444 1,830 1972 1994
Cranbrook Forest - 1,326 5,302 329 1,326 5,631 6,957 463 1984 1993
Memorial Heights I - 3,169 - 15,273 3,169 15,273 18,442 290 1996 1996
Memorial Heights
II - 9,164 - 475 9,164 475 9,639 (b) (b) 1996
Oaks at Medical
Center I - 4,210 - 14,201 4,210 14,201 18,411 347 (b) 1994
Oaks at Medical
Center II - 3,368 - 2,044 3,368 2,044 5,412 (b) (b) 1994
Pineloch - 1,980 11,221 558 1,980 11,779 13,759 988 1984 1993
Plaza Del Oro - 1,713 9,706 658 1,713 10,364 12,077 710 1984 1994
Seahawk 5,427 1,258 7,125 362 1,258 7,487 8,745 542 1984 1994
Sacks - 2,812 - - 2,812 - 2,812 (b) (b) 1996
Weslayan Oaks - 581 3,293 124 581 3,417 3,998 294 1984 1993
Inland Empire,
California:
The Crossing - 2,227 12,622 560 2,227 13,182 15,409 232 1989 1996
Miramonte - 2,357 13,364 614 2,357 13,978 16,335 374 1989 1995
Mission Springs &
Villas - 5,780 32,757 758 5,780 33,515 39,295 506 1988 1996
Westcourt Village - 1,909 10,817 2,607 1,909 13,424 15,333 273 1986 1996
Woodsong Village - 1,846 10,469 177 1,846 10,646 12,492 97 1985 1996
Kansas City,
Kansas:
SWC 119th &
Quivira - 1,565 - 368 1,565 367 1,932 (b) (b) 1996
NEC 119th &
Quivira - 1,540 - 470 1,540 470 2,010 (b) (b) 1996
Las Vegas, Nevada:
The Hamptons - 2,959 16,790 1,381 2,959 18,171 21,130 799 1989 1995
Horizons at
Peccole Ranch - 3,173 18,048 509 3,173 18,557 21,730 851 1990 1995
King's Crossing - 2,860 16,272 269 2,860 16,541 19,401 764 1991 1995
La Tierra at the
Lakes 26,019 5,904 33,561 2,792 5,904 36,353 42,257 1,676 1986 1995
Sunterra 8,138 2,086 11,867 301 2,086 12,168 14,254 561 1986 1995
Omaha, Nebraska:
Apple Creek 11,100 1,953 11,069 773 1,953 11,842 13,795 787 1987 1994
Oakbrook - 1,108 6,307 121 1,108 6,428 7,536 296 1994 1995
Orange County,
California:
Aliso Viejo - 4,872 - 883 4,872 883 5,755 (b) (b) 1996
Las Flores
Apartment Homes - 4,190 - 4,044 4,190 4,044 8,234 (b) (b) 1996
Newpointe - 1,403 7,981 100 1,403 8,081 9,484 109 1987 1996
Villa Marseilles - 1,970 11,162 255 1,970 11,417 13,387 26 1991 1996
Phoenix, Arizona:
Arrowhead I (g) - 2,019 - 370 2,019 370 2,389 (b) (b) 1995
Bay Club - 2,797 11,188 1,122 2,797 12,310 15,107 1,037 1985 1993
Foxfire - 1,055 5,976 326 1,055 6,302 7,357 465 1985 1994
Miralago I (g) - 2,743 - 16,697 2,743 16,697 19,440 6 1996 1995
Moorings at Mesa
Cove - 3,261 13,045 1,066 3,261 14,111 17,372 1,464 1985 1992
North Mountain
Village - 2,704 15,323 432 2,704 15,755 18,459 1,199 1986 1994
Peaks at Papago
Park I - 4,131 23,408 1,732 4,131 25,140 29,271 1,843 1988 1994
Peaks at Papago
Park II - 1,000 - 6,188 1,000 6,188 7,188 101 1996 1994
The Ridge--Phoenix - 1,852 10,492 411 1,852 10,903 12,755 918 1987 1993
San Antigua - 4,200 - 19,589 4,200 19,589 23,789 1,732 1994 1991
San Marina - 1,208 4,831 911 1,208 5,742 6,950 1,044 1986 1992
San Marquis North - 1,215 - 9,535 1,215 9,535 10,750 608 1994 1993
San Marquis South - 2,312 - 11,167 2,312 11,167 13,479 968 1994 1993
San Palmera (g) - 3,515 - 17,534 3,515 17,534 21,049 7 1996 1995
San Valiente I (g) - 3,062 - 13,851 3,062 13,851 16,913 (b) (b) 1995
Scottsdale Greens - 3,489 19,774 5,035 3,489 24,809 28,298 1,629 1980 1994
Superstition Park - 2,340 9,362 991 2,340 10,353 12,693 1,069 1985 1992
Portland, Oregon:
Arbor Heights - 2,669 - 6,135 2,669 6,135 8,804 (b) (b) 1996
</TABLE>
F-67
<PAGE>
---------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31,
INITIAL COST TO PTR COSTS 1996
------------------- CAPITALIZED ---------------------------
BUILDINGS SUBSE- BUILDINGS ACCUMU- CON-
ENCUM- AND QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- ------- ------ ------------ ----------- ------ ------------ ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Brighton $ - $1,675 $ 9,532 $ 270 $1,675 $ 9,801 $11,476 $ 90 1985 1996
Cambridge Crossing - 2,260 - 3,574 2,260 3,574 5,834 (b) (b) 1996
Club at the Green - 1,640 9,327 184 1,640 9,511 11,151 453 1991 1995
Double Tree I - 1,548 8,810 157 1,548 8,967 10,515 416 1990 1995
Double Tree II 4,750 991 5,611 79 991 5,690 6,681 252 1994 1995
Knight's Castle - 1,963 11,164 55 1,963 11,219 13,182 524 1989 1995
Meridian at
Murrayhill - 2,517 14,320 420 2,517 14,739 17,256 680 1990 1995
Preston's Crossing
(g) - 851 - 12,015 851 12,015 12,866 125 1996 1995
Riverwood Heights - 1,479 8,410 274 1,479 8,684 10,163 399 1990 1995
Squire's Court - 1,630 9,249 101 1,630 9,350 10,980 435 1989 1995
Timberline - 1,058 5,995 282 1,058 6,277 7,335 114 1990 1996
Reno, Nevada:
Meadowview I & II - 3,485 - 735 3,485 735 4,220 (b) (b) 1996
Vista Ridge - 2,002 - 15,593 2,002 15,593 17,595 (b) (b) 1995
Salt Lake City, Utah:
Brighton Place - 2,091 11,892 1,300 2,091 13,191 15,282 582 1979 1995
Cherry Creek 4,000 1,290 7,330 362 1,290 7,692 8,982 344 1986 1995
Fox Creek 4,236 1,172 6,641 123 1,172 6,764 7,936 - 1985 1996
Greenpointe 3,638 891 5,050 67 891 5,117 6,008 238 1985 1995
Greenpointe Expan-
sion - 32 - 124 32 124 156 (b) (b) 1996
Mountain Shadow 3,340 832 4,730 125 832 4,855 5,687 222 1985 1995
Mountain Shadow
Expansion - 95 - 239 95 239 334 (b) (b) 1996
Remington - 2,324 - 13,765 2,324 13,765 16,089 76 1996 1995
Riverview - 4,636 - 6,329 4,636 6,329 10,965 (b) (b) 1996
Summertree 4,435 1,521 8,619 43 1,521 8,662 10,183 39 1986 1996
San Antonio, Texas:
Applegate - 1,455 8,248 522 1,455 8,770 10,225 737 1983 1993
Austin Point - 1,728 9,725 615 1,728 10,340 12,068 870 1982 1993
Camino Real - 1,084 4,338 859 1,084 5,197 6,281 529 1979 1993
Cobblestone Village - 786 3,120 691 786 3,811 4,597 658 1984 1992
Contour Place - 456 1,829 339 456 2,168 2,624 427 1984 1992
The Crescent - 1,145 - 14,545 1,145 14,545 15,690 1,384 1994 1992
Dymaxion I - 683 3,740 231 683 3,971 4,654 228 1984 1994
The Gables - 1,025 5,809 554 1,025 6,363 7,388 521 1983 1993
Marbach Park - 1,122 6,361 651 1,122 7,012 8,134 605 1985 1993
Palisades Park - 1,167 6,613 481 1,167 7,094 8,261 598 1983 1993
Panther Springs - 585 3,317 145 585 3,462 4,047 294 1985 1993
Rancho Mirage - 724 2,971 1,437 724 4,407 5,131 368 1974 1993
Stanford Heights - 1,631 - 11,703 1,631 11,703 13,334 399 1996 1993
Sterling Heights - 1,644 - 10,460 1,644 10,460 12,104 558 1995 1993
St. Tropez I - 2,013 8,054 971 2,013 9,025 11,038 983 1982 1992
St. Tropez II - 605 - 554 605 554 1,159 (b) (b) 1994
Towne East Village - 350 1,985 236 350 2,221 2,571 182 1983 1993
Villas of Castle
Hills - 1,037 4,148 746 1,037 4,894 5,931 424 1971 1993
Waters of Northern
Hills - 1,251 7,105 785 1,251 7,890 9,141 604 1982 1994
San Diego, Califor-
nia:
Club Pacifica - 2,141 12,132 343 2,141 12,474 14,615 227 1987 1996
El Dorado Hills 16,718 4,418 25,084 713 4,418 25,797 30,215 237 1983 1996
Ocean Crest - 2,369 13,427 447 2,369 13,874 16,243 280 1993 1996
Scripps Landing - 1,332 7,550 318 1,332 7,868 9,200 646 1985 1994
The Palisades - 4,741 26,866 31 4,741 26,897 31,638 59 1991 1996
Tierrasanta Ridge - 2,859 16,130 695 2,859 16,825 19,684 1,340 1994 1994
San Francisco (Bay
Area), California:
Harborside - 3,213 18,210 - 3,213 18,210 21,423 (b) (b) 1996
Ashton Place 47,342 9,782 55,429 687 9,782 56,116 65,898 385 1970 1996
Quail Ridge - 2,633 14,923 587 2,633 15,508 18,141 246 1986 1996
Redwood Shores 25,220 5,608 31,778 263 5,608 32,046 37,654 215 1986 1996
Treat Commons 7,192 5,788 32,802 316 5,788 33,118 38,906 884 1988 1995
Santa Fe, New Mexico:
Foothills of Santa
Fe Phase I - 1,396 - 1,098 1,396 1,098 2,494 (b) (b) 1995
The Meadows of Santa
Fe - 760 - 11,672 760 11,672 12,432 1,220 1994 1993
</TABLE>
F-68
<PAGE>
------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO PTR COSTS DECEMBER 31, 1996
--------------------- CAPITALIZED --------------------------------
BUILDINGS SUBSE- BUILDINGS ACCUMU- CON-
ENCUM- AND QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seattle, Wash-
ington:
Canyon Creek $ - $ 5,250 $ - $ 9,393 $ 5,250 $ 9,393 $ 14,643 $ (b) (b)
Canyon Crown - 4,370 - 231 4,370 231 4,601 (b) (b)
Clubhouse 5,831 1,223 6,928 20 1,223 6,948 8,171 - 1982 1996
Forrest Creste - 1,681 - 312 1,681 312 1,993 (b) (b) 1996
Harbour Pointe - 2,027 - 2,865 2,027 2,865 4,892 (b) (b) 1996
Logan's Ridge - 1,950 11,118 278 1,950 11,395 13,345 524 1987 1995
Matanza Creek - 1,016 5,814 267 1,016 6,081 7,097 276 1991 1995
Millwood Es-
tates - 1,593 9,200 608 1,593 9,808 11,401 440 1987 1995
Pebble Cove - 1,895 - 15,084 1,895 15,084 16,979 148 1996 1995
Remington Park - 2,795 15,593 732 2,795 16,325 19,120 684 1990 1995
Walden Pond - 2,033 11,535 336 2,033 11,871 13,904 545 1990 1995
Tucson, Arizona:
Cobble Creek - 1,422 5,690 777 1,422 6,477 7,899 1,041 1980 1992
Craycroft Gar-
dens - 348 1,392 234 348 1,626 1,974 235 1963 1992
San Ventana (g) - 3,177 - 20,561 3,177 20,560 23,737 89 1996 1993
Tierra Antigua - 992 3,967 527 992 4,494 5,486 669 1979 1992
Villa Caprice - 1,279 7,248 319 1,279 7,567 8,846 641 1972 1993
Windsail 4,798 1,852 7,407 718 1,852 8,124 9,976 770 1986 1993
Tulsa, Oklahoma:
Southern Slope - 779 4,413 170 779 4,584 5,363 392 1982 1993
-------- -------- ---------- -------- -------- ---------- ---------- ------ ---- ----
Total Multifam-
ily 217,188 357,708 1,189,347 549,720 358,155 1,738,620 2,096,775 93,386
-------- -------- ---------- -------- -------- ---------- ---------- ------ ---- ----
LAND HELD FOR
FUTURE MULTI-
FAMILY DEVELOP-
MENT:
Austin, Texas:
Monterey Ranch
Village I (h) - 424 - 1,887 424 1,887 2,311 (b) (b) 1993
Monterey Ranch
Village III
(i) - 1,131 - 6,036 1,131 6,036 7,167 (b) (b) 1993
Monterey Ranch
IV (j) - 920 - - 920 - 920 - N/A 1993
El Paso, Texas:
West Ten (k) - 1,523 - 83 1,523 83 1,606 - N/A 1994
Houston, Texas:
SPCA Tract (l) - 563 - - 563 - 563 (b) (b) 1996
North Arlington,
Texas:
Cracker Barrel - 245 - - 245 - 245 -
Phoenix, Arizo-
na:
San Valiente
(m) - 1,647 - 540 1,647 540 2,187 - N/A 1995
Arrowhead II
(n) - 1,601 - 128 1,601 128 1,729 - N/A 1995
Miralago II - 1,801 33 33 1,801 66 1,867 -
San Antonio,
Texas:
Dymaxion II (o) - 545 - 18 545 18 563 - N/A 1994
Indian Trails
II (p) - 864 - 43 864 43 907 - N/A 1994
Walker Ranch
I (q) - 2,230 - 1,282 2,230 1,282 3,512 (b) (b) 1994
Walker Ranch
II (r) - 1,481 - 579 1,481 579 2,060 (b) (b) 1994
Walker Ranch
III (s) - 555 - 258 555 258 813 (b) (b) 1994
Santa Fe, New
Mexico:
Foothills of
Santa Fe II
(t) - 1,114 - 147 1,115 146 1,261 (b) (b) 1995
St. Francis (u) - 1,941 - 391 941 391 2,332 - N/A 1994
-------- ---------- -------- -------- ---------- ---------- ------
Total Develop-
ment Land 18,585 33 11,425 18,586 11,457 30,043
-------- ---------- -------- -------- ---------- ---------- ------
HOTEL:
San Francisco,
California:
Wharf Holiday
Inn (v) - 12,861 1,935 8,075 12,861 10,009 22,870 3,440 1972 1971
-------- ---------- -------- -------- ---------- ---------- ------
</TABLE>
F-69
<PAGE>
-------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST TO PTR COSTS DECEMBER 31, 1996
--------------------- CAPITALIZED --------------------------------
BUILDINGS SUBSE- BUILDINGS ACCUMU- CON-
ENCUM- AND QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE/INDUSTRIAL:
Dallas, Texas:
Irving Blvd. $ - $ 109 $ 303 $ 128 $ 109 $ 431 $ 540 $ 249 1968 1977
El Paso, Texas:
Vista Industrial - 567 2,504 63 567 2,568 3,135 499 1987 1987
-------- -------- ---------- -------- -------- ---------- ---------- -------
TOTAL OFFICE/
INDUSTRIAL - 676 2,807 191 676 2,999 3,675 748
-------- -------- ---------- -------- -------- ---------- ---------- -------
TOTAL $217,188 $389,830 $1,194,122 $569,411 $390,278 $1,763,085 $2,153,363 $97,574
======== ======== ========== ======== ======== ========== ========== =======
</TABLE>
- -------
(a) Phase I (118 units) was acquired in 1991 and Phase II (122 units) was
developed in 1992.
(b) As of December 31, 1996, property was undergoing development.
(c) Phase I (120 units) was developed in 1980, Phase II (60 units) was
developed in 1981 and Phase III (288 units) was developed in 1983.
(d) Phase I (160 units) was developed in 1989 and Phase II (132 units) was
developed in 1991.
(e) Phase I (208 units) was acquired in 1991 and Phase II (144 units) was
developed in 1994.
(f) Phase I (84 units) was developed in 1970 and Phase II (100 units) was
developed in 1978.
(g) Represents properties owned by third party developers that are subject to
presale agreements to PTR to acquire such properties. PTR's investment as of
December 31, 1996 represents development loans made by PTR to such developers.
(h) 19.9 acres of undeveloped land.
(i) 53.1 acres of undeveloped land.
(j) 11.01 acres of undeveloped land.
(k) 25.30 acres of undeveloped land.
(l) .05 acres of undeveloped land.
(m) 7.6 acres of undeveloped land.
(n) 11.60 acres of undeveloped land.
(o) 18.0 acres of undeveloped land.
(p) 25.6 acres of undeveloped land.
(q) 38.7 acres of undeveloped land.
(r) 30.5 acres of undeveloped land.
(s) 10.3 acres of undeveloped land.
(t) 19.2 acres of undeveloped land.
(u) 10.4 acres of undeveloped land.
(v) PTR owns the building and land leased to hold Holiday Inns of America, Inc.
at Fisherman's Wharf in San Francisco.
The lease with Holiday Inns expires in 2018.
