<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-26259
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
ON
FORM S-11
UNDER
THE SECURITIES ACT OF 1933
----------------
SECURITY CAPITAL GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
125 LINCOLN AVENUE
SANTA FE, NEW MEXICO 87501
(505) 982-9292
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY A. KLOPF, SECRETARY
SECURITY CAPITAL GROUP INCORPORATED
125 LINCOLN AVENUE
SANTA FE, NEW MEXICO 87501
(505) 982-9292
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
EDWARD J. SCHNEIDMAN
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 782-0600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
LOGO
WARRANTS TO PURCHASE
8,928,572 SHARES OF CLASS B COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Prospectus of Security Capital Group Incorporated ("Security Capital"
or the "Company") is being used in connection with the issuance (the "Warrant
Issuance") by Security Capital of an aggregate of 8,928,572 warrants (the
"Warrants"), each to purchase one share of Class B Common Stock, $0.01 par
value per share, of Security Capital (the "Class B Shares"), to holders (the
"Securityholders") of (i) shares of common stock, $0.01 par value per share
("ATLANTIC Common Shares"), of Security Capital Atlantic Incorporated, a
Maryland corporation ("ATLANTIC"), (ii) common shares of beneficial interest,
$1.00 par value per share ("PTR Common Shares"), of Security Capital Pacific
Trust, a Maryland real estate investment trust ("PTR"), and Cumulative
Convertible Series A Preferred Shares of Beneficial Interest, $1.00 par value
per share (the "PTR Preferred Shares"), of PTR, and (iii) common shares of
beneficial interest, $0.01 par value per share ("SCI Common Shares"), of
Security Capital Industrial Trust, a Maryland real estate investment trust
("SCI"), Cumulative Convertible Series B Preferred Shares of Beneficial
Interest, $0.01 par value per share (the "SCI Preferred Shares"), of SCI and
limited partnership interests ("Units") in four partnerships in which SCI is
the general partner, which Units are exchangeable for SCI Common Shares, in
each case, other than Security Capital. Holders of ATLANTIC Common Shares will
receive an aggregate of approximately 1,675,941 Warrants, holders of PTR
Common Shares and PTR Preferred Shares will receive an aggregate of
approximately 3,644,430 Warrants and holders of SCI Common Shares, SCI
Preferred Shares and Units will receive an aggregate of approximately
3,608,201 Warrants. For a breakdown of the number of Warrants to be issued to
such equity holders, see "Business--The Warrant Issuance."
The Warrant Issuance is being made by Security Capital as part of the
Transaction (as defined) pursuant to which, among other things, each of
ATLANTIC, PTR and SCI became internally managed real estate investment trusts
("REITs"). The actual number of Warrants issued to any particular
Securityholder depends on the number of ATLANTIC Common Shares, PTR Common
Shares, SCI Common Shares, PTR Preferred Shares, SCI Preferred Shares and
Units (collectively, the "REIT Securities") outstanding on September 16, 1997
(the "Warrant Issuance Record Date"). The exercise price of a Warrant is
$28.00 per Class B Share, and the Warrants will expire on September 18, 1998.
The Class B Shares and the Warrants are listed on the New York Stock
Exchange (the "NYSE") under the symbols "SCZ.B" and "SCZ WS", respectively.
See "Risk Factors--No Prior Market for Class B Shares or Warrants."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 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.
----------------
The date of this Prospectus is October 1, 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. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the Warrants or 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........................ 8
Use of Proceeds..................... 17
Dividend Policy..................... 18
Business............................ 19
Management.......................... 48
Selected Financial Information...... 63
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 65
Relationships with Operating
Companies.......................... 79
Certain Relationships and
Transactions....................... 90
Principal Shareholders.............. 93
Description of Capital Stock........ 96
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Provisions of Maryland Law
and of Security Capital's Charter
and Bylaws........................ 103
Shares Available for Future Sale... 106
Policies with Respect to Certain
Activities........................ 107
Certain Federal Income Tax
Consequences...................... 108
Certain United States Federal Tax
Considerations for Non-U.S.
Holders of Class B Shares......... 110
ERISA Matters...................... 110
Experts............................ 114
Legal Matters...................... 114
Available Information.............. 115
Index to Financial Statements...... F-1
</TABLE>
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.
FORWARD-LOOKING STATEMENTS
The statements contained and incorporated by reference in this Prospectus
that are not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are based on current expectations, estimates and projections about
the industry and markets in which Security Capital operates, management's
beliefs and assumptions made by management. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates",
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Security Capital's operating results depend primarily on the
operating results of its operating companies. In addition, capital and credit
market conditions which affect the cost of capital of Security Capital and its
operating companies also influence operating results.
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.
SECURITY CAPITAL GROUP INCORPORATED
Security Capital is a real estate research, investment and operating
management company. Management has assembled a superior team of operating and
investment professionals to implement the firm's strategy. Prior to the Warrant
Issuance and 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. The Company currently is considering several new
business initiatives, both domestically and globally, in which it has
recently made or has agreed to make investments. While none of the new
business initiatives is material at present to Security Capital's results
of operations or financial condition, such initiatives are expected to be
an important component of Security Capital's future growth. See
"Business--Future Strategy." 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. See "Business--Operating Strategy--
Security Capital Strategic Group."