F-70
<PAGE>
The following is a reconciliation of the carrying amount and related
accumulated depreciation of PTR's investment in real estate, at cost (in
thousands):
----------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
CARRYING AMOUNTS 1996 1995 1994
---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $1,855,866 $1,296,288 $ 872,610
Multifamily:
Acquisitions and renovations
expenditures 463,935 385,356 270,024
Development expenditures, excluding
land acquisition 187,377 117,980 111,184
Acquisition and improvements of land
held for current and future
development 20,880 11,255 16,789
Recurring capital expenditures 7,992 5,119 3,746
Dispositions (269,693) (6,166) (11,902)
---------- ---------- ----------
Net multifamily activity subtotal $ 410,491 $ 513,544 $ 389,841
---------- ---------- ----------
Non-multifamily:
Homestead development expenditure,
including land acquisitions $ 54,883 $ 48,247 $ 35,943
Contribution of Homestead Assets (161,370) - -
Non-multifamily dispositions (6,527) (2,235) (331)
Provision for possible loss - (220) (1,600)
Other 20 242 (175)
---------- ---------- ----------
Balance at December 31 $2,153,363 $1,855,866 $1,296,288
========== ========== ==========
-------------------------
<CAPTION>
DECEMBER
31,
----------------------------------
ACCUMULATED DEPRECIATION 1996 1995 1994
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 81,979 $ 46,199 $ 22,022
Depreciation for the year 44,887 36,685 24,614
Accumulated depreciation of real estate
sold (22,653) (646) (151)
Contribution of Homestead Assets (6,639) - -
Other - (259) (286)
---------- ---------- ----------
Balance at December 31 $ 97,574 $ 81,979 $ 46,199
========== ========== ==========
</TABLE>
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Security Capital Industrial Trust:
We have audited the accompanying consolidated balance sheets of Security
Capital Industrial Trust and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Capital Industrial
Trust and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
February 10, 1997
F-72
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
------------------
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Real Estate $2,508,747 $1,827,670
Less accumulated depreciation 109,147 56,406
---------- ----------
2,399,600 1,771,264
Cash and Cash Equivalents 4,770 22,235
Accounts Receivable 5,397 5,764
Other Assets 52,539 34,709
---------- ----------
Total assets $2,462,306 $1,833,972
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit $ 38,600 $ 81,000
Long-term debt 524,191 324,527
Mortgage notes payable 91,757 96,013
Securitized debt 36,025 38,090
Assessment bonds payable 12,170 11,173
Accounts payable and accrued expenses 35,357 32,826
Construction payable 24,645 20,437
Distributions payable 25,058 20,558
Other liabilities 18,130 14,416
---------- ----------
Total liabilities 805,933 639,040
---------- ----------
Commitments and Contingencies
Minority Interest 56,984 58,741
Shareholders' Equity:
Series A Preferred Shares; $0.01 par value: 5,400,000
shares issued and outstanding at December 31, 1996
and 1995; stated liquidation preference of $25 per
share 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par
value; 8,050,000 shares issued and outstanding at
December 31, 1996; stated liquidation preference of
$25 per share 201,250 -
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1996;
stated liquidation preference of $50 per share 100,000 -
Common Shares of beneficial interest, $0.01 par
value; 93,676,546 shares issued and outstanding at
December 31, 1996 and 81,416,451 shares issued and
outstanding at December 31, 1995 937 814
Additional paid-in capital 1,257,347 1,059,142
Accumulated undistributed net realized gain on
disposition of real estate - -
Distributions in excess of net earnings (95,145) (58,765)
---------- ----------
Total shareholders' equity 1,599,389 1,136,191
---------- ----------
Total liabilities and shareholders' equity $2,462,306 $1,833,972
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-73
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income:
Rental income $227,000 $153,879 $70,609
Other real estate income 5,342 2,899 -
Interest income 1,121 1,725 1,093
--------- --------- ---------
Total income 233,463 158,503 71,702
--------- --------- ---------
Expenses:
Rental expenses, net of recoveries of
$33,677 in 1996, $20,139 in 1995 and
$10,490 in 1994 26,674 18,460 7,244
Depreciation and amortization 59,850 39,767 18,169
Interest expense 38,819 32,005 7,568
REIT management fee 21,472 14,207 8,673
General and administrative 1,025 839 770
Other expense 2,913 2,234 1,220
--------- --------- ---------
Total expenses 150,753 107,512 43,644
--------- --------- ---------
Net earnings before minority interest and
gain (loss) on disposition of real estate 82,710 50,991 28,058
Minority interest share in net earnings 3,326 3,331 2,992
--------- --------- ---------
Net earnings before gain (loss) on
disposition of real estate 79,384 47,660 25,066
Gain (loss) on disposition of real estate (29) 1,053 35
--------- --------- ---------
Net earnings 79,355 48,713 25,101
Less preferred share dividends 25,895 6,698 -
--------- --------- ---------
Net Earnings Attributable to Common Shares $ 53,460 $ 42,015 $25,101
========= ========= =========
Weighted Average Common Shares Outstanding 84,504 68,924 44,265
========= ========= =========
Per Share Net Earnings Attributable to
Common Shares $ 0.63 $ 0.61 $ 0.57
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
-------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A SERIES B SERIES C UNDISTRIBUTED
PREFERRED PREFERRED PREFERRED NET REALIZED
COMMON SHARES SHARES AT SHARES AT SHARES AT GAIN ON
---------------- AGGREGATE AGGREGATE AGGREGATE ADDITIONAL DISTRIBUTIONS DISPOSITION
NUMBER OF PAR LIQUIDATION LIQUIDATION LIQUIDATION PAID-IN SUBSCRIPTIONS IN EXCESS OF OF REAL
SHARES VALUE PREFERENCE PREFERENCE PREFERENCE CAPITAL RECEIVABLE NET EARNINGS ESTATE
--------- ------ ----------- ----------- ----------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1993............. 19,762 $364.0 $ - $ - $ - $ 402,179 $(189,912) $ (3,180) $ -
Subscriptions
receivable
collected....... 16,642 - - - - - 189,912 - -
Sale of common
shares.......... 310 3.1 - - - 3,407 - - -
Initial public
offering........ 3,261 32.6 - - - 37,467 - - -
Public rights
offering........ 6,612 66.1 - - - 99,934 - - -
Sale of common
shares.......... 18,000 180.0 - - - 274,320 - - -
Less costs of
raising capital. - - - - - (9,304) - - -
Net earnings
before gain on
disposition of
real estate..... - - - - - - - 25,066 -
Gain on
disposition of
real estate..... - - - - - - - - 35
Common share
distributions... - - - - - - - (37,663) (35)
Distributions
accrued......... - - - - - - - (15,097) -
------ ------ -------- -------- -------- ---------- --------- -------- ------
Balances at
December 31,
1994............. 64,587 645.8 - - - 808,003 - (30,874) -
Sale of common
shares.......... 16,260 162.6 - - - 249,837 - - -
Sale of
preferred
shares.......... - - 135,000 - - - - - -
Dividend
reinvestment and
share purchase
plan............ 13 0.1 - - - 217 - - -
Less cost of
raising capital. - - - - - (5,022) - - -
Limited
partnership
units converted
to common
shares.......... 556 5.6 - - - 6,107 - - -
Net earnings
before gain on
disposition of
real estate..... - - - - - - - 47,660 -
Gain on
disposition of
real estate..... - - - - - - - - 1,053
Common share
distributions... - - - - - - - (48,295) (1,053)
Series A
Preferred Share
dividends....... - - - - - - - (6,698) -
Distributions
accrued......... - - - - - - - (20,558) -
------ ------ -------- -------- -------- ---------- --------- -------- ------
Balances at
December 31,
1995............. 81,416 814.1 135,000 - - 1,059,142 - (58,765) -
Sale of common
shares.......... 12,218 122.5 - - - 210,639 - - -
Sales of
preferred
shares.......... - - - 201,250 100,000 - - - -
Dividend
reinvestment and
share purchase
plan............ 21 .2 - - - 356 - - -
Common shares
issued upon
exercise of
warrants........ 22 .2 - - - 218 - - -
Less cost of
raising capital. - - - - - (13,008) - - -
Net earnings
before loss on
disposition of
real estate..... - - - - - - - 79,384 -
Loss on
disposition of
real estate..... - - - - - - - - (29)
Common share
distributions... - - - - - - - (64,811) 29
Preferred share
dividends....... - - - - - - - (25,895) -
Distributions
accrued......... - - - - - - - (25,058) -
------ ------ -------- -------- -------- ---------- --------- -------- ------
Balances at
December 31,
1996............. 93,677 $937.0 $135,000 $201,250 $100,000 $1,257,347 $ - $(95,145) $ -
====== ====== ======== ======== ======== ========== ========= ======== ======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balances at
December 31,
1993............. $ 209,451
Subscriptions
receivable
collected....... 189,912
Sale of common
shares.......... 3,410
Initial public
offering........ 37,500
Public rights
offering........ 100,000
Sale of common
shares.......... 274,500
Less costs of
raising capital. (9,304)
Net earnings
before gain on
disposition of
real estate..... 25,066
Gain on
disposition of
real estate..... 35
Common share
distributions... (37,698)
Distributions
accrued......... (15,097)
-------------
Balances at
December 31,
1994............. 777,775
Sale of common
shares.......... 250,000
Sale of
preferred
shares.......... 135,000
Dividend
reinvestment and
share purchase
plan............ 217
Less cost of
raising capital. (5,022)
Limited
partnership
units converted
to common
shares.......... 6,112
Net earnings
before gain on
disposition of
real estate..... 47,660
Gain on
disposition of
real estate..... 1,053
Common share
distributions... (49,348)
Series A
Preferred Share
dividends....... (6,698)
Distributions
accrued......... (20,558)
-------------
Balances at
December 31,
1995............. 1,136,191
Sale of common
shares.......... 210,762
Sales of
preferred
shares.......... 301,250
Dividend
reinvestment and
share purchase
plan............ 356
Common shares
issued upon
exercise of
warrants........ 218
Less cost of
raising capital. (13,008)
Net earnings
before loss on
disposition of
real estate..... 79,384
Loss on
disposition of
real estate..... (29)
Common share
distributions... (64,782)
Preferred share
dividends....... (25,895)
Distributions
accrued......... (25,058)
-------------
Balances at
December 31,
1996............. $1,599,389
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 79,355 $ 48,713 $ 25,101
Minority interest 3,326 3,331 2,992
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization 59,850 39,767 18,169
(Gain)/Loss on disposition of real
estate 29 (1,053) (35)
Rent leveling (4,777) (4,364) (1,862)
Amortization of deferred financing
costs 2,339 2,092 1,023
Increase in accounts receivable and other
assets (10,166) (14,392) (10,994)
Increase in accounts payable and accrued
expenses 2,531 19,028 8,497
Increase in other liabilities 3,714 7,032 4,331
--------- --------- ---------
Net cash provided by operating
activities 136,201 100,154 47,222
--------- --------- ---------
Investing Activities:
Real estate investments (657,873) (633,251) (629,424)
Tenant improvements and lease commissions (14,806) (6,163) (2,425)
Recurring capital expenditures (2,851) (330) (22)
Proceeds from disposition of real estate 9,652 10,949 -
--------- --------- ---------
Net cash used in investing activities (665,878) (628,795) (631,871)
--------- --------- ---------
Financing Activities:
Proceeds from sale of shares, net of
expenses 434,587 279,977 283,703
Net proceeds from sale of shares to
Affiliates 64,416 100,001 312,315
Proceeds from dividend reinvestment,
share purchase plan and exercised
warrants 574 217 -
Proceeds from long-term debt offerings 199,632 324,455 -
Debt issuance costs (4,698) (6,194) (3,783)
Distributions paid to common shareholders (85,340) (64,445) (37,698)
Distributions paid to minority interest
holders (5,237) (5,033) (4,003)
Preferred share dividends (25,895) (6,698) -
Payments on note payable to Affiliates - - (8,000)
Proceeds from line of credit 411,200 361,100 424,720
Payments on line of credit (453,600) (440,100) (348,126)
Regularly scheduled principal payments on
mortgage notes payable (3,738) (3,491) (1,577)
Balloon principal payments made upon
maturity (19,689) (10,183) (18,169)
--------- --------- ---------
Net cash provided by financing
activities 512,212 529,606 599,382
--------- --------- ---------
Net Increase/(Decrease) in Cash and Cash
Equivalents (17,465) 965 14,733
Cash and Cash Equivalents, beginning of
period 22,235 21,270 6,537
--------- --------- ---------
Cash and Cash Equivalents, end of period $ 4,770 $ 22,235 $ 21,270
========= ========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities:
In connection with formation of limited
partnerships, real estate was acquired
in exchange for the following:
Assumption of existing mortgage notes
payable, assessment bonds payable and
securitized debt $ - $ - $ 55,452
Minority ownership interest contributed - - 16,780
In conjunction with real estate acquired:
Assumption of existing mortgage notes
payable 18,103 14,688 68,447
Conversion of minority interest
partnership units into Common Shares - 6,112 -
--------- --------- ---------
Total $ 18,103 $ 20,800 $ 140,679
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-76
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. NATURE OF OPERATIONS:
Security Capital Industrial Trust ("SCI"), a Maryland real estate investment
trust ("REIT"), is a national operating company focused exclusively on meeting
the distribution space needs of national, regional and local industrial real
estate users through the SCI National Operating System(TM). SCI engages in the
acquisition, development, marketing, operation and long-term ownership of
distribution facilities, and the development of master-planned distribution
parks and build-to-suit facilities for its customers. SCI's operating strategy
is to provide an exceptional level of services to its existing and prospective
customers on a national, regional and local basis. SCI deploys capital in
markets with excellent long-term growth prospects where SCI can achieve a
strong market position through the acquisition and development of generic,
flexible facilities designed for both warehousing and light manufacturing uses.
As of December 31, 1996, SCI's portfolio contained 80.6 million square feet in
942 operating buildings and had an additional 5.9 million square feet under
development in 47 buildings for a total of 86.5 million square feet in 36
target market cities. SCI completed its initial public offering on March 31,
1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REIT Organization Status
In January 1993, SCI was formed as a Maryland real estate investment trust. In
February 1993, Security Capital Industrial Investors Incorporated, a Delaware
corporation, was merged with and into SCI. SCI has made an election to be taxed
as a REIT under the Internal Revenue Code of 1986, as amended.
REITs are not required to pay federal income taxes if minimum distribution and
income, asset and shareholder tests are met. During 1996, 1995 and 1994, SCI
was in compliance with the REIT requirements. Thus, no federal income tax
provision has been reflected in the accompanying consolidated financial
statements.
Basis of Presentation
The accompanying consolidated financial statements include the results of SCI,
its subsidiaries and its majority-owned and controlled partnerships (SCI has no
unconsolidated subsidiaries or minority ownership interests). The effects of
intercompany transactions have been eliminated. Certain amounts included in the
consolidated financial statements for prior years have been reclassified to
conform with the 1996 financial statement presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Real Estate and Depreciation
Real estate is carried at cost. Costs directly related to the acquisition,
renovation or development of real estate are capitalized and are depreciated
over the following useful lives:
<TABLE>
<S> <C>
Tenant improvements 10 years
Acquired buildings 30 years
Developed buildings 40 years
</TABLE>
Depreciation is computed using a straight-line method. Certain real estate was
acquired through formation of partnerships (see Note 5) wherein SCI contributed
cash and the limited partners contributed real estate in exchange for
partnership units which are ultimately exchangeable for SCI's Common Shares of
beneficial interest, par value $0.01 per share (the "Common Shares"). In
consolidating the partnerships' assets, real estate cost includes the estimated
fair value attributable to the limited partners' interests at the acquisition
dates because (1) SCI's cash contributions constituted over 50% of the
acquisition prices, (2) the acquisitions were from unrelated third-parties and
(3) the limited partners were not considered "promoters" under SEC Staff
Accounting Bulletin 48. The limited partners' interests will be reflected as
minority interest in the consolidated financial statements until the units are
exchanged for SCI Common Shares. In management's opinion, real estate assets
are not carried at amounts in excess of their estimated net realizable values.
F-77
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncement
Effective January 1, 1996, SCI adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which had no material
impact on its consolidated financial statements. SFAS No. 121 establishes
accounting standards for the review for impairment of long-lived assets to be
held and used, whenever the carrying amount of an asset may not be recoverable,
and requires that certain long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell.
Capitalized Interest
SCI capitalizes interest costs incurred during the land development or
construction period of qualifying projects.
Deferred Loan Fees
Included in other assets as of December 31, 1996 and 1995 are costs of $9.2
million and $6.8 million, respectively, associated with obtaining financing
(see Note 4) which have been capitalized and are being amortized (to interest
expense or capitalized interest, as appropriate) over the life of the loan
using the effective interest rate method.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and funds invested
in money market funds.
Minority Interest
Minority interest is carried at cost and represents limited partners' interests
in various real estate partnerships controlled by SCI. As discussed in Real
Estate and Depreciation, certain minority interests are carried at the pro rata
share of the estimated fair value of property at the acquisition dates. Common
Shares of SCI issued upon exchange of limited partnership units will be
accounted for at the cost of the minority interest surrendered.
Earnings per Share
Per share data is computed based on the weighted average number of Common
Shares outstanding during the period. Exercise of outstanding warrants and
options to acquire 29,764 Common Shares would not have a material dilutive
effect on earnings per share. The conversion of the limited partnership units
(see Note 5) and the Series B Cumulative Convertible Redeemable Preferred
Shares, par value $.01 per share ("Series B Preferred Shares"), into Common
Shares is not assumed since the effect would not be dilutive.
Interest Rate Contracts
SCI utilizes various interest rate contracts to hedge interest rate risk on
anticipated debt offerings. These anticipatory hedges are designated, and
effective, as hedges of identified debt issuances which have a high probability
of occurring. Gains and losses resulting from changes in the market value of
these contracts are deferred and amortized into interest expense over the life
of the related debt issuance.
F-78
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REAL ESTATE:
Real estate investments are comprised of income producing distribution
facilities, construction in progress and land planned for distribution facility
development in the following markets:
------------------
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL COST
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Atlanta, Georgia 7.99% 8.32%
Austin, Texas 3.32 3.26
Birmingham, Alabama 1.33 1.83
Charlotte, North Carolina 2.39 2.90
Chattanooga, Tennessee 0.60 0.83
Chicago, Illinois 3.80 0.83
Cincinnati, Ohio 2.57 2.48
Columbus, Ohio 2.16 2.26
Dallas/Fort Worth, Texas 4.79 3.17
Denver, Colorado 2.37 2.89
East Bay (San Francisco), California 4.49 5.91
El Paso, Texas 2.99 3.70
Fort Lauderdale/Miami, Florida 1.05 0.94
Houston, Texas 5.16 6.34
Indianapolis, Indiana 4.69 5.87
Kansas City, Kansas/Missouri 1.95 2.37
Las Vegas, Nevada 1.99 1.24
Los Angeles/Orange County, California 3.65 2.91
Louisville, Kentucky 0.46 0.22
Memphis, Tennessee 2.03 1.83
Nashville, Tennessee 1.87 2.13
New Jersey/I-95 Corridor 1.92 -
Oklahoma City, Oklahoma 0.56 0.74
Orlando, Florida 1.15 1.06
Phoenix, Arizona 1.69 1.81
Portland, Oregon 2.29 1.83
Reno, Nevada 2.01 2.36
Rio Grande Valley, Texas 0.89 1.04
Salt Lake City, Utah 2.35 2.29
San Antonio, Texas 4.56 4.78
San Diego, California 0.61 0.55
Seattle, Washington 1.57 1.46
South Bay (San Francisco), California 7.84 9.71
Tampa, Florida 4.53 5.94
Tulsa, Oklahoma 0.49 0.67
Washington, D.C./Baltimore 5.08 3.14
Other 0.81 0.39
------------ ------------
100.00% 100.00%
============ ============
</TABLE>
F-79
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes real estate investments as of December 31 (in
thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land held for development $ 109,316 $ 60,363
Land under development 40,465 56,944
Improved land 356,428 242,015
Buildings and improvements 1,918,256 1,380,389
Construction in progress 77,506 80,958
Capitalized preacquisition costs 6,776 7,001
---------- ----------
Total real estate 2,508,747 1,827,670
Less accumulated depreciation 109,147 56,406
---------- ----------
Net real estate $2,399,600 $1,771,264
========== ==========
</TABLE>
Capitalized preacquisition costs include $1,634,000 and $2,137,000 of funds on
deposit with title companies as of December 31, 1996 and 1995, respectively,
for property acquisitions.