. 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 ("SC-USREALTY") and
Homestead Village Incorporated ("Homestead"), each of which is now publicly
traded. Through September 12, 1997, Security Capital has invested an aggregate
of approximately $2.3 billion in the common shares of PTR, SCI, ATLANTIC, SC-
USREALTY and Homestead and warrants of Homestead. Those securities had an
aggregate market value of approximately $3.3 billion (based on the closing
price of those securities on the principal exchange on which such securities
are listed on September 12, 1997). As of September 12, 1997, Security Capital
owned approximately 33% of PTR, 50% of ATLANTIC, 68% of Homestead, 43% of SCI
and 33% of SC-USREALTY (based in each case on common shares outstanding) 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 September 12, 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 $9.4 billion. SC-USREALTY has made
strategic investments in three publicly traded companies,
3
<PAGE>
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 $4.6 billion as of September 12, 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."
Security Capital has several new business initiatives which recently became
operational, including Strategic Hotel Capital Incorporated, Security Capital
Preferred Growth Incorporated and Security Capital Employee REIT Fund
Incorporated, in which Security Capital has initially committed to invest $300
million, $50 million and $100 million, respectively, and several other new
business initiatives which are in various stages of research and development.
Security Capital and SC-USREALTY also have several new business initiatives
expected to be operational by the end of 1997, including Security Capital
Global Realty and Security Capital EuroPacific Real Estate Shares, in which
Security Capital has committed to invest $300 million and $50 million,
respectively. 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
OWNERSHIP AND MARKET CAPITALIZATION OF INVESTEES
<TABLE>
<CAPTION>
DIRECT/INDIRECT EQUITY MARKET
INVESTEE OWNERSHIP (1)(2) CAPITALIZATION (1)
-------- ---------------- ------------------
(in millions)
<S> <C> <C>
Security Capital Pacific Trust 30% $2,424
Security Capital Atlantic
Incorporated 49% 1,099
Homestead Village Incorporated (3) 31% 996
Security Capital Industrial Trust 37% 2,835
SC-USREALTY 33% 2,084
------
Total $9,438
======
CarrAmerica Realty Corporation
(4)(5) 37% $2,019
Storage USA, Inc. (4)(5) 34% 1,241
Regency Realty Corporation (4)(5) 38% 756
Pacific Retail Trust (4)(5) 69% 614
------
Total $4,630
======
</TABLE>
- --------
(1) Ownership and market capitalization are as of September 12, 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 September 12, 1997, Security Capital's percentage ownerships in its
investees, based on common shares outstanding on such date, were 33% of PTR,
50% of ATLANTIC, 68% of Homestead, 43% of SCI and 33% of SC-USREALTY. Equity
market capitalization, as of September 12, 1997, based on common shares
outstanding was $2.2 billion for PTR, $1.1 billion for ATLANTIC, $444 million
for Homestead, $2.4 billion for SCI, and $2.1 billion for SC-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
4
<PAGE>
upon conversion of convertible mortgages owned by PTR and ATLANTIC through
funding commitment agreements. See "Relationships with Operating Companies--
Homestead--Homestead Transaction."
(4) This company is an investee of SC-USREALTY through its subsidiary and is
not directly advised by Security Capital. The ownership percentage reflected is
that of SC-USREALTY.
(5) As of September 12, 1997, SC-USREALTY's percentage ownerships in its
investees, based on common shares outstanding on such date, were 43% of
CarrAmerica, 37% of Storage USA, 45% of REGENCY and 73% of PACIFIC RETAIL.
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 MERGER TRANSACTIONS
Prior to September 9, 1997, Security Capital, through its affiliates,
provided 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 of Directors of Security Capital (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, as amended
(collectively, the "Merger Agreements"), pursuant to which Security Capital
caused 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 became officers and employees of ATLANTIC, PTR and SCI,
respectively. The shareholders of ATLANTIC, PTR and SCI approved their
respective Merger Agreements on September 8, 1997 and each Merger closed on
September 9, 1997. In exchange for the transfer of those businesses, Security
Capital received 2,306,591 of ATLANTIC's shares of common stock, 3,295,533 of
PTR's common shares of beneficial interest and 3,692,023 of SCI's common shares
of beneficial interest.
THE RIGHTS OFFERINGS
In order to allow the common shareholders of ATLANTIC, PTR and SCI,
respectively, to maintain (and to the extent a shareholder oversubscribed for
common shares pursuant to the oversubscription privilege described below, to
increase) 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 conducted a rights offering entitling
its common shareholders (other than Security Capital) to purchase additional
common shares. Shareholders were entitled to subscribe for common shares not
purchased by other common shareholders pursuant to an oversubscription
privilege. The rights offering price for each company was at a discount to the
price at which common shares were issued to Security Capital pursuant to the
respective Merger Agreements. The exercise prices in the rights offerings, the
prices of the common shares issued to Security Capital in the Mergers, the
closing prices of the common shares on August 5, 1997 (the day prior to the
record dates for the Mergers) and the five-day trailing average closing prices
on August 5, 1997 were as follows:
<TABLE>
<CAPTION>
ATLANTIC PTR SCI
-------- -------- -------
<S> <C> <C> <C>
Exercise Price in Rights Offering.................... $22.375 $21.8125 $21.000
Price to Security Capital in Merger.................. $23.675 $23.0125 $22.175
NYSE Closing Price on August 5, 1997................. $24.000 $23.4375 $21.875
Five-Day Trailing Average Closing Price on August 5,
1997................................................ $23.675 $23.0125 $22.175
</TABLE>
5
<PAGE>
Common shares not subscribed for by common shareholders in the rights
offerings were made available for purchase by third parties. The rights
offerings were fully subscribed and closed on September 12, 1997 and PTR and
SCI sold an additional 1,486,686 and 994,070 common shares, respectively, to
cover oversubscriptions and third party demand.
THE WARRANT ISSUANCE
As part of the transactions contemplated by the Merger Agreements, Security
Capital issued warrants to purchase an aggregate of 8,928,572 of Class B Shares
(the "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 Warrants were issued as an incentive for the common
shareholders of ATLANTIC, PTR and SCI to vote in favor of the transactions, to
broaden Security Capital's shareholder base, to enable Security Capital to
raise additional equity capital at a relatively low cost through the exercise
of the Warrants and to enable Security Capital to raise additional equity
capital in the long run by preserving and enhancing its goodwill with the
shareholders of ATLANTIC, PTR and SCI. The exercise price of the Warrants of
$28.00 per Class B Share was the initial public offering price of the Class B
Shares in the initial public offering, and the Warrants expire on September 18,
1998.
THE CLASS B SHARE OFFERING
Security Capital filed a registration statement with the Securities and
Exchange Commission relating to the offering of 22,569,710 Class B Shares. Such
offering was made to the public at $28.00 per Class B Share on September 17,
1997 and closed on September 23, 1997. The net proceeds to Security Capital
from this offering were approximately $592.5 million and are being used for the
partial repayment of outstanding bank indebtedness, the allocation of capital
to new businesses and for general corporate purposes.
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, through its
investees, is subject to general real estate investment risks; (v) there are
limitations on the shareholders' ability to change control of Security Capital;
and (vi) there has been no prior market for the Class B Shares. See "Risk
Factors."
TAX STATUS OF SECURITY CAPITAL
For Federal income tax purposes, Security Capital is a Subchapter C
corporation subject to applicable federal and state tax on its taxable income
at regular corporate rates. As a result, it is under no obligation to make any
distributions to shareholders. If distributions are made by Security Capital,
shareholders will recognize ordinary income to the extent of current and
accumulated earnings and profits of Security Capital and any amounts
distributed in excess of current and accumulated earnings and profits will be
considered a tax-free return of capital, reducing the tax basis in the
shareholder's Shares by the amount of such distribution (but not below zero),
with distributions in excess of the shareholder's tax basis taxable as capital
gains (if the Shares are held as a capital asset). In general, any gain or loss
upon a sale or other disposition of Shares by a shareholder will be considered
either short-term or long-term capital gain depending upon the period of time
the Shares were held by the shareholder. Non-U.S. holders not holding shares in
connection with a U.S. trade or business generally will be subject to U.S.
withholding tax in connection with distributions unless reduced or eliminated
by an applicable tax treaty. In addition, non-U.S. holders not holding Shares
in connection with a U.S. trade or business generally will not be subject to
U.S. federal income tax on a sale or other disposition of Shares unless
Security Capital has been a "United States real property holding corporation"
within the five-year period preceding such sale or disposition. See "Certain
United States Federal Tax Considerations for Non-U.S. Holders of Class B
Shares."