Other real estate income consists primarily of gains on disposition of
undepreciated property and fees and other income from build-to-suit customers
generated to a large extent by SCI Development Services Incorporated ("SCI
Development Services"). SCI Development Services develops build-to-suit
distribution space facilities or works on a fee basis for customers whose space
needs do not meet SCI's strict investment criteria for long-term ownership.
Through its preferred stock ownership, SCI will realize substantially all
economic benefits of SCI Development Services' activities. The activities of
SCI Development Services are consolidated with SCI and all intercompany
transactions have been eliminated. As of December 31, 1996, the outstanding
balances of development and mortgage loans made by SCI to SCI Development
Services for the purchase of distribution facilities and land for distribution
facility development aggregated $162.0 million. SCI Development Services pays
federal and state taxes at the applicable corporate rate.
The REIT Manager provides SCI Development Services with day-to-day management
for a fee based on 16% of SCI Development Services' pre-tax cash flow,
including gains and losses realized on property sales. The fee incurred for
1996 was approximately $1.3 million. Dividends and interest paid by SCI
Development Services to SCI are excluded from SCI's cash flow for determining
the REIT management fee paid by SCI.
SCI leases its properties to customers under agreements which are classified as
operating leases. The leases generally provide for payment of all or a portion
of utilities, property taxes and insurance by the customer. SCI's largest
customer accounted for less than 1.5% of SCI's 1996 rental income (on an
annualized basis), and the annualized base rent for SCI's 20 largest customers
accounted for less than 12.9% of SCI's 1996 rental income (on an annualized
basis). Minimum lease payments receivable on non-cancelable leases with lease
periods greater than one year are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 241,100
1998 202,698
1999 161,395
2000 119,975
2001 83,309
Thereafter 200,772
----------
$1,009,249
==========
</TABLE>
In addition to the December 31, 1996 construction payable accrual of $24.6
million, SCI had unfunded commitments on its contracts for developments under
construction totaling $106.6 million. These commitments relate to development
activity in Atlanta, Charlotte, Chicago, Cincinnati, Dallas, East Bay (San
Francisco), Houston, Indianapolis, Kansas City, Las Vegas, Nashville, Orange
County, CA, Orlando, Portland, Rio Grande Valley, Salt Lake City, San Antonio,
Seattle, Tampa, and Washington, D.C./Baltimore.
F-80
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BORROWINGS:
Mortgage notes payable, assessment bonds payable and securitized debt consisted
of the following at December 31, 1996 (in thousands):
---------------------------------------------------------
<TABLE>
<CAPTION>
BALLOON
PERIODIC PAYMENT
INTEREST MATURITY PAYMENT PRINCIPAL DUE AT
DESCRIPTION MARKET RATE DATE DATE BALANCE MATURITY
----------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Notes Payable:
Charlotte Commerce Park
#4 Charlotte 9.250% 06/01/97 (1) $ 1,522 $ 1,511
DeSoto Business Park Baltimore 9.750 03/01/97 (1) 6,053 6,008
Downtown Distribution
Center San Antonio 9.375 07/01/97 (1) 1,186 1,169
Eigenbrodt Way Distri-
bution Center #1 East Bay 8.590 04/01/03 (1) 1,723 1,479
Gateway Corporate Cen-
ter #10 South Bay 8.590 04/01/03 (1) 2,094 1,361
Hayward Industrial Cen-
ter I & II East Bay 8.590 04/01/03 (1) 14,541 12,480
Landmark One Distribu-
tion
Center #1 San Antonio 9.250 06/01/97 (1) 1,886 1,872
Oxmoor Distribution
Center #1 Birmingham 8.390 04/01/99 (1) 4,131 3,895
Oxmoor Distribution
Center #2 Birmingham 8.100 05/01/99 (1) 1,521 1,439
Oxmoor Distribution
Center #3 Birmingham 8.100 05/01/99 (1) 1,511 1,426
Peter Cooper Distribu-
tion
Center #1 El Paso 10.625 06/01/99 (1) 2,664 2,619
Platte Valley Indus-
trial Center #1 Kansas City 9.750 03/01/00 (1) 524 256
Platte Valley Indus-
trial Center #3 Kansas City 9.750 06/01/98 (1) 1,168 1,091
Platte Valley Indus-
trial Center #4 Kansas City 10.100 11/01/21 (2) 2,100 -
Platte Valley Indus-
trial Center #5 Kansas City 9.500 07/01/97 (1) 2,911 2,795
Platte Valley Indus-
trial Center #8 Kansas City 8.750 08/01/04 (1) 2,000 1,488
Platte Valley Indus-
trial Center #9 Kansas City 8.100 04/01/17 (2) 3,477 -
Princeton Distribution
Center Cincinnati 9.250 02/19/99 (1) 1,247 1,300
Rio Grande Industrial
Center #1 Brownsville 8.875 09/01/01 (1) 3,368 2,544
Riverside Industrial
Center #3 Kansas City 8.750 08/01/04 (1) 1,571 1,170
Riverside Industrial
Center #4 Kansas City 8.750 08/01/04 (1) 4,246 3,161
Southwide Lamar Indus-
trial
Center #1 Memphis 7.670 05/01/24 (1) 421 674
Sullivan 75 Distribu-
tion
Center #1 Atlanta 9.960 04/01/04 (1) 1,857 1,663
Tampa West Distribution
Center #20 Tampa 9.125 11/30/00 (2) 203 -
Thorton Business Center
#1- #4 South Bay 8.590 04/01/03 (1) 9,537 8,185
Titusville Industrial
Center #1 Orlando 10.000 09/01/01 (1) 4,942 4,181
Vista Del Sol Indus-
trial
Center #1 El Paso 9.680 08/01/07 (2) 2,978 -
Vista Del Sol Indus-
trial
Center #3 El Paso 9.680 08/01/07 (2) 1,260 -
West One Business Cen-
ter #1 Las Vegas 8.250 09/01/00 (1) 4,584 4,252
West One Business Cen-
ter #3 Las Vegas 9.000 09/01/04 (1) 4,531 3,847
---------
8.99% Weighted-average rate $91,757
=========
Assessment Bonds Pay-
able:
City of Las Vegas Las Vegas 8.75% 10/01/13 (2) $ 312 $ -
City of Las Vegas Las Vegas 8.75 10/01/13 (2) 241 -
City of Hayward South Bay 7.00 03/01/98 (2) 7 -
City of Fremont South Bay 7.00 03/01/11 (2) 10,870 -
City of Wilsonville Portland 6.82 08/19/04 (2) 161 -
City of Kent Seattle 7.85 06/20/05 (2) 134 -
City of Kent Seattle 7.98 05/20/09 (2) 76 -
City of Portland Portland 7.25 11/07/15 (2) 113 -
City of Portland Portland 7.25 11/17/07 (2) 6 -
City of Portland Portland 7.25 09/15/16 (2) 250 -
---------
7.10% Weighted-average rate $12,170
=========
Securitized Debt:
Tranche A (3) 7.74% 02/01/04 (1) $27,686 $20,821
Tranche B (3) 9.94 02/01/04 (1) 8,339 7,215
---------
8.25% Weighted-average rate $36,025
=========
</TABLE>
- -------
(1) Amortizing monthly with a balloon payment due at maturity.
(2) Fully amortizing.
(3) Secured by real estate located primarily in Fort Lauderdale/Miami, Orlando
and Tampa.
F-81
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage notes payable are secured by real estate with an aggregate
undepreciated cost of $165.0 million at December 31, 1996. Assessment bonds
payable are secured by real estate with an aggregate undepreciated cost of
$219.6 million at December 31, 1996. Securitized debt is collateralized by real
estate with an aggregate undepreciated cost of $68.1 million at December 31,
1996.
Line of Credit
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank of Texas, N.A. (as agent for a bank group). Borrowings bear
interest at SCI's option, at either (a) the greater of the federal funds rate
plus 0.5% and the prime rate, or (b) LIBOR plus 1.25% based upon SCI's current
senior debt ratings. The prime rate was 8.25% and the 30 day LIBOR rate was
5.50% at December 31, 1996. Additionally, there is a commitment fee ranging
from .125% to .25% per annum of the unused line of credit balance. The line is
scheduled to mature in May 1998 and may be extended annually for an additional
year with the approval of NationsBank and the other participating lenders; if
not extended, at SCI's election, the facility will either (a) convert to a
three-year term note or (b) continue on a revolving basis with the remaining
one-year maturity. All debt incurrences are subject to a covenant that SCI
maintain a debt to tangible net worth ratio of not greater than 1 to 1.
Additionally, SCI is required to maintain an adjusted net worth (as defined) of
at least $1.0 billion, to maintain interest payment coverage of not less than 2
to 1 and to maintain a fixed charge coverage ratio of not less than 1.4 to 1.
SCI is in compliance with all covenants contained in the line of credit, and as
of February 10, 1997, no borrowings were outstanding on the line of credit.
A summary of SCI's line of credit borrowings is as follows for the years ended
December 31, (in thousands):
------------------
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Weighted-average daily interest rate 7.02% 8.0%
Borrowings outstanding at December 31 $ 38,600 $ 81,000
Weighted-average daily borrowings $ 44,268 $ 61,132
Maximum borrowings outstanding at any month end $124,200 $246,000
Total line of credit at December 31 $350,000 $350,000
</TABLE>
Long-Term Debt
------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
8.72% Senior Unsecured Notes, issued on March 2, 1995 in
an original principal amount of $150,000,000. Interest
is payable March 1 and September 1 of each year. The
Notes are payable in eight consecutive annual
installments of $18,750,000 commencing March 1, 2002
and maturing on March 1, 2009. $150,000 $150,000
9.34% Senior Unsecured Notes, issued on March 2, 1995 in
an original principal amount of $50,000,000. Interest
is payable March 1 and September 1 of each year. The
Notes are payable in six consecutive annual
installments ranging from $5,000,000 to $12,500,000
commencing on March 1, 2010 and maturing on March 1,
2015. 50,000 50,000
7.13% Senior Unsecured Notes due 1998, issued on May 16,
1995 in an original principal amount of $15,000,000,
net of original issue discount. Interest is payable May
15 and November 15 of each year. 14,993 14,990
7.25% Senior Unsecured Notes due 2000, issued on May 16,
1995 in an original principal amount of $17,500,000,
net of original issue discount. Interest is payable May
15 and November 15 of each year. 17,448 17,444
7.30% Senior Unsecured Notes due 2001, issued on May 16,
1995 in an original principal amount of $17,500,000,
net of original issue discount. Interest is payable May
15 and November 15 of each year. 17,435 17,429
</TABLE>
F-82
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
7.88% Senior Unsecured Notes, issued on May 16, 1995 in
an original principal amount of $75,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in
eight annual installments of $9,375,000 beginning May
15, 2002 and maturing on May 15, 2009. 74,668 74,664
7.25% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $50,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in four
annual installments of $12,500,000 beginning May 15,
1999 and maturing on May 15, 2002. 49,951 -
7.95% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $100,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in four
annual installments of $25,000,000 beginning May 15,
2005 and maturing on May 15, 2008. 99,840 -
8.65% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $50,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in
seven annual installments ranging from $5,000,000 to
$12,500,000 beginning May 15, 2010 and maturing on May
15, 2016. 49,856 -
--------- ---------
Total long-term debt, net of original issue discount $524,191 $324,527
========= =========
</TABLE>
All of the foregoing Notes are redeemable at any time at the option of SCI, in
whole or in part, at a redemption price equal to the sum of the principal
amount of the Notes being redeemed plus accrued interest thereon to the
redemption date plus an adjustment, if any, based on the yield to maturity
relative to market yields available at redemption. The Notes are governed by
the terms and provisions of an indenture agreement (the "Indenture") between
SCI and State Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, SCI can incur additional debt only if, after
giving effect to the debt being incurred and application of proceeds therefrom,
(i) the ratio of debt to total assets, as defined in the Indenture, does not
exceed 60%, (ii) the ratio of secured debt to total assets, as defined in the
Indenture, does not exceed 40% and (iii) SCI's pro forma interest coverage
ratio, as defined in the Indenture, for the four preceding fiscal quarters is
not less than 1.5:1. In addition, SCI may not at any time own total
unencumbered assets, as defined in the Indenture, equal to less than 150% of
the aggregate outstanding principal amount of SCI's unsecured debt. At December
31, 1996, SCI was in compliance with all debt covenants contained in the
Indenture.
Approximate principal payments due on long-term debt, mortgage notes payable,
assessment bonds payable and securitized debt during each of the years in the
five-year period ending December 31, 2001 and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
1997 $ 18,265
1998 19,782
1999 25,689
2000 38,429
2001 40,686
2002 and thereafter 522,101
---------
Total principal due 664,952
Less: Original issue discount (809)
---------
Total carrying value $664,143
=========
</TABLE>
F-83
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1996, 1995 and 1994, interest expense was $38,819,000, $32,005,000, and
$7,568,000, respectively, which was net of capitalized interest of $16,138,000,
$8,599,000 and $2,208,000, respectively. Total amortization of deferred loan
fees included in interest expense was $2,339,000, $2,092,000 and $1,023,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. The total
interest paid in cash on all outstanding debt was $50,704,000, $33,634,000, and
$8,992,000 during 1996, 1995, and 1994, respectively.
5. MINORITY INTEREST:
Minority interest represents limited partners' interests in five real estate
partnerships controlled by SCI.
SCI owns a 70.0% general partnership interest in Red Mountain Joint Venture,
which owns approximately $3 million of property in Albuquerque, New Mexico.
On December 22, 1993, SCI acquired a 68.7% controlling general partnership
interest in SCI Limited Partnership-I, which owns distribution facilities
primarily in the San Francisco Bay area. Limited partners are entitled to
exchange each partnership unit for one Common Share and are entitled to receive
preferential cumulative quarterly distributions per unit equal to the quarterly
distribution in respect of Common Shares. At December 31, 1996, 4,520,533
limited partnership units were outstanding and no units had been exchanged.
During the first two quarters of 1994, SCI acquired an 81.2% controlling
general partnership interest in SCI Limited Partnership-II, which owns
distribution facilities primarily in Austin, Charlotte, Dallas, Denver, El Paso
and the San Francisco Bay area. Limited partners are entitled to exchange each
partnership unit for one Common Share and are entitled to receive preferential
cumulative quarterly distributions per unit equal to the quarterly distribution
in respect of Common Shares. During the third quarter of 1995, certain limited
partners in SCI Limited Partnership-II exercised their conversion rights to
exchange partnership units for Common Shares on a one for one basis. As a
result of these conversions, SCI's general partnership interest in SCI Limited
Partnership-II increased to 97.4%, and SCI's outstanding Common Shares
increased by 555,651 shares. As of December 31, 1996, there were 90,213 limited
partnership units outstanding in SCI Limited Partnership-II.
In October 1994, SCI acquired a 50.4% controlling general partnership interest
in SCI Limited Partnership-III, which owns distribution facilities primarily in
Tampa, Florida. During 1995, SCI contributed an additional $11.9 million to
this partnership for asset acquisitions which increased SCI's general
partnership interest to 71.8%. During 1996, SCI contributed $4.2 million for a
property acquisition in San Antonio, Texas which increased SCI's general
partnership interest from 71.8% to 75.6%. Limited partners are entitled to
exchange each partnership unit for one Common Share and are entitled to receive
preferential cumulative quarterly distributions per unit equal to the quarterly
distribution in respect of Common Shares. As of December 31, 1996, there were
514,900 limited partnership units outstanding in SCI Limited Partnership-III
and no units had been exchanged.
In October 1994, SCI IV, Inc., a wholly-owned subsidiary of SCI, made a $27.5
million cash contribution to SCI Limited Partnership-IV, a Delaware limited
partnership ("Partnership-IV"), in exchange for a 96.36% general partner
interest in Partnership-IV, and third party investors that were not affiliated
with SCI contributed an aggregate of $1.0 million in assets to Partnership-IV
in exchange for limited partner interests totalling 3.6% in Partnership-IV. SCI
contributed an additional $150,000 to the partnership in 1996 in conjunction
with a Section 1031 exchange transaction which increased SCI's interest from
96.36% to 96.38%. SCI IV, Inc., as general partner, manages the activities of
Partnership-IV and has fiduciary responsibilities to Partnership-IV and its
other partners.
Both Partnership-IV and SCI IV, Inc. are legal entities that are separate and
distinct from SCI, its affiliates and each other, and each has separate assets,
liabilities, business functions and operations. The assets owned by
Partnership-IV consist of income-producing, improved real property located in
Florida, Ohio and Oklahoma. The sole assets owned by SCI IV, Inc. are its
general partner advances to and interest in Partnership-IV. SCI and its
affiliates had no borrowings from Partnership-IV at December 31, 1996 and 1995.
Partnership-IV had $1,384,000 and $283,000 of borrowings from SCI IV, Inc. at
December 31, 1996 and 1995, respectively. SCI IV, Inc. had $1,384,000 and
$283,000 of borrowings from SCI and its affiliates at December 31, 1996 and
1995, respectively. For financial
F-84
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reporting purposes, the assets, liabilities, results of operations and cash
flows of each of Partnership-IV and SCI IV, Inc. are included in SCI's
consolidated financial statements, and the third party investors' interests in
Partnership-IV are reflected as minority interest. Limited partners are
entitled to exchange each partnership unit for one Common Share and are
entitled to receive preferential cumulative quarterly distributions per unit
equal to the quarterly distribution in respect of Common Shares. At December
31, 1996, there were 68,612 limited partnership units outstanding in
Partnership-IV and no units had been exchanged.
6. SHAREHOLDERS' EQUITY:
On November 13, 1996, SCI issued 2,000,000 Series C Cumulative Redeemable
Preferred Shares (the "Series C Preferred Shares"). The Series C Preferred
Shares have a liquidation preference of $50.00 per share for an aggregate
liquidation preference of $100.0 million plus accrued and unpaid dividends. The
net proceeds (after underwriting commission and other offering costs) of the
Series C Preferred Shares issued were $97.1 million. Holders of the Series C
Preferred Shares are entitled to receive, when, as and if declared by SCI's
Board of Trustees (the "Board"), out of funds legally available for payment of
distributions, cumulative preferential cash distributions at a rate of 8.54% of
the liquidation preference per annum (equivalent to $4.27 per share). On or
after November 13, 2026, the Series C Preferred Shares may be redeemed for cash
at the option of SCI. The redemption price (other than the portion thereof
consisting of accrued and unpaid distributions) is payable solely out of the
sale proceeds of other capital shares of SCI, which may include shares of other
series of preferred shares.
On August 21, 1996, SCI commenced a rights offering to sell 6,787,806 Common
Shares at $17.25 per Common Share and also authorized an additional 3,393,903
Common Shares for oversubscriptions or third party subscribers. In September
1996, SCI issued 7,865,645 Common Shares of the 10,181,709 Common Shares
subscribed for and recorded subscriptions receivable of $40.0 million. In
October 1996, 2,316,064 Common Shares were issued and all subscriptions
receivable were collected. Gross proceeds from the offering totaled $175.6
million.
On September 24, 1996, SCI offered 2,036,342 Common Shares to third party
subscribers in the rights offering that were not accepted in whole or in part
due to demand in excess of the Common Shares offered. All of the Common Shares
were subscribed for as of September 30, 1996 and subscriptions receivable for
gross proceeds of $35.1 million recorded. In October 1996, all of such Common
Shares were issued and all subscriptions receivable were collected.
Security Capital Group Incorporated ("Security Capital"), an affiliate of SCI's
REIT Manager, purchased 3,734,240 Common Shares in connection with the
September rights offering at the same price paid by the public. As of December
31, 1996, Security Capital owned 46.0% of SCI's outstanding 93,676,546 Common
Shares.
In February 1996, SCI issued a total of 8,050,000 Series B Cumulative
Convertible Redeemable Preferred Shares (the "Series B Preferred Shares"). The
Series B Preferred Shares have a liquidation preference of $25.00 per share for
an aggregate liquidation preference of $201.3 million plus any accrued and
unpaid dividends. Holders of the Series B Preferred Shares are only entitled to
limited voting rights under certain conditions. The Series B Preferred Shares
are convertible at any time, unless previously redeemed, at the option of the
holders thereof into Common Shares at a conversion price of $19.50 per share
(equivalent to a conversion rate of 1.282 Common Shares for each Series B
Preferred Share), subject to adjustment in certain circumstances. Holders of
the Series B Preferred Shares are entitled to receive, when, as and if declared
by the Board, out of funds legally available for the payment of distributions,
cumulative preferential cash distributions in an amount per share equal to the
greater of 7% of the liquidation preference per annum (equivalent to $1.75 per
share) or the distribution on the Common Shares, or portion thereof, into which
a Series B Preferred Share is convertible. Distributions on the Series B
Preferred Shares are cumulative from the date of original issue and payable
quarterly in arrears on the last day of March, June, September and December of
each year. The Series B Preferred Shares are redeemable at the option of SCI on
or after February 21, 2001.
On September 29, 1995, SCI issued 9,421,505 Common Shares at $15.375 per share
and received subscriptions for 6,838,658 additional Common Shares at the same
price in conjunction with a rights offering ($250 million). The
F-85
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional Common Shares were issued on October 3, 1995. Security Capital
purchased 6,504,148 Common Shares in this offering (40% of the shares sold). As
of December 31, 1995, Security Capital owned 48.3% of SCI's outstanding
81,416,451 Common Shares.
On June 21, 1995, SCI issued 5,400,000 Series A Cumulative Redeemable Preferred
Shares (the "Series A Preferred Shares"). The Series A Preferred Shares have a
liquidation preference of $25.00 per share for an aggregate liquidation
preference of $135.0 million plus any accrued and unpaid dividends. The net
proceeds (after underwriting commission and other offering costs) of the Series
A Preferred Shares issued were $130.4 million. Holders of the Series A
Preferred Shares are entitled only to limited voting rights under certain
conditions. Holders of the Series A Preferred Shares will be entitled to
receive, when, as and if declared by the Board, out of funds legally available
for the payment of distributions, cumulative preferential cash distributions at
the rate of 9.4% of the liquidation preference per annum (equivalent to $2.35
per share). Such distributions are cumulative from the date of original issue
and are payable quarterly in arrears on the last day of March, June, September,
and December of each year. The Series A Preferred Shares are redeemable at the
option of SCI on or after June 21, 2000. The redemption price (other than the
portion thereof consisting of accrued and unpaid distributions) is payable
solely out of the sale proceeds of other capital shares of SCI, which may
include shares of other series of preferred shares.
In October and November 1994, SCI completed an offering of 18,000,000 Common
Shares at a price of $15.25 per share. 17,750,000 Common Shares were issued on
October 5, 1994, and 250,000 Common Shares were issued on November 17, 1994.
9,800,000 of the Common Shares were purchased by Security Capital, at the same
price paid by the public, with no underwriting discount or commission ($149.5
million). 8,200,000 of the Common Shares were sold through an underwritten
offering at $15.25 per share. The underwriting discount on these Common Shares
was $0.80 per share. After additional costs of the offering, net proceeds to
SCI were $266.9 million.
On June 29, 1994, SCI completed a rights offering and issued 6,611,571 Common
Shares at $15.125 per share ($100 million). Security Capital purchased
3,517,483 Common Shares in this offering (53% of the shares sold). On March 31,
1994, SCI completed its initial public offering and sold 3,260,870 Common
Shares at $11.50 per share ($37.5 million). Security Capital purchased 523,370
Common Shares in this offering (16% of the shares sold).
Dividend Reinvestment and Share Purchase Plan
In March 1995, SCI adopted a Dividend Reinvestment and Share Purchase Plan (the
"1995 Plan"), which commenced in April 1995. The 1995 Plan allows holders of
Common Shares the opportunity to acquire additional Common Shares by
automatically reinvesting distributions. Common Shares are acquired pursuant to
the 1995 Plan at a price equal to 98% of the market price of such Common
Shares, without payment of any brokerage commission or service charge. The 1995
Plan also allows participating common shareholders to purchase a limited number
of additional Common Shares at 98% of the market price of such Common Shares,
by making optional cash payments, without payment of any brokerage commission
or service charge. Holders of Common Shares who do not participate in the 1995
Plan continue to receive distributions as declared.
Option Plan
In April 1994, SCI adopted its Share Option Plan for Outside Trustees (the
"Outside Trustees Plan"). Under the Outside Trustees Plan, there are 100,000
Common Shares approved which can be granted to non-employee Trustees. All
options granted are for a term of five years and are immediately exercisable in
whole or in part. The exercise price of the options granted may not be less
than the fair market value on the date of the grant. At December 31, 1996 there
were 18,000 options for Common Shares outstanding and exercisable under the
Outside Trustees Plan at exercise prices of $15.50, $16.00, and $17.50.
SCI adopted the provisions of Statement of Financial Accounting Standards No.
123 ("SFAS 123") "Accounting for Stock Based Compensation" during 1996. Under
the provisions of this statement, SCI will continue to account for the Outside
Trustees Plan under the provisions of APB Opinion No. 25, and make the pro
forma disclosures required by SFAS 123 where applicable. The effect of adopting
this statement was immaterial to SCI's consolidated financial statements.
F-86
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shareholder Purchase Rights
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right ("Right") for each outstanding Common Share to be distributed to
all holders of record of the Common Shares on December 31, 1993. Each Right
entitles the registered holder to purchase one-hundredth of a Participating
Preferred Share for an exercise price of $40.00 per one-hundredth of a
Participating Preferred Share, subject to adjustment as provided in the Rights
Agreement. The Rights will generally be exercisable only if a person or group
(other than certain affiliates of SCI) acquires 20% or more of the Common
Shares or announces a tender offer for 25% or more of the Common Shares. Under
certain circumstances, upon a shareholder acquisition of 20% or more of the
Common Shares (other than certain affiliates of SCI), each Right will entitle
the holder to purchase, at the Right's then-current exercise price, a number of
Common Shares having a market value of twice the Right's exercise price. The
acquisition of SCI pursuant to certain mergers or other business transactions
will entitle each holder of a Right to purchase, at the Right's then-current
exercise price, a number of the acquiring company's common shares having a
market value at that time equal to twice the Right's exercise price. The Rights
held by certain 20% shareholders will not be exercisable. The Rights will
expire on December 7, 2003, unless the expiration date of the Rights is
extended, and the Rights are subject to redemption at a price of $0.01 per
Right under certain circumstances.
7. DISTRIBUTIONS:
The annual distribution per Common Share was $1.01 in 1996, $0.935 in 1995 and
$0.85 in 1994. Distributions attributable to realized gains on the disposition
of investments may be considered for payment to shareholders on a special, as-
incurred basis.
For federal income tax purposes, the following summarizes the taxability of
distributions paid on Common Shares in 1995 and 1994 and the estimated
taxability for 1996:
----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Per Common Share:
Ordinary income $0.879 $0.692 $0.67
Capital gains - - -
Return of capital 0.131 0.243 0.18
--------- --------- ---------
Total $1.010 $0.935 $0.85
========= ========= =========
</TABLE>
On December 17, 1996, SCI declared a distribution of $0.2675 per Common Share
payable on February 18, 1997 to shareholders of record as of February 4, 1997.
At the same time, SCI announced that it set an annualized distribution level of
$1.07 per Common Share for 1997.
Pursuant to the terms of the preferred shares, SCI is restricted from declaring
or paying any distribution with respect to the Common Shares unless all
cumulative distributions with respect to the preferred shares have been paid
and sufficient funds have been set aside for distributions that have been
declared for the then-current distribution period with respect to the preferred
shares.
F-87
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For Federal income tax purposes, the following summary reflects the taxability
of dividends paid on the Series A Preferred Shares, Series B Preferred Shares,
and Series C Preferred Shares for the period prior to 1996 and the estimated
taxability for 1996.
------------------
<TABLE>
<CAPTION>
DATE OF
ISSUANCE
TO
DECEMBER
1996 31, 1995
--------- ---------
<S> <C> <C>
Per Series A Preferred Share:
Ordinary Income $2.35 $1.24
Capital Gains - -
--------- ---------
Total $2.35 $1.24
========= =========
<CAPTION>
DATE OF
ISSUANCE
TO
DECEMBER
31, 1996
---------
<S> <C> <C>
Per Series B Preferred Share:
Ordinary Income $1.50
Capital Gains -
---------
Total $1.50
=========
Per Series C Preferred Share:
Ordinary Income $0.57
Capital Gains -
---------
Total $0.57
=========
</TABLE>
SCI's tax return for the year ended December 31, 1996 has not been filed, and
the taxability information for 1996 is based upon the best available data.
SCI's tax returns have not been examined by the Internal Revenue Service and,
therefore, the taxability of the distributions is subject to change.
8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands except for per share amounts)
for 1996 and 1995 is as follows:
------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED, YEAR ENDED
3-31 6-30 9-30 12-31 12-31
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1996:
Rental income $50,062 $54,361 $59,391 $63,186 $227,000
========= ========= ========= ========= =========
Earnings from opera-
tions $17,262 $19,456 $20,427 $25,565 $ 82,710
Minority interest
share in net
earnings 756 884 859 827 3,326
Loss on disposition of
real estate (29) - - - (29)
--------- --------- --------- --------- ---------
Net earnings 16,477 18,572 19,568 24,738 79,355
Less preferred share
dividends 4,673 6,695 6,694 7,833 25,895
--------- --------- --------- --------- ---------
Net earnings attribut-
able to Common Shares $11,804 $11,877 $12,874 $16,905 $ 53,460
========= ========= ========= ========= =========
Net earnings per Com-
mon Share $ 0.14 $ 0.15 $ 0.16 $ 0.18 $ 0.63
========= ========= ========= ========= =========
</TABLE>
F-88
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED, YEAR ENDED
3-31 6-30 9-30 12-31 12-31
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1995:
Rental income $32,901 $35,340 $40,372 $45,266 $153,879
========= ========= ========= ========= =========
Earnings from
operations $10,528 $10,372 $13,121 $16,970 $ 50,991
Minority interest
share in net earnings 865 874 807 785 3,331
Gain on disposition of
real estate - - - 1,053 1,053
--------- --------- --------- --------- ---------
Net earnings 9,663 9,498 12,314 17,238 48,713
Less preferred share
dividends - 353 3,172 3,173 6,698
--------- --------- --------- --------- ---------
Net earnings
attributable to
Common Shares $ 9,663 $ 9,145 $ 9,142 $14,065 $ 42,015
========= ========= ========= ========= =========
Net earnings per
Common Share $ 0.15 $ 0.14 $ 0.14 $ 0.17 $ 0.61
========= ========= ========= ========= =========
</TABLE>
9. REIT MANAGEMENT AGREEMENT:
Security Capital Industrial Incorporated (the "REIT Manager"), a subsidiary of
Security Capital (Note 6), is the REIT manager of SCI. All officers of SCI are
employees of the REIT Manager and SCI currently has no employees. Pursuant to
the REIT management agreement, in exchange for providing research, strategic
planning, investment analysis, acquisition and development services, asset
management, capital markets, legal and accounting services and day-to-day
management of SCI's operations, the REIT Manager is entitled to receive from
SCI a REIT management fee, payable quarterly, equal to 16% of cash flow, as
defined in the agreement, before deducting (i) fees paid to the REIT Manager,
(ii) extraordinary expenses incurred at the request of the independent Trustees
of SCI, and (iii) 33% of any interest paid by SCI on convertible subordinated
debentures (of which there has been none since inception of the REIT management
agreement); and, after deducting (iv) actual or assumed regularly scheduled
principal and interest payments on long-term debt and (v) distributions
actually paid with respect to any non-convertible preferred shares of
beneficial interest of SCI. The REIT management agreement has been amended so
that the long-term senior notes described in Note 4 will be treated as if they
had regularly scheduled principal and interest payments similar to a 20-year
level monthly payment, fully amortizing mortgage and the assumed principal and
interest payments will be deducted from cash flow in determining the fee for
future periods. Cash flow does not include interest and income from SCI
Development Services, realized gains from dispositions of investments or income
from cash equivalent investments. The REIT Manager also receives a fee of .2%
of the average daily balance of funds invested in interest bearing cash
accounts, the earnings on which are not subject to the 16% fee. For the years
ended December 31, 1996, 1995 and 1994, the REIT Manager earned REIT management
fees totalling $21,472,000, $14,207,000 and $8,673,000, respectively.
10. PROPERTY MANAGEMENT COMPANY:
Commencing January 1994, SCI Client Services Incorporated ("Client Services"),
a subsidiary of Security Capital, began providing property management services
for certain of SCI's properties. The agreement is subject to termination by SCI
or Client Services on 30 days' notice, is renewable annually upon approval of
SCI's independent Trustees, and provides for a monthly fee to Client Services
of no more than 3% per annum of property revenues, paid monthly, plus leasing
commissions consistent with industry practice, which together were $10.1
million, $4.7 million and $1.7 million for 1996, 1995 and 1994, respectively.
As of December 31, 1996, Client Services managed 90.0% of SCI's 80.6 million
total operating square feet. The REIT Manager anticipates that Client Services
will manage additional SCI properties in the future. Any management contracts
executed with Client Services are expected to be at terms management believes
are no less favorable to SCI than could be obtained with unaffiliated third
parties.
F-89
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS:
SCI leases space to related parties on market terms that management believes
are no less favorable to SCI than those that could be obtained with
unaffiliated third parties. These transactions are summarized as follows:
--------------------------------------
<TABLE>
<CAPTION>
SECURITY REIT CLIENT
CAPITAL MANAGER SERVICES
(NOTE 6) (NOTE 9) (NOTE 10) TOTAL
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Rental revenue during the year ended
December 31, 1994 $203,220 $ 44,926 $112,542 $ 360,688
Rental revenue during the year ended
December 31, 1995 $415,264 $210,856 $194,335 $ 820,455
Rental revenue during the year ended
December 31, 1996 $593,657 $210,856 $571,970 $1,376,483
Square feet leased as of December 31,
1996 102,268 25,007 84,520 211,795
Annualized revenue for leases in effect
at December 31, 1996 $744,718 $210,856 $766,190 $1,721,764
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is presented in accordance with the requirements of SFAS No. 107. The estimated
fair value amounts have been determined by SCI using available market
information and valuation methodologies.
As of December 31, 1996 and 1995, the carrying amounts of certain financial
instruments employed by SCI, including cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued expenses were representative of
their fair values because of the short-term maturity of these instruments. As
of December 31, 1995, based on the borrowings available to SCI, the carrying
value of the long-term debt and mortgages was a reasonable estimation of their
fair values. As of December 31, 1996, the fair value of the long-term debt and
mortgages has been estimated based on quoted market prices for the same or
similar issues or by discounting the future cash flows using rates currently
available for debt with similar terms and maturities. The increase in the fair
value of long-term debt and mortgages over the carrying value in the table
below is a result of a net reduction in the interest rates available to SCI at
December 31, 1996 from the interest rates in effect at the dates of issuance.
The long-term debt and many of the mortgages contain prepayment penalties or
yield maintenance provisions which would make the cost of refinancing exceed
the benefit of refinancing at the lower rates. As of December 31, 1996, the
fair value of all derivative financial instruments are amounts at which they
could be settled, based on quoted market prices or estimates obtained from
brokers (there were no derivative financial instruments outstanding as of
December 31, 1995). The following table reflects the carrying amount and
estimated fair value of SCI's financial instruments (in thousands):
------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Balance sheet financial instruments
Long-term debt $524,191 $549,613
Mortgages $139,952 $142,643
Derivative financial instruments
Interest rate contracts $ - $ 1,218
</TABLE>
Derivative Financial Instruments
SCI has only limited involvement with derivative financial instruments and does
not use them for trading purposes. SCI uses derivatives to manage well-defined
interest rate risk.
F-90
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The primary risks associated with derivative instruments are market risk (price
risk) and credit risk. Price risk is defined as the potential for loss in the
value of the derivative due to adverse changes in market prices (interest
rates). SCI utilizes derivative instruments in anticipation of future
transactions to manage well defined interest rate risk. Through hedging, SCI
can effectively manage the risk of increases in interest rates on future debt
issuances.