6
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth summary selected financial information for
Security Capital as of and for the six months ended June 30, 1997, for the six
months ended June 30, 1996 and 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>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
Dollars in thousands, 1997 1996 1996 1995 (1) 1994 1993 1992 1991
except per share data ------------ ------------ --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Equity in earnings...... $ 78,083 $ 39,738 $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues......... 105,321 63,685 145,907 103,634 55,071 10,916 1,592 -
Services Division
revenues (2)........... 49,018 33,653 77,512 49,404 - - - -
Total revenues.......... 239,993 139,588 398,122 200,534 156,855 17,503 3,534 467
Rental expenses......... 41,370 25,234 58,259 40,534 23,052 1,428 292 -
Services Division
expenses(2)............ 42,472 32,805 79,296 56,317 - - - -
General, administrative
and other (2).......... 35,571 14,396 32,617 20,197 6,172 2,555 679 205
Costs incurred in
acquiring Services
Division (2)........... - - - 158,444 - - - -
Interest expense:
Security Capital:
Convertible
Debentures/notes (3). 54,623 45,000 93,912 78,785 29,647 1,616 180 -
Line of credit........ 2,608 3,081 6,256 5,977 6,424 1,808 960 88
Majority-owned
subsidiaries (4)...... 9,402 8,123 17,056 19,042 8,057 362 - -
------------ ------------ --------- --------- --------- --------- --------- ---------
Total interest expense. 66,633 56,204 117,224 103,804 44,128 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares (5)............. $ 2,368 $ (10,862) $ 32,067 $(201,634) $ (7,685) $ 5,155 $ 1,014 $ 141
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
1997 1996 1996 1995 (1) 1994 1993 1992 1991
------------ ------------ --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Series A Preferred Stock
dividends.............. $ 37.50 $ 18.75 $ 56.25 - - - - -
Net earnings (loss)
attributable to
Class A Shares......... $ 1.75 $ (10.79) $ 28.28 $ (224.87) $ (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..... 1,355,349 1,007,009 1,133,711 896,681 458,945 131,776 46,913 35,565
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1997 1996 1995 (1) 1994 1993 1992 1991
Dollars in thousands ----------- ---------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Investments, at equity.. $1,551,010 $1,438,937 $ 930,043 $ 230,756 $ 161,270 $ 68,160 $ 24,911
Real estate, net of
accumulated
depreciation (1)....... 1,575,945 1,365,373 865,367 2,005,957 478,630 41,577 -
Total assets............ 3,410,395 2,929,284 1,855,056 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3)... 1,038,268 940,197 718,611 514,383 48,970 6,532 -
Majority-owned
subsidiaries (4)...... 298,006 257,099 118,524 301,787 47,988 - -
Minority interests...... 475,909 394,537 159,339 554,752 157,545 4,884 -
Total shareholders'
equity................. $1,029,071 $ 918,702 $ 528,539 $ 359,859 $ 293,823 $ 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
Convertible Subordinated Debentures due June 30, 2014 (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.
7
<PAGE>
RISK FACTORS
Holders of Warrants and Class B Shares should consider carefully the
information set forth below, as well as the other information set forth in
this Prospectus, as applicable. 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
and one-half year period ended June 30, 1997, Security Capital's book value
per Class A Share (after payment of convertible debt interest and preferred
stock dividends) increased at a compounded average growth rate of 7.40% 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.
RISKS RELATING TO NEW BUSINESS INITIATIVES
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 have recently become operational, or
are expected to be operational by the end of 1997, or are in varying stages of
research and development, and SC-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,
may be subject to a greater risk of failure as a new business initiative than
generally would be associated with a mature business. As a result, there can
be no assurance that these new business initiatives will be completed, or if
completed, prove to be successful or viable. While none of the new business
initiatives is material at present to Security Capital's results of operations
or financial condition, such initiatives are expected to be an important
component of Security Capital's future growth. 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 following Managing
Directors: Jeffrey A. Cozad, John H. Gardner, W. Joseph Houlihan, Gordon S.
Kerr, Anthony R. Manno, Jr., Todd W. Mansfield, Caroline S. McBride, Daniel F.
Miranda, Mary Lou Rogers, Donald E. Suter, Paul E. Szurek and Robert S.
Underhill. Security Capital has experienced individuals who manage its
operating companies, including R. Scot Sellers, President and Chief Executive
Officer of PTR, Patrick R. Whelan, Managing Director 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. The loss of any of these key personnel could have an
adverse effect on Security Capital.
8
<PAGE>
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, SC-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 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 TO SHAREHOLDERS
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 June 30, 1997,
Security Capital had approximately $1.4 billion of consolidated outstanding
long-term indebtedness (of which $298 million represented indebtedness of
Security Capital's consolidated operating companies) and $386 million of
consolidated outstanding short-term indebtedness (of which $279 million
represented indebtedness of Security Capital's consolidated operating
companies). Of the $1.4 billion of consolidated outstanding long-term
indebtedness, approximately $1.1 billion consisted of the 2014 Convertible
Debentures and the Convertible Debentures due March 29, 2016 (the "2016
Convertible Debentures" and together with the 2014 Convertible Debentures, the
"Convertible Debentures"), which are convertible at the option of the holders
into Class A Shares one year after the date of the Offering or upon redemption
of the Convertible Debentures. The current conversion prices for the
Convertible Debentures are below the Company's estimate of the fair market
value per Class A Share. If the Convertible Debentures were converted, the
outstanding long-term indebtedness would be reduced to approximately $298
million (all of which would be indebtedness of Security Capital's consolidated
operating companies). On September 29, 1997, Security Capital announced that
it has called for redemption all $715.8 million principal amount of its
outstanding 2014 Convertible Debentures on December 1, 1997. The 2014
Convertible Debentures will be redeemed at a redemption price of $1,000 per
$1,000 principal amount of 2014 Convertible Debentures plus accrued and unpaid
interest through December 1, 1997. As a result of the call, the 2014
Convertible Debentures are convertible, beginning October 10, 1997 and ending
on November 28, 1997, into Class A Shares, at the conversion rate of $1,046
per $1,000 principal amount of 2014 Convertible Debentures outstanding. If all
outstanding 2014 Convertible Debentures are converted into Class A Shares,
Security Capital will issue an additional 684,358 Class A Shares. 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 entered into an $85 million revolving line of
credit with Wells Fargo Realty Advisers Funding, 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, $300
million and $400 million in 1994, 1995 and 1997, respectively. In 1995,
Security Capital transferred its investments in the REITs and assigned its
obligation under the line of credit to SC Realty, its wholly owned subsidiary,
effectively making SC Realty the borrower. The facility, which is provided by
a group of 11 banks, is effective through November 15, 1998 and had an
outstanding balance of $165.5 million as of August 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Investing and Financing Activities--Line of Credit."