Credit risk is the risk that one of the parties to a derivative contract fails
to perform or meet their financial obligation under the contract. SCI does not
obtain collateral to support financial instruments subject to credit risk but
monitors the credit standing of counterparties. As of December 31, 1996, the
counterparties to all outstanding contracts were financial institutions with AA
or A+ credit ratings. SCI does not anticipate non-performance by any of the
counterparties to its derivative contracts. Should a counterparty fail to
perform, however, SCI would incur a financial loss to the extent of the
positive fair market value of the derivative instruments.
The following table summarizes the activity in interest rate contracts for the
year ended December 31, 1996 (in millions):
------------------
<TABLE>
<CAPTION>
INTEREST
RATE FUTURES INTEREST
CONTRACTS RATE SWAPS
------------ ---------
<S> <C> <C>
Notional amount at December 31, 1995 $ - $ -
New contracts 156.0 173.0
Matured or expired contracts (50.0) -
Terminated contracts - (140.0)
--------- ---------
Notional amount at December 31, 1996 $106.0(1) $ 33.0(2)
========= =========
</TABLE>
- --------
(1) Included in the $106.0 million notional amount at December 31, 1996 are two
contracts totalling $80.0 million which settled on January 31, 1997 (see Note
14), and a $26.0 million contract with a termination date of July 15, 1997. The
$26.0 million contract locks in the 30 year Treasury at a rate of 6.56%.
(2) The remaining swap contract as of December 31, 1996, which matures in 2007,
provides for SCI to pay a fixed rate of 6.61% and receive a floating rate equal
to the three month LIBOR rate.
Deferred losses totalling $1.9 million on matured, expired or terminated
interest rate contracts were recorded on the balance sheet as of December 31,
1996. These losses related to the unwind of hedges placed for the May 1996 debt
offering (see Note 4) and are being amortized into interest expense over a
weighted-average amortization period of 10.8 years.
13. COMMITMENTS AND CONTINGENCIES:
Environmental Matters
All of the properties acquired by SCI have been subjected to Phase I
environmental reviews. While some of these assessments have led to further
investigation and sampling, none of the environmental assessments has revealed,
nor is SCI aware of any environmental liability (including asbestos-related
liability) that SCI believes would have a material adverse effect on SCI's
business, financial condition or results of operations.
14. SUBSEQUENT EVENTS:
On January 22, 1997, SCI announced that it received a proposal from Security
Capital to exchange the REIT Manager and Client Services, the REIT manager's
property management affiliate, for Common Shares. As a result of the proposed
transaction, SCI would become an internally managed REIT, and Security Capital
would remain SCI's largest shareholder. SCI's Board has formed a special
committee comprised of independent Trustees to review the proposed transaction.
The proposed transaction is subject to approval by the special committee, the
full Board and SCI's shareholders.
On February 7, 1997, SCI completed a public offering of 4,025,000 Common
Shares. Net proceeds to SCI after underwriting discounts and offering costs
were $80.4 million.
F-91
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 4, 1997, SCI issued $100.0 million of Series A 2015 Notes under its
Medium-Term Note program established in November 1996. The Series A 2015 Notes
bear interest at 7.81%, payable semi-annually on February 1 and August 1,
commencing August 1, 1997. Installments of principal will be paid annually on
each February 1, commencing February 1, 2010, in the following amounts: $20
million in 2010, $15 million in 2011, $15 million in 2012, $20 million in 2013,
$20 million in 2014 and $10 million in 2015. The Series A 2015 Notes have a
weighted-average life to maturity of 15.35 years and a final maturity extending
to 2015. The average effective interest cost is 7.73%, including all costs
associated with the offering plus $1.7 million in proceeds received on January
31, 1997 in connection with two interest rate protection agreements entered
into in August and November 1996 in anticipation of the debt offering. Both the
August 1996 and the November 1996 interest rate protection agreements were in
the form of a forward treasury lock agreement with an AA rated financial
institution. The August agreement included a notional principal amount of $30.0
million and a reference price of 99.653 on the thirty year Treasury Note. The
November agreement included a notional principal amount of $50.0 million and a
reference price of 101 29/32 on the ten year Treasury Note. The settlement date
on both contracts was January 31, 1997.
On October 11, 1996, and as amended on October 31, 1996, SCI filed a shelf
registration statement with the Securities and Exchange Commission regarding
the offering from time to time of $600 million in one or more series of its
debt securities, preferred shares of beneficial interest and Common Shares of
beneficial interest, and had approximately $78 million remaining under its
previous shelf registration statement. After the Series C Preferred Share
offering in November 1996 (see Note 6) and the offerings described above, as of
February 10, 1997, approximately $393 million in securities were available to
be issued under the shelf registration statement.
F-92
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Security Capital Industrial Trust:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Security Capital Industrial Trust, and have issued our
report thereon dated February 10, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The supplemental
Schedule III--Real Estate and Accumulated Depreciation ("Schedule III") is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
Schedule III has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 10, 1997
F-93
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
---------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
------------------- CAPITALIZED --------------------------- ACCUMULATED DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ------ ------- ------ ------------ -------------- ------ ------------ ------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
PROPERTIES
Atlanta, Georgia
Atlanta Airport
Distribution
Center 3 $1,758 $ - $ 4,610 $1,763 $ 4,605 $ 6,368 $ (70) 1996
Atlanta NE
Distribution
Center 4 3,248 - 11,942 3,248 11,942 15,190 (156) 1996
Atlanta West
Distribution
Center 21 6,995 36,055 7,007 6,995 43,062 50,057 (2,496) 1994, 1996
Carter-Pacific
Business Center 3 556 3,151 59 556 3,210 3,766 (115) 1995
Chattahoochee
Business Center 4 362 2,049 601 438 2,574 3,012 - 1996
Fulton Park
Distribution
Center 4 447 2,533 (79) 426 2,475 2,901 - 1996
International
Airport
Industrial
Center 9 2,939 14,146 4,436 2,969 18,552 21,521 (1,251) 1994, 1995
LaGrange
Distribution
Center 1 174 986 103 174 1,089 1,263 (91) 1994
Northeast
Industrial
Center 4 1,109 6,283 (158) 1,050 6,184 7,234 (168) 1996
Northmont
Industrial
Center 1 566 3,209 135 566 3,344 3,910 (244) 1994
Oakcliff
Industrial
Center 3 608 3,446 142 608 3,588 4,196 (206) 1995
Olympic
Industrial
Center 2 698 3,956 950 757 4,847 5,604 (120) 1996
Peachtree
Commerce
Business Center 4 707 4,004 490 707 4,494 5,201 (379) 1994
Peachtree
Distribution
Center 1 302 1,709 27 302 1,736 2,038 (115) 1994
Plaza Industrial
Center 1 66 372 11 66 383 449 (19) 1995
Pleasantdale
Industrial
Center 2 541 3,184 102 541 3,286 3,827 (214) 1995
Regency
Industrial
Center 9 1,853 10,480 555 1,856 11,032 12,888 (804) 1994
Sullivan 75
Distribution
Center 3 (d) 728 4,123 217 728 4,340 5,068 (291) 1994, 1995
Tradeport
Distribution
Center 3 1,464 4,563 5,215 1,479 9,763 11,242 (479) 1994, 1996
Weaver
Distribution
Center 2 935 5,182 369 935 5,551 6,486 (350) 1995
Westfork
Industrial
Center 10 2,483 14,115 415 2,483 14,530 17,013 (720) 1995
Zip Industrial
Center 4 533 3,023 (275) 485 2,796 3,281 - 1996
Austin, Texas
Braker Service
Center 3 1,765 10,002 789 1,765 10,791 12,556 (1,012) 1994
Corridor Park
Corporate Center 6 2,109 1,681 12,135 2,131 13,794 15,925 (369) 1995, 1996
Montopolis
Distribution
Center 1 580 3,384 430 580 3,814 4,394 (349) 1994
Pecan Business
Center 4 630 3,572 217 631 3,788 4,419 (177) 1995
Rutland
Distribution
Center 2 460 2,617 197 462 2,812 3,274 (275) 1993
Southpark
Corporate Center 7 1,946 - 13,894 1,946 13,894 15,840 (694) 1994, 1995, 1996
Walnut Creek
Corporate Center 12 2,707 5,649 15,668 2,707 21,317 24,024 (671) 1994, 1995, 1996
</TABLE>
F-94
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
----------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
-------------------- CAPITALIZED ------------------------------ ACCUMULATED DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ------ ------- ------- ------------ -------------- ------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Birmingham,
Alabama
Oxmoor
Distribution
Center 4 (d) 2,398 13,591 123 2,398 13,714 16,112 (1,215) 1994
Perimeter
Distribution
Center 2 2,489 14,109 428 2,490 14,536 17,026 (1,285) 1994
Charlotte, North
Carolina
Barringer
Industrial
Center 3 308 1,746 380 308 2,126 2,434 (176) 1994
Bond
Distribution
Center 2 905 5,126 859 905 5,985 6,890 (527) 1994
Charlotte
Commerce Center 10 (d) 4,341 24,954 765 4,342 25,718 30,060 (2,221) 1994
Charlotte
Distribution
Center 5 3,131 - 11,549 3,131 11,549 14,680 (344) 1995, 1996
Northpark
Distribution
Center 1 307 1,742 38 307 1,780 2,087 (145) 1994
Chattanooga,
Tennessee
Stone Fort
Distribution
Center 4 2,063 11,688 150 2,063 11,838 13,901 (889) 1994
Tiftonia
Distribution
Center 1 146 829 182 146 1,011 1,157 (51) 1995
Chicago, Illinois
Bedford Park
Distribution
Center 1 473 2,678 17 473 2,695 3,168 (15) 1996
Bridgeview
Distribution
Center 4 1,302 7,378 384 1,302 7,762 9,064 (102) 1996
Des Plaines
Distribution
Center 3 2,158 12,232 278 2,159 12,509 14,668 (311) 1995, 1996
Elk Grove
Distribution
Center 8 3,674 20,820 1,793 3,674 22,613 26,287 (555) 1995, 1996
Glendale Heights
Distribution
Center 1 1,126 6,382 40 1,126 6,422 7,548 - 1996
Glenview
Distribution
Center 1 214 1,213 7 214 1,220 1,434 (7) 1996
Itasca
Distribution
Center 1 319 1,808 23 319 1,831 2,150 (41) 1996
Mitchell
Distribution
Center 1 1,236 7,004 287 1,236 7,291 8,527 (137) 1996
Northlake
Distribution
Center 1 372 2,106 41 372 2,147 2,519 (47) 1996
Tri-Center
Distribution
Center 3 889 5,038 82 889 5,120 6,009 (42) 1996
Cincinnati, Ohio
Airpark
Distribution
Center 2 1,692 - 10,020 1,718 9,994 11,712 (169) 1996
Blue
Ash/Interstate
Distribution
Center 1 144 817 469 144 1,286 1,430 (44) 1995
Capital
Distribution
Center I 4 1,750 9,922 574 1,751 10,495 12,246 (680) 1994
Capital
Distribution
Center II 5 1,953 11,067 876 1,953 11,943 13,896 (853) 1994
</TABLE>
F-95
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
------------------ CAPITALIZED ------------------------- ACCUMULATED DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ------ ------- ----- ------------ -------------- ----- ------------ ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital
Industrial
Center I 10 1,039 5,885 841 1,039 6,726 7,765 (375) 1994, 1995
Empire
Distribution
Center 3 529 2,995 223 529 3,218 3,747 (138) 1995
Production
Distribution
Center 1 (f) 598 2,717 (18) 479 2,818 3,297 (201) 1994
Springdale
Commerce Center 3 421 2,384 431 421 2,815 3,236 (74) 1996
Columbus, Ohio
Capital Park
South
Distribution
Center 3 1,981 - 18,781 1,981 18,781 20,762 (320) 1996
Columbus West
Industrial
Center 3 645 3,655 578 645 4,233 4,878 (199) 1995
Corporate Park
West 2 679 3,849 45 679 3,894 4,573 (54) 1996
Fischer
Distribution
Center 1 1,197 6,785 561 1,197 7,346 8,543 (475) 1995
McCormick
Distribution
Center 5 1,664 9,429 697 1,664 10,126 11,790 (666) 1994
New World
Distribution
Center 1 207 1,173 411 207 1,584 1,791 (120) 1994
Dallas/Fort
Worth, Texas
Carter
Industrial
Center 1 334 - 2,301 334 2,301 2,635 (8) 1996
Dallas Corporate
Center 4 3,325 - 15,517 3,325 15,517 18,842 (208) 1996
Franklin
Distribution
Center 2 528 2,991 392 528 3,383 3,911 (317) 1994
Freeport
Distribution
Center 1 613 3,473 34 613 3,507 4,120 (19) 1996
Great Southwest
Distribution
Center 8 2,260 10,697 3,420 2,269 14,108 16,377 (590) 1994, 1995, 1996
Great Southwest
Industrial
Center 2 308 1,744 96 308 1,840 2,148 (68) 1995
Lone Star
Distribution
Center 2 967 5,477 57 967 5,534 6,501 (107) 1996
Metropolitan
Distribution
Center 1 201 1,097 716 297 1,717 2,014 (76) 1995
Northgate
Distribution
Center 5 1,570 8,897 339 1,570 9,236 10,806 (700) 1994, 1996
Northpark
Business Center 2 467 2,648 158 467 2,806 3,273 (79) 1995, 1996
Northway
Business Plaza 7 565 3,202 184 565 3,386 3,951 - 1995
Redbird
Distribution
Center 2 738 4,186 86 739 4,271 5,010 (112) 1994, 1996
Skyline Business
Center 4 409 2,320 21 409 2,341 2,750 - 1995
Stemmons
Distribution
Center 1 272 1,544 341 272 1,885 2,157 (103) 1995
Stemmons
Industrial
Center 11 1,497 8,484 993 1,497 9,477 10,974 (532) 1994, 1995, 1996
Trinity Mills
Distribution
Center 4 1,709 9,684 584 1,709 10,268 11,977 (191) 1996
Valwood Business
Center 2 520 2,945 (35) 520 2,910 3,430 - 1995
</TABLE>
F-96
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
------------------ CAPITALIZED ------------------------- ACCUMULATED DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ------ ------- ----- ------------ -------------- ----- ------------ ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Denver, Colorado
Denver Business
Center 5 1,156 7,486 5,892 1,156 13,378 14,534 (1,141) 1992, 1994, 1996
Havana
Distribution
Center 1 401 2,281 67 401 2,348 2,749 (270) 1993
Moline
Distribution
Center 1 327 1,850 95 327 1,945 2,272 (181) 1994
Moncrieff
Distribution
Center 1 314 2,493 147 314 2,640 2,954 (356) 1992
Pagosa
Distribution
Center 1 406 2,322 100 406 2,422 2,828 (295) 1993
Stapleton
Distribution
Center 1 219 1,247 49 219 1,296 1,515 (148) 1993
Upland
Distribution
Center I 6 820 5,710 8,007 821 13,716 14,537 (1,243) 1992, 1994, 1995
Upland
Distribution
Center II 6 2,456 13,946 486 2,489 14,399 16,888 (1,569) 1993, 1994
East Bay (San
Francisco),
California
East Bay
Industrial
Center 1 531 3,009 137 531 3,146 3,677 (246) 1994
Eigenbrodt Way
Distribution
Center 1 (d) 393 2,228 39 393 2,267 2,660 (226) 1993
Hayward Commerce
Center 4 1,933 10,955 276 1,933 11,231 13,164 (1,104) 1993
Hayward Commerce
Park 9 2,764 15,661 1,037 2,764 16,698 19,462 (1,603) 1994
Hayward
Distribution
Center 7 (e) 3,417 19,255 262 3,417 19,517 22,934 (1,947) 1993
Hayward
Industrial
Center 13 (d) 4,481 25,393 1,727 4,481 27,120 31,601 (2,603) 1993
Patterson Pass
Business Center 2 862 4,885 34 862 4,919 5,781 (492) 1993
San Leandro
Distribution
Center 3 1,387 7,862 188 1,387 8,050 9,437 (817) 1993
El Paso, Texas
Billy the Kid
Distribution
Center 1 273 1,547 453 273 2,000 2,273 (145) 1994
Broadbent
Industrial
Center 3 676 5,183 248 676 5,431 6,107 (668) 1993
Goodyear
Distribution
Center 1 511 2,899 32 511 2,931 3,442 (251) 1994
Northwestern
Corporate Center 4 1,272 3,155 6,632 1,278 9,781 11,059 (819) 1992, 1993, 1994
Pan Am
Distribution
Center 1 318 - 2,330 318 2,330 2,648 (107) 1995
Peter Cooper
Distribution
Center 1 (d) 495 2,816 42 495 2,858 3,353 (244) 1994
Vista Corporate
Center 4 1,945 - 10,211 1,946 10,210 12,156 (420) 1994, 1995, 1996
Vista Del Sol
Industrial
Center 7 (d) 2,255 12,782 9,310 3,516 20,831 24,347 (1,468) 1994, 1995
</TABLE>
F-97
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
-------------------- CAPITALIZED ------------------------------ ACCUMULATED
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C)
----------- ------ ------- ------- ------------ -------------- ------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center 1 675 3,825 644 1,276 3,868 5,144 (129)