9
<PAGE>
Under SC Realty's line of credit, Security Capital (as guarantor) is not
permitted to incur or assume any indebtedness other than (i) indebtedness
under the SC Realty line of credit which is guaranteed by Security Capital,
(ii) existing convertible subordinated indebtedness, (iii) subordinated
indebtedness, (iv) indebtedness represented by declared but unpaid dividends,
(v) indebtedness secured by purchase money liens in an aggregate amount not to
exceed $10 million at any time outstanding, (vi) indebtedness owing to SC
Realty (limited to a maximum of $50 million), and (vii) other indebtedness in
an aggregate amount not to exceed $10 million at any time outstanding. In
addition, the terms and conditions of SC Realty's line of credit impose
restrictions that affect, among other things, the ability of Security Capital
to (i) create liens on assets, (ii) sell or otherwise transfer certain assets,
(iii) engage in mergers or consolidations, and (iv) pay dividends. Security
Capital is also required by the terms of its guaranty to comply with certain
specified financial ratios and tests, including (i) a minimum shareholders'
equity of greater than $795 million; (ii) a maximum ratio of total liabilities
of Security Capital to the net worth of Security Capital plus the market value
net worth of SC Realty of 1.75 to 1.00; and (iii) a minimum ratio of cash flow
to mandatory interest expense of 1.75 to 1.00. Security Capital's ability to
comply with the foregoing provisions may be affected by events beyond its
control. Security Capital's failure to comply with any of these covenants
could result in a default under the line of credit. At June 30, 1997, Security
Capital was in compliance with all covenants under the guaranty and SC
Realty's 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 the exercise
of Warrants and funds currently available under its $400 million revolving
line of credit will be sufficient to enable Security Capital to satisfy its
anticipated cash requirements for operating and investing activities for
existing businesses 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. 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.
OPERATING LOSS IN 1995 AND ACCUMULATED DEFICIT
For the year ended December 31, 1995, Security Capital experienced a net
loss of $201.6 million of which $158.4 million related to the one-time,
noncash charge related to the acquisition of the Services Division. In
addition, as of June 30, 1997, Security Capital had an accumulated deficit of
$203.3 million. Although Security Capital had net earnings for 1996 and the
first six months of 1997, there can be no assurance that Security Capital will
remain profitable in the future.
CONFLICTS OF INTEREST
Allocation of New Business Opportunities
Security Capital will deploy its capital (both its corporate and third-party
managed capital) through the direct and indirect ownership of public and
private companies with highly focused business strategies which are engaged in
real estate activities. The allocation of new business opportunities may
present conflicts between Security Capital and its direct and indirect
investees. New opportunities in existing property types within the United
States, for example, multifamily communities or distribution facilities, will
be presented to existing direct or indirect investees which are engaged in
owning and operating those property types. Long-term strategic investment
opportunities in equity oriented REITs located in the United States, which are
not engaged in operating product types in which Security Capital currently
owns a strategic position, will be allocated to SC-USREALTY. All other
investment opportunities in unrelated real estate operating companies located
in the United States are expected to be allocated to Security Capital, which
may form new entities to develop those opportunities.
10
<PAGE>
Interests of Certain Directors and Officers of Security Capital in Direct and
Indirect Investees
Several directors and officers of Security Capital are directors or officers
of direct or indirect investees of Security Capital and own shares of Security
Capital and direct and indirect investees of Security Capital. As of September
26, 1997, directors and executive officers of Security Capital as a group
beneficially owned 97,000 Class A Shares, representing approximately 7.17% of
those shares, and also owned options to purchase additional Class A Shares. At
that same date, such directors and officers as a group beneficially own 40,683
common shares of ATLANTIC (less than 1%), 382,804 shares of Homestead common
stock (1.37%), 813,516 common shares of PTR (less than 1%), 707,940 common
shares of SCI (less than 1%), and 3,052,330 common shares of SC-USREALTY
(2.14%). This information does not include any common shares of ATLANTIC, PTR
and SCI which such persons may have purchased pursuant to the rights offerings
recently conducted by ATLANTIC, PTR and SCI. See "Principal Shareholders."
William D. Sanders is Chairman and Chief Executive Officer of Security Capital
and non-executive chairman of SC-USREALTY, a director of Storage USA and an
advisory director of REGENCY. C. Ronald Blankenship is a Managing Director of
Security Capital, a trustee and non-executive chairman of PTR, a director of
Strategic Hotel Capital Incorporated and an advisory director of ATLANTIC and
Homestead. John T. Kelley III is a director of Security Capital, a trustee of
PTR, an advisory trustee of SCI and Chairman of PACIFIC RETAIL. John P.
Frazee, Jr. is a director of Security Capital and a director of Homestead.
Thomas G. Wattles is a Managing Director of Security Capital, a trustee and
non-executive chairman of SCI. Caroline S. McBride is a Managing Director of
the Strategic Group (defined below) and a director of CarrAmerica and Storage
USA. Jeffery A. Klopf is Senior Vice President and Secretary of Security
Capital and holds similar positions in SCI, PTR, ATLANTIC and Homestead.
Each of Messrs. Blankenship, Wattles, Frazee and Kelley hold their
directorships in direct investees of Security Capital as nominees of Security
Capital pursuant to Investor Agreements between Security Capital and the
respective investee. Mr. Sanders and Ms. McBride hold their directorships in
indirect investees of Security Capital as nominees of SC-USREALTY under
agreements between SC-USREALTY and the respective indirect investee.
From time to time there may be transactions between Security Capital and its
direct investees, or among its direct and indirect investees, or between
Security Capital and its indirect investees. The interests of the foregoing
persons may differ from the interests of shareholders of Security Capital as a
result of their positions in the direct or indirect investees or their
ownership of securities of the direct or indirect investees and as a result,
such persons may have an incentive to place the interests of the direct or
indirect investees over those of Security Capital's shareholders.
Principal Transactions with Officers, Directors and Direct and Indirect
Investees
Security Capital has engaged in principal transactions with certain officers
and directors or companies in which a director may have a material interest.
See "Certain Relationships and Transactions." Other than as described in
"Certain Relationships and Transactions," Security Capital does not intend to
engage in principal transactions with officers and directors or to engage
independent directors to provide services to Security Capital. Security
Capital will not borrow from or make loans to affiliates, other than loans to
officers similar to those described in "Certain Relationships and
Transactions," or loans to affiliates in which Security Capital owns a
substantial economic interest, or where the Board believes that such loans are
in the best long-term interests of Security Capital and its shareholders. In
those cases where Security Capital engages in these types of transactions, it
has and will obtain, after appropriate disclosure of all material interests,
Board approval for officer transactions, disinterested director approval for
interested director transactions, and where appropriate under Maryland law or
required by its charter or by-laws, shareholder approval.
Neither Security Capital's charter nor its bylaws contain any restrictions
on interested party transactions with directors and officers. Under the laws
of Maryland (where Security Capital is organized), each director is obligated
to offer to Security Capital any opportunity (with certain limited exceptions)
which comes to him and which Security Capital could reasonably be expected to
have an interest in developing. In addition, under Maryland law, any contract
or other transaction between Security Capital and any director or any entity
in which
11
<PAGE>
the director has a material financial interest is voidable unless (i) it is
approved, after disclosure of the interest, by the affirmative vote of a
majority of disinterested directors or by the affirmative vote of a majority
of the votes cast by a disinterested shareholders or (ii) it is fair and
reasonable to Security Capital.
Transactions with direct investees have been and will be considered, after
appropriate disclosure of all material interests, by the entire Board of
Directors of Security Capital. Security Capital owns substantial positions in
its direct investees 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 USREALTY generally has investor agreements
and board representation for indirect investees of Security Capital.
LIMITATIONS ON ACQUISITION OF SHARES AND CHANGE IN CONTROL
Ownership Limit
The Charter restricts ownership of more than 9.8% of the number or value of
the outstanding Class A Shares and Class B Shares by any single shareholder
except SC-USREALTY. This provision is designed to help ensure that Security
Capital's operating companies that are REITs are able to meet the constructive
ownership limitations imposed by the Internal Revenue Code of 1986, as amended
(the "Code"). 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 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
in the Charter and the constructive ownership limitations imposed by the Code.
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, deferring 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.
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
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 SC-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
12
<PAGE>
the Purchase Right's exercise price. The Purchase Rights held by the
triggering 20% shareholders (other than SC-USREALTY or other affiliates of
Security Capital) would not be exercisable.
The Purchase Rights may have the effect of delaying, deferring 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 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 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, deferring or preventing a change in control of Security Capital even
if a change in control were in the shareholders' interests.
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 exemptions provided
by Rule 3a-1 promulgated under the Investment Company Act. 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 September 12, 1997, Security Capital owned approximately 33%
of PTR, 50% of ATLANTIC, 68% of Homestead, 43% of SCI and 33% of SC-USREALTY
(based in each case on outstanding common shares at such date) and 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
13
<PAGE>
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 SC-USREALTY
SC-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
SC-USREALTY is not currently, and intends to operate so as not to become, a
Passive Foreign Investment Company ("PFIC") or subject to the accumulated
earnings tax for United States income tax purposes. Characterization of SC-
USREALTY as a PFIC could potentially subject the Company to income tax on its
pro rata share of the undistributed income of SC-USREALTY. In addition,
application of the accumulated earnings tax to SC-USREALTY could potentially
subject SC-USREALTY to a 39.6% tax rate on its "accumulated taxable income"
for United States income tax purposes.