North Andrews
Distribution
Center 1 (f) 698 3,956 91 698 4,047 4,745 (292)
Port 95
Distribution
Center 1 1,174 6,654 26 1,174 6,680 7,854 (370)
Houston, Texas
Crosstimbers
Distribution
Center 1 359 2,035 427 359 2,462 2,821 (213)
Hempstead
Distribution
Center 3 1,013 5,740 545 1,013 6,285 7,298 (551)
I-10 Central
Distribution
Center 2 181 1,023 100 181 1,123 1,304 (104)
I-10 Central
Service Center 1 58 330 29 58 359 417 (33)
Pine Forest
Business Center 18 4,859 27,557 1,451 4,859 29,008 33,867 (1,684)
Post Oak
Business Center 16 3,462 17,966 2,468 3,462 20,434 23,896 (1,718)
Post Oak
Distribution
Center 7 2,115 12,017 1,224 2,115 13,241 15,356 (1,433)
South Loop
Distribution
Center 5 1,051 5,964 689 1,052 6,652 7,704 (527)
Southwest
Freeway
Industrial
Center 1 84 476 27 84 503 587 (44)
West by
Northwest
Industrial
Center 13 3,076 8,382 17,984 3,088 26,354 29,442 (1,308)
White Street
Distribution
Center 1 469 2,656 164 469 2,820 3,289 (168)
Indianapolis,
Indiana
Eastside
Distribution
Center 2 471 2,668 246 472 2,913 3,385 (106)
North by
Northeast
Distribution
Center 1 1,058 - 6,009 1,059 6,008 7,067 (107)
Park 100
Industrial
Center 29 10,918 61,874 2,854 10,985 64,661 75,646 (2,757)
Park Fletcher
Distribution
Center 12 3,251 18,418 1,612 3,309 19,972 23,281 (711)
Shadeland
Industrial
Center 3 428 2,431 440 429 2,870 3,299 (130)
Kansas City,
Kansas/Missouri
44th Street
Business Center 1 143 813 284 143 1,097 1,240 (27)
<CAPTION>
DATE OF CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- ----------------------
<S> <C>
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center 1995
North Andrews
Distribution
Center 1994
Port 95
Distribution
Center 1995
Houston, Texas
Crosstimbers
Distribution
Center 1994
Hempstead
Distribution
Center 1994
I-10 Central
Distribution
Center 1994
I-10 Central
Service Center 1994
Pine Forest
Business Center 1993, 1994, 1995
Post Oak
Business Center 1993, 1994, 1996
Post Oak
Distribution
Center 1993, 1994
South Loop
Distribution
Center 1994
Southwest
Freeway
Industrial
Center 1994
West by
Northwest
Industrial
Center 1993, 1994, 1995, 1996
White Street
Distribution
Center 1995
Indianapolis,
Indiana
Eastside
Distribution
Center 1995
North by
Northeast
Distribution
Center 1995
Park 100
Industrial
Center 1994, 1995
Park Fletcher
Distribution
Center 1994, 1995, 1996
Shadeland
Industrial
Center 1995
Kansas City,
Kansas/Missouri
44th Street
Business Center 1996
</TABLE>
F-98
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
------------------ CAPITALIZED ------------------------- ACCUMULATED DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ------ ------- ----- ------------ -------------- ----- ------------ ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Congleton
Distribution
Center 3 518 2,937 203 518 3,140 3,658 (254) 1994
Lamar
Distribution
Center 1 323 1,829 274 323 2,103 2,426 (166) 1994
Macon Bedford
Distribution
Center 1 304 1,725 140 304 1,865 2,169 (34) 1996
Platte Valey
Industrial
Center 9 (d) 3,533 20,017 550 3,533 20,567 24,100 (1,479) 1994
Riverside
Distribution
Center 5 (d) 533 3,024 226 534 3,249 3,783 (230) 1994
Riverside
Industrial
Center 5 (d) 1,012 5,736 212 1,012 5,948 6,960 (419) 1994
Terrace &
Lackman
Distribution
Center 1 285 1,615 397 285 2,012 2,297 (139) 1994
Las Vegas, Nevada
Hughes Airport
Center 1 876 - 3,511 910 3,477 4,387 (241) 1994
Las Vegas
Corporate Center 5 (e) 3,255 - 14,229 3,256 14,228 17,484 (537) 1994, 1995, 1996
West One
Business Center 4 (d) 2,468 13,985 78 2,468 14,063 16,531 (156) 1996
Louisville, Ken-
tucky
Louisville
Distribution
Center 2 1,219 3,402 6,200 1,220 9,601 10,821 (173) 1995, 1996
Memphis, Tennes-
see
Airport
Distribution
Center 15 4,543 25,748 1,894 4,544 27,641 32,185 (1,230) 1995, 1996
Delp
Distribution
Center 6 1,910 10,826 814 1,910 11,640 13,550 (678) 1995
Fred Jones
Distribution
Center 1 125 707 66 125 773 898 (49) 1994
Southwide
Industrial
Center 4 (d) 423 3,365 271 425 3,634 4,059 (236) 1994
Nashville, Ten-
nessee
Bakertown
Distribution
Center 2 463 2,626 53 463 2,679 3,142 (103) 1995
I-40 Industrial
Center 3 665 3,774 150 666 3,923 4,589 (200) 1995, 1996
Interchange City
Distribution
Center 3 1,953 5,767 3,638 2,095 9,263 11,358 (423) 1994, 1995, 1996
Space Park South
Distribution
Center 15 3,499 19,830 929 3,499 20,759 24,258 (1,514) 1994
New Jersey/I-95
Corridor
Clearview
Distribution
Center 1 2,232 12,648 - 2,232 12,648 14,880 - 1996
Kilmer
Distribution
Center 4 2,526 14,313 - 2,526 14,313 16,839 - 1996
Meadowland
Industrial
Center 1 2,409 13,653 246 2,409 13,899 16,308 (191) 1996
</TABLE>
F-99
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-----------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
-------------------- CAPITALIZED -------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
----------- ------ ------- ------- ------------ -------------- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oklahoma City,
Oklahoma
Greenfield
Service Center 2 257 1,172 362 258 1,533 1,791 (134)
Melcat
Distribution
Center 1 240 1,363 268 240 1,631 1,871 (133)
Meridian
Business Center 2 195 1,109 402 196 1,510 1,706 (99)
Oklahoma
Distribution
Center 3 893 5,082 266 893 5,348 6,241 (607)
Will Rogers
Service Center 2 334 1,891 252 334 2,143 2,477 (170)
Orange County,
California
Mid-Counties
Distribution
Center 5 2,804 15,895 1,431 2,805 17,325 20,130 (719)
North County
Distribution
Center 2 16,543 - 22,571 16,543 22,571 39,114 (119)
Pacific Business
Center 2 1,179 - 4,820 1,179 4,820 5,999 (66)
Santa Ana
Distribution
Center 1 647 3,668 26 647 3,694 4,341 (246)
Orlando, Florida
33rd Street
Industrial
Center 9 (d)(f) 1,980 11,237 523 1,980 11,760 13,740 (531)
Chancellor
Distribution
Center 1 380 2,156 692 380 2,848 3,228 (182)
La Quinta
Distribution
Center 1 354 2,006 592 354 2,598 2,952 (182)
Titusville
Industrial
Center 1 (d) 283 1,603 62 283 1,665 1,948 (118)
Phoenix, Arizona
24th Street
Industrial
Center 2 503 2,852 188 503 3,040 3,543 (299)
Alameda
Distribution
Center 1 369 2,423 166 369 2,589 2,958 (397)
Hohokam 10
Industrial
Center 5 2,940 - 10,992 2,940 10,992 13,932 (108)
I-10 West
Business Center 3 263 1,525 102 263 1,627 1,890 (186)
Kyrene Commons
Distribution
Center 1 430 2,656 77 430 2,733 3,163 (435)
Martin Van Buren
Distribution
Center 6 572 3,285 188 572 3,473 4,045 (318)
Papago
Distribution
Center 1 420 2,383 73 420 2,456 2,876 (225)
Pima
Distribution
Center 1 306 1,742 195 306 1,937 2,243 (195)
Tiger
Distribution
Center 1 402 2,279 592 402 2,871 3,273 (265)
Watkins
Distribution
Center 1 242 1,375 192 243 1,566 1,809 (101)
Portland, Oregon
Argyle
Distribution
Center 3 946 5,388 211 946 5,599 6,545 (589)
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- ----------------
<S> <C>
Oklahoma City,
Oklahoma
Greenfield
Service Center 1994
Melcat
Distribution
Center 1994
Meridian
Business Center 1994
Oklahoma
Distribution
Center 1993
Will Rogers
Service Center 1994
Orange County,
California
Mid-Counties
Distribution
Center 1995
North County
Distribution
Center 1996
Pacific Business
Center 1996
Santa Ana
Distribution
Center 1994
Orlando, Florida
33rd Street
Industrial
Center 1994, 1995, 1996
Chancellor
Distribution
Center 1994
La Quinta
Distribution
Center 1994
Titusville
Industrial
Center 1994
Phoenix, Arizona
24th Street
Industrial
Center 1994
Alameda
Distribution
Center 1992
Hohokam 10
Industrial
Center 1996
I-10 West
Business Center 1993
Kyrene Commons
Distribution
Center 1992
Martin Van Buren
Distribution
Center 1993, 1994
Papago
Distribution
Center 1994
Pima
Distribution
Center 1993
Tiger
Distribution
Center 1994
Watkins
Distribution
Center 1995
Portland, Oregon
Argyle
Distribution
Center 1993
</TABLE>
F-100
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
-------------------- CAPITALIZED ------------------------------- DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C) ACQUISITION
----------- ------ ------- ------- ------------ -------------- ------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Columbia
Distribution
Center 2 550 3,121 107 551 3,227 3,778 (231) 1994
PDX Corporate
Center North 7 (e) 2,405 - 10,698 2,542 10,561 13,103 (380) 1995, 1996
Wilsonville
Corporate Center 6 (e) 2,963 - 11,143 2,963 11,143 14,106 (301) 1995, 1996
Reno, Nevada
Golden Valley
Distribution
Center 2 2,850 - 10,331 2,812 10,369 13,181 - 1996
Meredith Kleppe
Business Center 5 1,573 8,949 699 1,573 9,648 11,221 (991) 1993
Pacific
Industrial
Center 4 2,501 - 10,519 2,501 10,519 13,020 (568) 1994, 1995
Packer Way
Business Center 3 458 2,604 408 458 3,012 3,470 (312) 1993
Packer Way
Distribution
Center 2 506 2,879 164 506 3,043 3,549 (318) 1993
Spice Island
Distribution
Center 1 435 2,466 648 435 3,114 3,549 (51) 1996
Rio Grande
Valley, Texas
Rio Grande
Distribution
Center 5 (d) 527 2,987 480 527 3,467 3,994 (160) 1995
Rio Grande
Industrial
Center 8 (d) 2,188 12,399 1,190 2,188 13,589 15,777 (664) 1995
Salt Lake City,
Utah
Centennial
Distribution
Center 2 1,149 - 7,769 1,149 7,769 8,918 (281) 1995
Clearfield
Distribution
Center 2 2,500 14,165 101 2,481 14,285 16,766 (471) 1995
Ogden
Distribution
Center 1 463 2,625 50 463 2,675 3,138 - 1996
Salt Lake
International
Distribution
Center 2 1,364 2,792 7,520 1,364 10,312 11,676 (289) 1994, 1996
San Antonio,
Texas
10711
Distribution
Center 2 582 3,301 473 582 3,774 4,356 (338) 1994
Blossom Business
Center 2 573 3,249 605 573 3,854 4,427 (182) 1995
Coliseum
Distribution
Center 2 1,102 2,380 10,433 1,568 12,347 13,915 (728) 1994, 1995
Distribution
Drive Center 1 473 2,680 191 473 2,871 3,344 (382) 1992
Downtown
Distribution
Center 1 (d) 241 1,364 255 241 1,619 1,860 (146) 1994
I-10 Central
Distribution
Center 1 223 1,275 161 223 1,436 1,659 (202) 1992
I-35 Business
Center 4 663 3,773 350 663 4,123 4,786 (477) 1993
Ison Business
Center 3 648 3,674 1,146 648 4,820 5,468 (219) 1995
Landmark One
Distribution
Center 1 (d) 341 1,933 251 341 2,184 2,525 (177) 1994
Macro
Distribution
Center 1 225 1,282 139 225 1,421 1,646 (191) 1993
</TABLE>
F-101
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-----------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
-------------------- CAPITALIZED -------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
- ----------- ------ ------- ------- ------------ -------------- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest
Corporate Center 6 609 3,453 341 609 3,794 4,403 -
Perrin Creek
Corporate Center 6 1,547 - 8,502 1,610 8,439 10,049 (216)
San Antonio
Distribution
Center I 13 2,154 12,247 2,628 2,154 14,875 17,029 (1,881)
San Antonio
Distribution
Center II 3 969 - 5,713 885 5,797 6,682 (429)
San Antonio
Distribution
Center III 6 1,709 9,684 503 1,709 10,187 11,896 (210)
Sentinel
Business Center 6 1,276 7,230 797 1,276 8,027 9,303 (560)
Woodlake
Distribution
Center 2 248 1,405 64 248 1,469 1,717 (134)
San Diego,
California
Carmel Mountain
Ranch Industrial
Center 2 1,834 - 4,384 1,834 4,384 6,218 (2)
Eastgate
Distribution
Center 1 2,204 - 5,151 2,204 5,151 7,355 -
Seattle,
Washington
Andover East
Business Center 2 535 3,033 198 535 3,231 3,766 (234)
Fife Corporate
Center 3 4,059 - 7,820 4,060 7,819 11,879 -
Kent Corporate
Center 2 2,882 1,987 8,246 3,154 9,961 13,115 (395)
Van Doren's
Distribution
Center 1 (e) 895 - 3,343 977 3,261 4,238 (62)
South Bay (San
Francisco),
California
Bayside Business
Center 2 (e) 2,088 - 3,802 2,088 3,802 5,890 (24)
Bayside
Corporate Center 7 (e) 4,365 - 16,080 4,365 16,080 20,445 (454)
Bayside Plaza I 12 (e) 5,212 18,008 393 5,216 18,397 23,613 (1,839)
Bayside Plaza II 2 (e) 634 - 2,784 634 2,784 3,418 (342)
Gateway
Corporate Center 11 (d)(e) 7,575 24,746 4,432 7,575 29,178 36,753 (2,876)
Shoreline
Business Center 8 (e) 4,328 16,101 314 4,328 16,415 20,743 (1,634)
Shoreline
Business Center
II 2 (e) 922 - 4,595 922 4,595 5,517 (283)
Spinnaker
Business Center 12 (e) 7,043 25,220 662 7,043 25,882 32,925 (2,606)
Thornton
Business Center 5 (d) 3,988 11,706 6,072 3,989 17,777 21,766 (1,373)
Trimble
Distribution
Center 5 2,836 16,067 606 2,836 16,673 19,509 (1,628)
Tampa, Florida
Adamo
Distribution
Center 1 105 595 300 105 895 1,000 (24)
Clearwater
Distribution
Center 2 (f) 92 524 48 92 572 664 (39)
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
- ----------- --------------
<S> <C>
Northwest
Corporate Center 1995
Perrin Creek
Corporate Center 1995, 1996
San Antonio
Distribution 1992, 1993,
Center I 1994
San Antonio
Distribution
Center II 1994
San Antonio
Distribution
Center III 1996
Sentinel
Business Center 1994
Woodlake
Distribution
Center 1994
San Diego,
California
Carmel Mountain
Ranch Industrial
Center 1996
Eastgate
Distribution
Center 1996
Seattle,
Washington
Andover East
Business Center 1994
Fife Corporate
Center 1996
Kent Corporate
Center 1995
Van Doren's
Distribution
Center 1995
South Bay (San
Francisco),
California
Bayside Business
Center 1996
Bayside
Corporate Center 1995, 1996
Bayside Plaza I 1993
Bayside Plaza II 1994
Gateway
Corporate Center 1993, 1996
Shoreline
Business Center 1993
Shoreline
Business Center
II 1995
Spinnaker
Business Center 1993
Thornton
Business Center 1993, 1996
Trimble
Distribution
Center 1994
Tampa, Florida
Adamo
Distribution
Center 1995
Clearwater
Distribution
Center 1994
</TABLE>
F-102
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------
INITIAL COSTS COSTS
--------------------- CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Commerce Park
Distribution
Center 4 $ 811 $ 4,597 $ 205
Eastwood
Distribution
Center 1 (f) 122 690 36
Joe's Creek
Distribution
Center 3 (f) 242 1,369 174
Lakeland
Distribution
Center 1 938 5,313 541
Orchid Lake
Industrial
Center 1 41 235 10
Plant City
Distribution
Center 1 (f) 206 1,169 50
Sabal Park
Distribution
Center 1 352 - 3,042
Silo Bend
Distribution
Center 4 (f) 2,887 16,358 655
Silo Bend
Industrial
Center 1 (f) 525 2,975 222
St. Petersburg
Service Center 1 35 197 21
Tampa East
Distribution
Center 12 (f) 2,780 15,757 1,337
Tampa East
Industrial
Center 2 (f) 332 1,880 104
Tampa West
Distribution
Center 16 (d)(f) 3,341 19,046 1,663
Tampa West
Industrial
Center 4 (f) 700 1,161 3,569
Tampa West
Service Center 4 (f) 970 5,501 273
ulsa, Oklahoma
52nd Street
Distribution
Center 1 340 1,924 64
70th East
Distribution
Center 1 129 733 131
East 55th Street
Distribution
Center 1 (f) 210 1,191 28
Expressway
Distribution
Center 4 573 3,280 322
Henshaw
Distribution
Center 3 500 2,829 70
Washington,
D.C./Baltimore
Ardmore
Distribution
Center 3 1,431 8,110 231
Ardmore
Industrial
Center 2 984 5,581 128
Chantilly
Distribution
Center 1 1,650 - 9,352
Concorde
Industrial
Center 4 1,538 8,717 319
De Soto Business
Park 5 (d) 1,774 10,055 978
Eisenhower
Industrial
Center 3 1,240 7,025 894
Fleet
Distribution
Center 8 3,198 18,121 430
Hampton Central
Distribution
Center 1 986 - 3,635
Patapsco
Distribution
Center 1 270 1,528 499
Sunnyside
Industrial
Center 3 1,541 8,733 947
Other markets 9 (f) 2,703 16,583 (105)
--- -------- ---------- --------
Total Operat-
ing Properties 942 $352,574 $1,406,914 $515,196
--- -------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
GROSS AMOUNTS AT
WHICH CARRIED
AT CLOSE OF PERIOD
-------------------------------- DATE OF
BUILDING & ACCUMULATED CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C) ACQUISITION
----------- -------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Commerce Park
Distribution
Center $ 811 $ 4,802 $ 5,613 $ (342) 1994
Eastwood
Distribution
Center 122 726 848 (51) 1994
Joe's Creek
Distribution
Center 242 1,543 1,785 (102) 1994
Lakeland
Distribution
Center 938 5,854 6,792 (498) 1994
Orchid Lake
Industrial
Center 41 245 286 (17) 1994
Plant City
Distribution
Center 206 1,219 1,425 (86) 1994
Sabal Park
Distribution
Center 352 3,042 3,394 (26) 1996
Silo Bend