UNITED STATES REAL PROPERTY HOLDING CORPORATION
In the opinion of Mayer, Brown & Platt, based on certain representations of
Security Capital, Security Capital was not, as of September 17, 1997, a
"United States real property holding corporation." However, such opinion is
not binding on the Internal Revenue Service and there can be no assurance that
the Internal Revenue Service will agree with the conclusions set forth in such
opinion. Moreover, such opinion is based on certain factual matters, as of
September 17, 1997, which may change, such as the relative fair market value
of Security Capital's assets and investments made by Security Capital, as of
September 17, 1997. In general, if Security Capital were treated as or were to
become a "United States real property holding corporation," a non-U.S. holder
of Class B Shares deemed to own more than 5% of the Class B Shares would be
subject to U.S. income and withholding taxes upon a sale or other disposition
of such shares. See "Certain United States Federal Tax Considerations for Non-
U.S. Holders of Class B Shares--U.S. Income and Estate Tax Consequences."
REAL ESTATE RISKS AFFECTING SECURITY CAPITAL
General
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, regional or national conditions (such as an
oversupply of properties or a reduction in rental demand in a specific area),
the quality and philosophy of management, competition from other available
properties and the ability to provide adequate maintenance and insurance and
to control operating costs. Although Security Capital seeks to minimize these
risks through its market research and asset and property management
capabilities, these risks cannot be eliminated entirely. Real estate cash
flows and values are also affected by such factors as government regulations,
including zoning, usage and tax laws, interest rate levels, the availability
of financing, the possibility of bankruptcies of tenants and potential
liability under, and changes in, environmental and other laws. Since a
significant portion of the income from Security Capital's direct and indirect
REIT investees is derived from rental income and other payments from real
property (in excess of 97% of the 1996 total revenues for each such company,
except in the case of CarrAmerica and REGENCY for which such amounts were in
excess of 92% of 1996 total revenues), their respective income and
distributable cash flow, and accordingly Security Capital's, 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.
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 the acquisition and
disposition of real estate assets and the development or redevelopment of
properties.
14
<PAGE>
Debt Financing
To the extent Security Capital or one of its operating companies incur debt,
such company will be subject to the risks associated with debt financing,
including the risks that cash flow from operations will be insufficient to
meet required payments of principal and interest, that such company will be
unable to refinance any revolving line of credit or any current or future
indebtedness on its properties, that the terms of any such refinancings may
not be as favorable as the terms of existing indebtedness and that, due to a
lack of funds, such company may be unable to make necessary capital
expenditures for purposes such as renovations or releasing properties. If a
property owned by one of Security Capital's operating companies is mortgaged
to secure payment of indebtedness and the operating company is unable to meet
its mortgage payments, the property would be transferred to the mortgagee with
a consequent loss of income and asset value to the operating company.
Risks of Real Estate Development
Security Capital's operating companies have developed or commenced
development on properties (e.g., multifamily communities, distribution
facilities and extended-stay lodging facilities) and expect to develop
additional properties in the future. Real estate development involves
significant risks in addition to those involved in the ownership and operation
of established properties, including the risks that financing, if needed, may
not be available on favorable terms for development projects, that
construction may not be completed on schedule (resulting in increased debt
service expense and construction costs), that estimates of the costs of
construction may prove to be inaccurate and that properties may not be leased
or rented on profitable terms and therefore will fail to perform in accordance
with expectations. Timely construction may be affected by local weather
conditions, local or national strikes and by local or national shortages in
materials, insulation, building supplies and energy and fuel for equipment.
Renewal of Leases and Re-leasing of Space
Certain of Security Capital's operating companies, particularly those that
invest in multifamily communities and distribution facilities, are subject to
the risks that leases may not be renewed, space may not be re-leased or the
terms of such renewal or re-leasing may be less favorable than current lease
terms. If such operating companies were unable to promptly re-lease or renew
leases or if the rental rates upon such renewal or re-lease were significantly
lower than expected, their cash flow, and accordingly Security Capital's cash
flow, may be adversely affected.
Illiquidity of Real Estate Investments
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 operating and maintenance costs) are
generally not reduced when circumstances cause a reduction in income from the
investments. Further, Security Capital's operating companies that are REITs
must comply with safe harbor rules which enable a REIT to avoid punitive
taxation. Thus, the ability of the operating companies that are REITs to sell
assets to change their asset base is restricted by tax rules which impose
holding periods for assets and potential disqualification as a REIT upon
certain asset sales.