Distribution
Center 2,887 17,013 19,900 (1,131) 1994
Silo Bend
Industrial
Center 525 3,197 3,722 (226) 1994
St. Petersburg
Service Center 35 218 253 (15) 1994
Tampa East
Distribution
Center 2,780 17,094 19,874 (1,165) 1994
Tampa East
Industrial
Center 332 1,984 2,316 (139) 1994
Tampa West
Distribution
Center 3,400 20,650 24,050 (1,421) 1994, 1995
Tampa West
Industrial
Center 700 4,730 5,430 (119) 1994, 1996
Tampa West
Service Center 971 5,773 6,744 (405) 1994
Tulsa, Oklahoma
52nd Street
Distribution
Center 340 1,988 2,328 (141) 1994
70th East
Distribution
Center 129 864 993 (54) 1994
East 55th Street
Distribution
Center 210 1,219 1,429 (88) 1994
Expressway
Distribution
Center 573 3,602 4,175 (405) 1993
Henshaw
Distribution
Center 499 2,900 3,399 (213) 1994
Washington,
D.C./Baltimore
Ardmore
Distribution
Center 1,431 8,341 9,772 (549) 1994
Ardmore
Industrial
Center 985 5,708 6,693 (381) 1994
Chantilly
Distribution
Center 2,103 8,899 11,002 - 1996
Concorde
Industrial
Center 1,538 9,036 10,574 (470) 1995
De Soto Business
Park 1,774 11,033 12,807 (170) 1996
Eisenhower
Industrial
Center 1,240 7,919 9,159 (515) 1994
Fleet
Distribution
Center 3,198 18,551 21,749 (558) 1996
Hampton Central
Distribution
Center 986 3,635 4,621 (59) 1996
Patapsco
Distribution
Center 270 2,027 2,297 (57) 1995
Sunnyside
Industrial
Center 1,541 9,680 11,221 (618) 1994
1991, 1994,
Other markets 2,825 16,356 19,181 (748) 1996
-------- ---------- ---------- ---------
Total Operat-
ing Properties$356,428 $1,918,256 $2,274,684 $(109,147)
-------- ---------- ---------- ---------
</TABLE>
F-103
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED -------------------------------- DATE OF
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED CONSTRUCTION/
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C) ACQUISITION
----------- ------ ------- -------- ------------ -------------- -------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LAND UNDER DE-
VELOPMENT
Atlanta, Georgia
Atlanta North
East
Distribution
Center $ 1,287 $ - $ 334 $ 1,621 $ - $ 1,621 $ - 1995
Charlotte, North
Carolina
Charlotte
Distribution
Center 695 - 483 1,178 - 1,178 - 1995, 1996
Chicago,
Illinois
O'Hare Cargo
Distribution
Center 3,557 - 1,615 5,172 - 5,172 - 1996
North Avenue
Distribution
Center 1,675 - 99 1,774 - 1,774 - 1996
Cincinnati, Ohio
Princeton
Distribution
Center (d) 816 - 204 1,020 - 1,020 - 1996
Dallas/Fort
Worth, Texas
Dallas
Corporate
Center 615 - 310 925 - 925 - 1995
Great Southwest
Industrial
Center II 836 - 7 843 - 843 - 1996
East Bay (San
Francisco),
California
Patterson Pass
Business Center 590 - 409 999 - 999 - 1996
Houston, Texas
West by
Northwest
Industrial
Center 744 - 89 833 - 833 - 1993
Indianapolis,
Indiana
Ameriplex
Distribution
Center 634 - 55 689 - 689 - 1996
Kansas City,
Kansas/Missouri
Platte Valley
Ind Ctr 416 - 44 460 - 460 - 1994
Las Vegas,
Nevada
Black Mountain
Distribution
Center 1,108 - 70 1,178 - 1,178 - 1995
Las Vegas
Corporate
Center (e) 893 - 411 1,304 - 1,304 - 1993, 1995
Nashville,
Tennessee
Interchange
City
Distribution
Center 369 - 558 927 - 927 - 1995
</TABLE>
F-104
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
-------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED --------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
----------- ------ ------- -------- ------------ -------------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orange County,
California
Mid-Counties
Distribution
Center $ 3,360 $ - $ (2,809) $ 551 $ - $ 551 $ -
Pacific Business
Center 3,017 - 183 3,200 - 3,200 -
Foothill
Business Center 1,841 - 68 1,909 - 1,909 -
Orlando, Florida
Orlando Central
Park 613 - 78 691 - 691 -
Portland, Oregon
PDX Corporate
Center North 1,464 - 346 1,810 - 1,810 -
The Evergreen
Park 2,241 - 788 3,029 - 3,029 -
Rio Grande
Valley, Texas
Valley
Industrial
Center 230 - 102 332 - 332 -
Salt Lake City,
Utah
Centennial Dist
Center 2,115 - 39 2,154 - 2,154 -
San Antonio,
Texas
Tri-County
Distribution
Center 496 - 119 615 - 615 -
Seattle,
Washington
Van Doren's
Distribution
Center (e) 1,670 - 212 1,882 - 1,882 -
Tampa, Florida
Sabal Park
Distribution
Center 428 - 76 504 - 504 -
Washington,
DC/Baltimore
Airport Commons
Distribution
Center 2,320 - 37 2,357 - 2,357 -
Chantilly
Distribution
Center 592 - 677 1,269 - 1,269 -
Hampton Central
Distribution
Center 880 - 359 1,239 - 1,239 -
-------- ---------- -------- -------- ---------- ---------- ---------
Total Land
Under
Development $ 35,502 - $ 4,963 $ 40,465 - $ 40,465 -
-------- ---------- -------- -------- ---------- ---------- ---------
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- -------------
<S> <C>
Orange County,
California
Mid-Counties
Distribution
Center 1995
Pacific Business
Center 1995
Foothill
Business Center 1995
Orlando, Florida
Orlando Central
Park 1996
Portland, Oregon
PDX Corporate
Center North 1996
The Evergreen
Park 1996
Rio Grande
Valley, Texas
Valley
Industrial
Center 1996
Salt Lake City,
Utah
Centennial Dist
Center 1996
San Antonio,
Texas
Tri-County
Distribution
Center 1996
Seattle,
Washington
Van Doren's
Distribution
Center 1994
Tampa, Florida
Sabal Park
Distribution
Center 1995
Washington,
DC/Baltimore
Airport Commons
Distribution
Center 1996
Chantilly
Distribution
Center 1995
Hampton Central
Distribution
Center 1994
Total Land
Under
Development
</TABLE>
F-105
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED --------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
----------- ------ ------- -------- ------------ -------------- -------- ------------ ---------- ---------------
LAND HELD FOR
DEVELOPMENT
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, Georgia
Atlanta West
Distribution
Center $ 750 $ - $ 1 $ 751 $ - $ 751 $ -
Atlanta NE
Distribution
Center 520 - 266 786 - 786 -
Clark Howell
Road
Distribution
Center 1,679 - 126 1,805 - 1,805 -
Riverside
Distribution
Center 1,378 - 119 1,497 - 1,497 -
Austin, Texas
Corridor Park
Corporate Center 585 - 727 1,312 - 1,312 -
Southpark
Corporate Center 526 - 62 588 - 588 -
Walnut Creek
Corporate Center 1,029 - 32 1,061 - 1,061 -
Charlotte, North
Carolina
Charlotte
Distribution
Center 1,599 - - 1,599 - 1,599 -
Chicago, Illinois
North Avenue
Distribution
Center 1,524 - 73 1,597 - 1,597 -
O'Hare Cargo
Distribution
Center 2,216 - 655 2,871 - 2,871 -
Cincinnati, Ohio
Sharonville
Distribution
Center 1,780 - 35 1,815 - 1,815 -
Princeton
Distribution
Center 436 - (1) 435 - 435 -
Columbus, Ohio
Capital Park
South
Distribution
Center 909 - 320 1,229 - 1,229 -
International
Street Commerce
Center 555 - 27 582 - 582 -
Dallas/Fort
Worth, Texas
Dallas Corporate
Center 1,534 - - 1,534 - 1,534 -
Freeport
Distribution
Center 414 - 1 415 - 415 -
GSW Distribution
Center 1,539 - - 1,539 - 1,539 -
Denver, Colorado
Upland
Distribution
Center I 1,128 - 17 1,145 - 1,145 -
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- ---------------------
LAND HELD FOR
DEVELOPMENT
-------------
<S> <C>
Atlanta, Georgia
Atlanta West
Distribution
Center 1994
Atlanta NE
Distribution
Center 1995
Clark Howell
Road
Distribution
Center 1996
Riverside
Distribution
Center 1996
Austin, Texas
Corridor Park
Corporate Center 1994
Southpark
Corporate Center 1996
Walnut Creek
Corporate Center 1994, 1996
Charlotte, North
Carolina
Charlotte
Distribution
Center 1995, 1996
Chicago, Illinois
North Avenue
Distribution
Center 1996
O'Hare Cargo
Distribution
Center 1996
Cincinnati, Ohio
Sharonville
Distribution
Center 1996
Princeton
Distribution
Center 1996
Columbus, Ohio
Capital Park
South
Distribution
Center 1994, 1995, 1996
International
Street Commerce
Center 1996
Dallas/Fort
Worth, Texas
Dallas Corporate
Center 1995
Freeport
Distribution
Center 1996
GSW Distribution
Center 1996
Denver, Colorado
Upland
Distribution
Center I 1994
</TABLE>
F-106
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED --------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
----------- ------ ------- -------- ------------ -------------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
East Bay (San
Francisco), Cali-
fornia
Patterson Pass
Business Center $ 920 $ - $ 597 $ 1,517 $ - $ 1,517 $ -
El Paso, Texas
Northwestern
Corporate Center 3,455 - 2,853 6,308 - 6,308 -
Vista Corporate
Center 351 - 123 474 - 474 -
Vista Del Sol
Industrial
Center 2,923 - 191 3,114 - 3,114 -
Fort
Lauderdale/Miami,
Florida
Port 95
Distribution
Center I 8,419 - - 8,419 - 8,419 -
Houston, Texas
West by
Northwest
Industrial
Center 1,859 - 203 2,062 - 2,062 -
Indianapolis, In-
diana
North by
Northeast
Distribution
Center 437 - 54 491 - 491 -
Plainfield Park 1,967 - 656 2,623 - 2,623 -
Las Vegas, Nevada
Black Mountain
Distribution
Center 2,845 - 117 2,962 - 2,962 -
Las Vegas
Corporate Center (e) 2,772 - 248 3,020 - 3,020 -
Louisville, Ken-
tucky
Riverport
Distribution
Center 539 - 47 586 - 586 -
Los Angeles Ba-
sin, California
Foothills
Business Center 11,350 - 174 11,524 - 11,524 -
Nashville, Ten-
nessee
Nashville/l-24
Distribution
Center 776 - 90 866 - 866 -
Orlando, Florida
Orlando Central
Park 4,007 - 30 4,037 - 4,037 -
Phoenix, Arizona
Kyrene Commons
Distribution
Center 2,530 - 46 2,576 - 2,576 -
Portland, Oregon
The Evergreen
Park 2,235 - - 2,235 - 2,235 -
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- -------------
<S> <C>
East Bay (San
Francisco), Cali-
fornia
Patterson Pass
Business Center 1996
El Paso, Texas
Northwestern
Corporate Center 1991, 1992
Vista Corporate
Center 1993
Vista Del Sol
Industrial
Center 1994, 1996
Fort
Lauderdale/Miami,
Florida
Port 95
Distribution
Center I 1996
Houston, Texas
West by
Northwest
Industrial
Center 1993
Indianapolis, In-
diana
North by
Northeast
Distribution
Center 1994
Plainfield Park 1996
Las Vegas, Nevada
Black Mountain
Distribution
Center 1995, 1996
Las Vegas
Corporate Center 1995
Louisville, Ken-
tucky
Riverport
Distribution
Center 1996
Los Angeles Ba-
sin, California
Foothills
Business Center 1995, 1996
Nashville, Ten-
nessee
Nashville/l-24
Distribution
Center 1996
Orlando, Florida
Orlando Central
Park 1996
Phoenix, Arizona
Kyrene Commons
Distribution
Center 1992, 1996
Portland, Oregon
The Evergreen
Park 1996
</TABLE>
F-107
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS AMOUNTS AT
WHICH CARRIED
INITIAL COSTS COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED --------------------------------
NO. OF ENCUM- BUILDING & SUBSEQUENT BUILDING & ACCUMULATED
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(A,B) DEPRECIATION(C)
----------- ------ ------- -------- ------------ -------------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reno, Nevada
Golden Valley
Distribution
Center $ 609 $ - $ 1,601 $ 2,210 $ - $ 2,210 $ -
Rio Grande
Valley, Texas
Rio Grande
Industrial
Center 429 - 10 439 - 439 -
Salt Lake City,
Utah
Salt Lake
International
Distribution
Center 1,804 - 16 1,820 - 1,820 -
Centennial
Distribution
Center 2,726 - 46 2,772 - 2,772 -
San Antonio,
Texas
Coliseum
Distribution
Center 651 - 326 977 - 977 -
Perrin Creek
Corporate Center 2,637 - 153 2,790 - 2,790 -
San Antonio
Distribution
Center III 1,290 - 13 1,303 - 1,303 -
San Diego,
California
Carmel Mountain
Ranch Industrial
Center 1,899 - 40 1,939 - 1,939 -
Seattle,
Washington
Van Doren's
Distribution
Center (e) 1,138 - 110 1,248 - 1,248 -
South Bay (San
Francisco),
California
Mowry Business
Center 5,931 - 103 6,034 - 6,034 -
Tampa, Florida
Sabal Park
Distribution
Center 1,694 - 95 1,789 - 1,789 -
Tampa East
Distribution
Center 3,528 - 7 3,535 - 3,535 -
Washington,
DC/Baltimore
Hampton Central
Distribution
Center 1,298 - (2) 1,296 - 1,296 -
Meadowridge
Distribution
Center 5,617 - 172 5,789 - 5,789 -
--- -------- ---------- -------- -------- ---------- ---------- ---------
Total Land
Held for
Development $ 98,737 - $ 10,579 $109,316 - $ 109,316 -
--- -------- ---------- -------- -------- ---------- ---------- ---------
Grand Total $486,813 $1,406,914 $530,738 $506,209 $1,918,256 $2,424,465 $(109,147)
=== ======== ========== ======== ======== ========== ========== =========
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- -------------
<S> <C>
Reno, Nevada
Golden Valley
Distribution
Center 1995
Rio Grande
Valley, Texas
Rio Grande
Industrial
Center 1995
Salt Lake City,
Utah
Salt Lake
International
Distribution
Center 1994, 1995
Centennial
Distribution
Center 1996
San Antonio,
Texas
Coliseum
Distribution
Center 1994
Perrin Creek
Corporate Center 1996
San Antonio
Distribution
Center III 1996
San Diego,
California
Carmel Mountain
Ranch Industrial
Center 1995
Seattle,
Washington
Van Doren's
Distribution
Center 1994
South Bay (San
Francisco),
California
Mowry Business
Center 1996
Tampa, Florida
Sabal Park
Distribution
Center 1995
Tampa East
Distribution
Center 1994
Washington,
DC/Baltimore
Hampton Central
Distribution
Center 1994
Meadowridge
Distribution
Center 1996
Total Land
Held for
Development
Grand Total
</TABLE>
F-108
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
- --------
(a) Reconciliation of total cost to balance sheet caption at December 31, 1996
(in thousands):
<TABLE>
<S> <C>
total per schedule III $2,424,465
construction in process 77,506
capitalized preacquisition costs 6,776
----------
Total real estate $2,508,747(g)
==========
</TABLE>
(b) The aggregate cost for Federal income tax purposes was approximately
$2,340,922,000.
(c) Buildings are depreciated over their estimated useful lives (30 years for
acquisitions, 40 years for developments).
(d) $165,049,812 of these properties are pledged as collateral for $91,756,998
in mortgage notes payable.
(e) $219,627,378 of these properties are subject to lien under $12,170,468 of
net assessment bonds payable.
(f) $68,139,988 of these properties are pledged as collateral for $27,685,408
and $8,339,169 in first and second priority mortgage notes, respectively.
(g) A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
-------------
<CAPTION>
DECEMBER 31,
1996
(IN THOUSANDS)
--------------
<S> <C>
Real Estate
Balance at beginning of year $1,827,670
Additions:
Acquisitions/Completions 649,049
Improvements 43,568
Cost of real estate sold (7,863)
Change in construction in process (3,452)
Change in capitalized preacquisition costs (225)
----------
Balance at end of year $2,508,747
==========
Accumulated Depreciation
Balance at beginning of year $ 56,406
Depreciation expense 52,919
Accumulated depreciation associated with real estate
sold (178)
----------
Balance at end of year $ 109,147
==========
</TABLE>
F-109
<PAGE>
SECURITY CAPITAL U.S. REALTY
AUDITORS' REPORT
To the Shareholders of
SECURITY CAPITAL U.S. REALTY
Luxembourg
We have audited the consolidated financial statements, which consist of the
consolidated statement of net assets, the consolidated statement of operations,
the consolidated statement of changes in net assets, the consolidated statement
of cash flows, the consolidated statement of changes in shares outstanding, the
consolidated financial highlights for the year, the consolidated schedules of
investments and the notes to the consolidated financial statements of Security
Capital U.S. Realty (the "Company") as of and for the year ended December 31,
1996. These consolidated financial statements are the responsibility of the
Board of Directors of the Company. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing.
Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors of the Company in
preparing the consolidated financial statements, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the attached consolidated financial statements described above
give, in conformity with the legal requirements and United States generally
accepted accounting principles, a true and fair view of the financial position
of the Company at December 31, 1996 and of the results of its operations and
changes in its net assets for the year then ended.
Price Waterhouse Jean-Robert Lentz
Reviseur d'enterprises
Luxembourg, February 28, 1997
F-110
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENT OF NET ASSETS
AT DECEMBER 31, 1996
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
STRATEGIC INVESTMENTS:
CarrAmerica, at market/fair value (cost $428,416) 554,573
Pacific Retail, at fair value (cost $210,315) 209,091
Regency, at market value (cost $67,098) 98,986
Storage USA, at market value (cost $271,883) 321,745
SPECIAL OPPORTUNITY INVESTMENTS:
Publicly traded positions, at market value (cost $178,008) 223,745
Security Capital, at fair value (cost $22,500) 22,500
---------
1,430,640
---------
Cash and cash equivalents 54,957
Accounts receivable and prepayments 8,294
Interest receivable from affiliate 366
---------
TOTAL ASSETS 1,494,257
---------
LIABILITIES
Accounts payable and accrued expenses 2,651
Operating advisor fee payable 2,614
Taxes payable 393
Line of credit 169,500
---------
TOTAL LIABILITIES 175,158
---------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY) 1,319,099
=========
NET ASSETS ARE COMPRISED OF:
Paid in capital 1,050,184
Undistributed net investment income 13,015
Undistributed realised gain 3,480
Unrealised appreciation on investments 252,420
---------
1,319,099
=========
Represented by 96,492,710 shares outstanding
NET ASSET VALUE PER SHARE 13.67
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-111
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
INVESTMENT INCOME
<TABLE>
<S> <C>
Dividends from strategic investments:
CarrAmerica (net of withholding tax of $2,015) 11,552
Pacific Retail (net of withholding tax of $1,359) 8,123
Regency Realty (net of withholding tax of $115) 658
Storage USA (net of withholding tax of $1,292) 7,408
---------
27,741
Dividends from publicly-traded investments (net of withholding tax
of $770) 4,422
---------
32,163
Interest and other income 2,673
---------
TOTAL INVESTMENT INCOME 34,836
---------
EXPENSES
Operating advisor fees 8,041
Custodian fees 318
Professional expenses 431
Offering expenses 592
Directors fees 57
Administrative expenses 845
Amortisation of formation expenses 1,654
Formation expenses 172
Line of credit arrangement fees 2,991
Taxes 628
Interest on line of credit 6,168
---------
TOTAL EXPENSES 21,897
NET INVESTMENT INCOME 12,939
Realised gains on publicly-traded investments 3,480
Increase in appreciation on investments 252,294
---------
Increase in net assets resulting from operations 268,713
=========
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-112
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES:
Net Income 268,713
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Movement in unrealised gain (252,294)
Amortisation of formation expenses 1,654
Changes in operating assets and liabilities:
Accounts receivable and prepayments (8,289)
Interest receivable from affiliate (366)
Accounts payable and accrued expenses 2,426
Operating advisor fees payable 2,594
Other liabilities 386
----------
Net cash provided by operating activities 14,824
----------
INVESTING ACTIVITIES:
Investments in Strategic Positions:
CarrAmerica (428,416)
Pacific Retail (157,255)
Regency (67,098)
Storage USA (271,883)
Investments in Publicly-traded Positions (176,413)
Investments in Security Capital (22,500)
----------
Net cash used in investing activities (1,123,565)
----------
FINANCING ACTIVITIES:
Proceeds from public and private offerings 987,238
Proceeds from line of credit 376,500
Repayment of line of credit (207,000)
----------
Net cash provided by financing activities 1,156,738
----------
Net increase in cash and cash equivalents 47,997
Cash and cash equivalents, beginning of the year 6,960
----------
Cash and cash equivalents, end of the year 54,957
==========
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-113
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR/PERIOD ENDED DECEMBER 31, 1996 AND 1995
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
----------
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net investment income 12,939 76
Realised gains on publicly-traded investments 3,480 0
Increase in appreciation on investments 252,294 126
--------- ---------
Increase in net assets resulting from operations 268,713 202
Paid-in subscriptions 987,238 62,946
--------- ---------
Increase in net assets during the year/period 1,255,951 63,148
Net assets at the beginning of the year/period 63,148 0
--------- ---------
Net assets at the end of the year/period 1,319,099 63,148
========= =========
Net Asset Value per share on December 31, 1996 13.67 10.03
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHARES OUTSTANDING
FOR THE YEAR/PERIOD ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
1996 1995
---------- ---------
<S> <C> <C>
At the beginning of the year/period 6,294,573 0
Issued during the year/period 90,198,137 6,294,573
---------- ---------
At the end of the year/period 96,492,710 6,294,573
========== =========
</TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS FOR THE
YEAR/PERIOD ENDED DECEMBER 31, 1996 AND 1995
(EXPRESSED IN $)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Per share data:
Net asset value beginning of the year/period 10.03 0.00
Paid-in capital 0.00 10.00
Net investment income 0.12 0.01
Net change in unrealised appreciation and realised gains
on investments in year/period 3.52 0.02
--------- ---------
Net asset value at the end of the year/period 13.67 10.03
========= =========
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-114
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULE OF INVESTMENTS IN STRATEGIC POSITIONS
AT DECEMBER 31, 1996
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
-----------------------------------------------------------------------------------
<CAPTION>
NUMBER OF MARKET/FAIR PERCENTAGE
STRATEGIC INVESTEES SECURITY TYPE SHARES HELD COST VALUE OF NET ASSETS
- ------------------- ------------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
CarrAmerica Common Stock 18,515,307 415,416 541,573 41.1%
CarrAmerica Preferred Stock 520,000 13,000 13,000 0.9%
Pacific Retail Common Stock 20,909,091 210,315 209,091 15.9%
Regency Common Stock 3,770,900 67,098 98,986 7.5%
Storage USA Common Stock 8,551,354 271,883 321,745 24.4%
TOTAL INVESTMENTS IN STRATEGIC POSITIONS AT MARKET VALUE (FOR
PUBLICLY-
---------
TRADED COMPANIES) AND ESTIMATED FAIR VALUE (FOR UNTRADED COM-
PANIES) 1,184,395
---------
</TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS IN SPECIAL OPPORTUNITY POSITIONS
AT DECEMBER 31, 1996
(EXPRESSED IN $, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
------------------------------------
<CAPTION>
NUMBER OF MARKET/FAIR PERCENTAGE
PROPERTY TYPE SHARES HELD COST VALUE OF NET ASSETS
- ------------- ----------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Companies in which USREALTY owns
a 5% or greater interest:
NONE
Companies in which USREALTY owns
less than 5% interest:
Multifamily 2,386,900 49,749 59,935 4.5%
Office/Industrial 2,690,900 65,472 87,946 6.7%
Retail 3,215,800 62,787 75,864 5.8%
---------
Total investments in publicly-
traded companies at market
value: 223,745
Investment in Security Capital 22,500 22,500 1.7%
TOTAL INVESTMENTS IN SPECIAL OPPORTUNITY POSITIONS
AT MARKET VALUE (FOR PUBLICLY-
---------
TRADED COMPANIES) AND ESTIMATED FAIR VALUE (FOR
UNTRADED COMPANIES): 246,245
---------
</TABLE>
A detailed schedule of portfolio changes for the year ended December 31, 1996
is available free of charge upon request at the registered office.
The accompanying notes form an integral part of the financial statements.
F-115
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 1996
NOTE 1--ORGANISATION
Security Capital U.S. Realty (the "Company") is a Luxembourg real estate
corporation organised as a "Societe d'Investissement a Capital Variable"
("SICAV"). The Company was formed on July 7, 1995 for the purpose of owning and
operating United States of America real estate primarily through companies in
which it has a strategic ownership position. The Company owns its assets
through its wholly owned Luxembourg subsidiary, Security Capital Holdings S.A.
("HOLDINGS"). All accounts of HOLDINGS have been consolidated with the Company
and all significant intercompany transactions have been eliminated upon
consolidation. References herein to USREALTY are to the consolidated entity
consisting of Security Capital U.S. Realty and Security Capital Holdings S.A.,
unless noted otherwise.
The Company expects to request shareholder approval in the first half of 1997
to convert to a Societe d'Investissement a Capital Fixe, which should not
materially alter the Company's operations or prospects.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and with Luxembourg
regulatory requirements.
A. Market Value/Fair Value Basis of Presentation:
USREALTY accounts for its investments at market value or estimated fair value
(depending on whether the investment is publicly traded or not) as management
believes market/fair value more accurately reflects USREALTY's financial
position and results of operations as a real estate business. Thus, USREALTY's
investments in publicly traded companies are valued at market determined by
using closing market prices as of the balance sheet date. Investments in
private companies are valued at fair value generally determined at cost, or an
appropriate lower value if the investment is not progressing as envisioned. If
substantial additional capital is raised by the investee from independent third
parties in a private placement, then USREALTY values its investment at the
price at which that capital was raised when a substantial percentage of the new
subscriptions have been funded. Untraded convertible securities are carried at
their principal amount until convertible at an ascertainable value. The
CarrAmerica convertible preferred each are convertible into one share of
CarrAmerica common stock beginning April 1997, at which time they will be
reflected at their conversion value.
Under market/fair value accounting, unrealised gains or losses are determined
by comparing market/fair value of the securities held to the cost of such
securities. Unrealised gains or losses relating to changes in market/fair value
of USREALTY'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 USREALTY's operating methods and plans, USREALTY's
investment gains generally are not subject to income taxes.
USREALTY's investments are generally long-term and USREALTY does not intend to
sell securities simply to realise gain thereon (other than in the case of
selected special opportunity investments).
At December 31, 1996, 17.1% of USREALTY's investments were 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 shares 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 (being the date that USREALTY's broker actually executes an order to
buy or sell). Purchases and sales of unlisted securities are recorded as of the
date the actual purchase or sale is completed. Dividend income is recorded on
the ex-dividend date for each dividend declared by an issuer. Dividends
received are presented net of withholding taxes, which totalled $5.6 million
during the twelve months ended December 31, 1996. The withholding tax is stated
net of
F-116
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated refunds of $56,573. HOLDINGS is entitled to the refunds as the
withholding tax is not levied on the portion of dividends which is a return of
capital. Interest income (including interest on convertible subordinated
debentures issued by Security Capital Group Incorporated ("Security Capital"))
is recorded on the accrual basis. Interest received is also stated net of
withholding taxes, of which there were none in 1996. Realised gains and losses
on sales of shares are determined on the average cost method.
C. Cash and Cash Equivalents
USREALTY 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.
NOTE 3--INVESTMENTS
USREALTY will aim to have 65% to 85% of its assets deployed in strategic
ownership positions ("Strategic Investments"), and 10% to 35% invested in
special opportunity ownership positions, including up to 10% in securities of
Security Capital.
A. Strategic Investments
Strategic investments represent significant (minimum of 25% to a general
maximum of 49% of each issuer's fully diluted common stock outstanding) equity
ownership positions in public companies, or in private companies that will be
positioned to be taken public. With private companies which USREALTY sponsors,
it will frequently own substantially more than 50% of the voting shares until
such companies become publicly traded, at which time USREALTY's ownership will
begin to be diluted until it reaches 35% to 45% ownership levels. USREALTY will
be the largest shareholder of its strategic investees, have representation on
their Boards of Directors, and influence their operations and strategy.
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.
B. Special Opportunity Investments
(i) PUBLICLY-TRADED INVESTMENTS
"Publicly-Traded Investments" consist of ownership positions of less than 10%
of the fully diluted stock in publicly-traded United States real estate
investment trusts ("US REITS") and real estate companies. Publicly-traded
investments have and will take the form of either direct investments in, or
public market purchases of, shares of companies that USREALTY believes possess
the requisite fundamentals to generate strong cash flow growth and/or value
appreciation.
At December 31, 1996, USREALTY had $223.7 million (market value) of publicly-
traded investments in thirteen companies. From time to time, when deemed
appropriate, USREALTY may seek to increase a publicly-traded investment to a
strategic investment.
(ii) INVESTMENT IN SECURITY CAPITAL GROUP INCORPORATED.
USREALTY has a Special Opportunity Investment in securities of Security Capital
which, through wholly owned subsidiaries, owned approximately 39.4% of
USREALTY's total subscribed shares at December 31, 1996 (and may from time to
time purchase further shares on the open market and in new USREALTY offerings)
and is the sole shareholder of USREALTY's Operating Advisor. The purpose of
this investment is to provide USREALTY with the benefit of exposure to specific
niches within the apartment and industrial real estate sectors, as well as the
diversification benefits of fee income through Security Capital's real estate
services and advisory activities. USREALTY intends to invest up to 10% of its
assets in securities of Security Capital. USREALTY's investments in such
securities will primarily be made in general offerings by Security Capital, on
the same terms and conditions as all other investors in such offerings. To a
lesser extent, USREALTY may negotiate purchases from independent third parties
on an arm's-length basis. When and if Security Capital becomes traded on a
recognised securities market, USREALTY may purchase Security Capital securities
from third parties in open-market transactions. At December 31, 1996, USREALTY
had funded $22.5 million (representing 10,724.5 common shares and $11.25
million principal amount of 6.5% convertible subordinated debentures due 2016)
out of a total commitment of $110 million. The remaining commitment is expected
to be funded in the first half of 1997.
F-117
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACCOUNTS RECEIVABLE AND PREPAYMENTS
A. Deferred Costs
The Company believes that minimising intangible assets makes the Company more
attractive to investors. Therefore, the unamortised portion of (i) costs
associated with the formation of USREALTY and its initial private placement,
and (ii) costs incurred in connection with arranging USREALTY's $300 million
line of credit, were written off in October 1996. Such amortised costs were
$3.7 million. Since October 1996, all costs of raising capital, including line
of credit increases, are expensed as incurred (an additional $1.1 million for
increasing the line of credit in 1996).
B. Accounts Receivable
The amounts included within accounts receivable and prepayments are as follows:
<TABLE>
<CAPTION>
---------------------
DECEMBER 31,
1996 1995
--------- ---------
(IN THOUSANDS $)
<S> <C> <C>
Dividends 8,236
Debenture Interest from Security Capital 366
Formation Expenses - 1,654
Refund of withholding tax 56
Other 2 6
--------- ---------
8,660 1,660
========= =========
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<CAPTION>
---------------------
DECEMBER 31,
1996 1995
--------- ---------
(IN THOUSANDS $)
<S> <C> <C>
Offering expenses 1,090
Interest Payable 646 -
Amount payable to Security Capital 217
Custodian Fees 127
Other 571 224
--------- ---------
2,651 224
========= =========
</TABLE>
The offering expenses accruals are covered by the commission received during
the November 1996 offering.
NOTE 6--ADVISORY AGREEMENT AND OPERATING EXPENSES
USREALTY has an advisory agreement with Security Capital (EU) Management S.A.
(the "Operating Advisor"), a wholly-owned subsidiary of Security Capital. This
agreement requires the Operating Advisor to provide USREALTY with advice with
respect to the investment of assets of USREALTY. The Operating Advisor has
agreed to identify tangible investment opportunities in U.S. real estate
companies and evaluate such companies' competitive positions, management
expertise, strategic direction, financial strength and their prospects for
long-term sustainable per share cash flow growth. The Operating Advisor will
also advise USREALTY on obtaining board and committee representation and
management rights. The agreement is for a two-year term expiring July 1997. The
agreement automatically renews for successive two-year periods unless either
party gives notice they will not renew. The Operating Advisor subcontracts for
certain services through its wholly-owned affiliate, Security Capital (UK)
Management Limited (based in London), and another Security Capital subsidiary,
Security Capital Investment Research Incorporated (based in Chicago). The
Operating Advisor is entitled to a management fee, payable quarterly, at an
annual rate of 1.25% of gross invested assets, excluding investments in
Security Capital securities and investments of short-term cash and cash
equivalents. The amounts accrued at December 31, 1996 represent two months'
fees. USREALTY pays its own third-party operating and administrative expenses
and transaction costs, provided that 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% of assets, excluding Security Capital
securities, per annum. Such third-party operating and administrative costs were
0.19% per annum in 1996.
F-118
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USREALTY pays to the Custodian, Paying Agent, Domiciliary and Corporate Agent
as well as the Registrar and Transfer Agent, a fee in accordance with usual
practice in Luxembourg. Such fees are payable quarterly and are based on
USREALTY's gross assets.
NOTE 7--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 in effect for 1996. These are proposed to be increased to 30%
based on a new tax treaty; however, the proposed increase is the subject of
U.S. Senate committee review, and may not go into effect. If approved, the
increase would probably become effective January 1, 1999. Management does not
believe such an increase would materially adversely affect growth in net asset
value per share.
HOLDINGS, an ordinary corporate taxpayer under Luxembourg law, owns
substantially all of the consolidated group's interests in US REITs.
Corporations which are resident Luxembourg taxpayers are taxed on their
worldwide net income, determined on the basis of gross income less cost
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 attempts to operate so as to
have the highest possible percentage of its investments qualify for the
exclusion. Interest accrued on advances from the Company to HOLDINGS are
deducted in determining HOLDINGS's taxable income.
Income paid from HOLDINGS to the Company is subject to various levels of tax.
Gross cash (but not accrued) interest payments from HOLDINGS to the Company,
which were $5,029,787 during the twelve months ended December 31, 1996, are
subject to withholding tax at a rate of 3.75% (which totalled $188,617 for the
twelve months to December 31, 1996). No dividends were paid.
<TABLE>
<CAPTION>
---------------------
DECEMBER 31,
1996 1995
--------- ---------
(IN THOUSANDS $)
<S> <C> <C>
Capital Tax 439 -
Withholding Tax 189 7
--------- ---------
628 7
========= =========
</TABLE>
NOTE 8--LINE OF CREDIT
The Company's wholly owned subsidiary, HOLDINGS, has a $400 million revolving
line of credit from a syndicate of European and international banks. The
earliest date on which this line of credit will expire is June 1999, subject to
annual extension with the consent of the lenders, but HOLDINGS has the right to
convert the then outstanding borrowings into a two-year term loan on that date,
with semi-annual amortisation payments to be made over the two-year period,
which effectively extends the final loan payment to June 2001. Borrowings bear
interest at the greater of United States prime or the federal funds rate plus
0.5% or, at HOLDINGS' option, LIBOR plus 1.75%. Additionally, there is a
commitment fee of 0.25% to 0.375% on the average undrawn balance of the line of
credit.
The amount of $2.99 million was paid to the syndicate of European and
international banks as arrangement and upfront fees as well as to cover the
costs of syndication.
The line of credit is secured by substantially all the assets of USREALTY.
HOLDINGS has pledged all securities owned by it as collateral for the line, and
the Company has guaranteed the line and pledged its shares in HOLDINGS as
collateral.
F-119
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 1997, HOLDINGS received preliminary agreement from the lead lending
bank to increase the line of credit to $500 million and reduce the interest
rate to 1.50% over LIBOR, subject to certain conditions and approvals.
Average daily borrowings during the twelve months ended December 31, 1996 were
$84.9 million, at a weighted average interest rate of 7.18% per annum.
The line of credit requires USREALTY to continue to meet certain financial
covenants. At December 31, 1996, USREALTY was in compliance with all covenants.
NOTE 9--SHAREHOLDERS' EQUITY
During the twelve months ended December 31, 1996, $987.3 million of equity
capital subscriptions were called by the Company and funded by investors. This
equity was partly raised through the completion of the funding of subscriptions
under the Company's initial $509.5 million private offering.
The equity was also raised through the June 1996 international public offering
where the Company accepted subscriptions for 22,244,420 shares: 13,112,000
shares through an underwritten public offering and 9,132,420 shares directly to
its principal shareholder, Security Capital. The Company contracted to receive
net proceeds per share of $10.95, equal to the net asset value per share on
June 26, 1996, the day the offering was priced. The transaction was closed on
July 2, 1996.
Additional equity was also raised through the November private offering where
the Company sold 24,115,805 shares. The Company contracted to receive net
proceeds per share of $12.32, equal to the net asset value per share on
November 15, 1996, the day the offering was priced. The transaction closed on
December 19, 1996.
F-120
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and ShareholdersSECURITY CAPITAL ATLANTIC INCORPORATED
We have audited the balance sheets of Security Capital Atlantic Incorporated as
of December 31, 1996 and 1995, and the related statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Capital Atlantic
Incorporated at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, TexasFebruary 3, 1997
F-121
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Homestead Village Incorporated
We have audited the balance sheet of Homestead Village Incorporated as of
December 31, 1996 and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1996 (not presented
separately herein). The financial statements are the responsibility of
Homestead Village Incorporated's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Homestead Village Incorporated
at December 31, 1996, and the results of its operations and its cash flows for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Dallas, Texas
February 24, 1997
F-122
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