Regulation
Governmental authorities at the federal, state and local levels are actively
involved in the promulgation and enforcement of regulations relating to land
use and zoning restrictions. Regulations may be promulgated which could have
the effect of restricting or curtailing certain uses of existing structures or
requiring that such structures be renovated or altered in some fashion. The
establishment of such regulations could have the effect of increasing the
expenses and lowering the profitability of any of the properties affected
thereby. Security Capital does not believe that any of these regulations will
have a material impact on Security Capital or its direct or indirect
investees.
15
<PAGE>
Changes in Laws
Increased costs resulting from increases in real estate, income or transfer
taxes or other governmental requirements generally may not be passed through
directly to residents, tenants or lessees, inhibiting the ability of Security
Capital's operating companies to recover such costs. Substantial increases in
rents, as a result of such increased costs, may affect the ability of a
resident, tenant or lessee to pay rent, causing increased vacancy. In
addition, changes in laws increasing potential liability for environmental
conditions or increasing the restrictions on discharges or other conditions
may result in significant unanticipated expenditures.
Uninsured Loss
Security Capital's operating companies carry comprehensive liability, fire,
flood, earthquake, extended coverage and rental loss insurance with respect to
their properties with policy specifications and insured limits customarily
carried for similar properties and which the operating companies believe are
appropriate under the circumstances. There are, however, certain types of
losses (such as from wars) that may be uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits
occur, such operating company could lose both its capital invested in and
anticipated profits from one or more properties.
HIGHLY COMPETITIVE BUSINESSES
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.
Security Capital's operating companies compete on a regional and national
basis with no individual market material to Security Capital as a whole.
ATLANTIC and PTR each have a significant portion of their respective assets
in certain geographic markets. ATLANTIC has 29% and 11%, respectively, of its
assets, based on total expected investment, located in the Atlanta, Georgia
and Ft. Lauderdale/West Palm Beach, Florida markets. PTR has 18%, 14% and 11%,
respectively, of its assets, based on total expected investment, located in
the Southern California, Northern California and Phoenix, Arizona markets. As
a result, such operating companies are subject to increased exposure to the
economic and other competitive factors specific to those markets. See
"Business--Competition and Properties of the Operating Companies". 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 OR WARRANTS; SHARE PRICE FLUCTUATIONS
The Class B Shares and the Warrants began trading on the NYSE on September
18, 1997. However, there can be no assurance that an active trading market for
the Class B Shares or the Warrants will develop or be maintained. From time to
time, the stock market experiences significant price and volume volatility,
which may affect the market price of the Class B Shares and the Warrants for
reasons unrelated to Security Capital's performance.
16
<PAGE>
POTENTIAL ADVERSE 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. Security Capital has issued Warrants to purchase a total of
8,928,572 Class B Shares, which underlying Class B Shares may be sold by non-
affiliates in the public markets without limitation. Security Capital has an
additional 22,569,710 Class B Shares outstanding. All such shares may be sold
by non-affiliates in the public markets without limitation. In addition,
Security Capital has 1,327,740 Class A Shares outstanding, which will be
convertible beginning January 1, 1998 into a total of 66,387,000 Class B
Shares, and 139,000 shares of Series A Cumulative Convertible Redeemable
Voting Preferred Stock (the "Series A Preferred Stock") outstanding,
convertible into a maximum of 105,896 Class A Shares. As of August 31, 1997,
Security Capital also had outstanding (i) approximately $715 million principal
amount of its 2014 Convertible Debentures, convertible into an aggregate of
683,771 Class A Shares, (ii) approximately $323 million principal amount of
its 2016 Convertible Debentures, convertible into an aggregate of 279,941
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 132,604
Class A Shares and approximately $45 million principal amount of 2014
Convertible Debentures (convertible into 43,259 Class A Shares) under Security
Capital's employee benefit plans. On September 29, 1997, Security Capital
announced that it has called for redemption all $715.8 million principal
amount of its outstanding 2014 Convertible Debentures on December 1, 1997. The
2014 Convertible Debentures will be redeemed at a redemption price of $1,000
per $1,000 principal amount of 2014 Convertible Debentures plus accrued and
unpaid interest through December 1, 1997. As a result of the call, the 2014
Convertible Debentures are convertible, beginning October 10, 1997 and ending
on November 28, 1997, into Class A Shares, at the conversion rate of $1,046
per $1,000 principal amount of 2014 Convertible Debentures outstanding. If all
outstanding 2014 Convertible Debentures are converted into Class A Shares,
Security Capital will issue an additional 684,358 Class A Shares. 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. See "Shares Available for Future
Sale." No prediction can be made regarding the effect of future sales of Class
B Shares, Class A Shares or Warrants, or the conversion of Class A Shares into
Class B Shares, on the market price of Class B Shares or Warrants.
IMPACT OF ENVIRONMENTAL REGULATIONS
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.
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.
USE OF PROCEEDS
The maximum net proceeds to Security Capital from the exercise of Warrants
offered hereby, after payment of all expenses of the Warrant Issuance, will be
a maximum of $250 million. The net proceeds will be used for general corporate
purposes. Depending on the timing and amount of any proceeds from the exercise
of Warrants, proceeds may be used for a variety of purposes, including the
partial repayment of outstanding indebtedness and the allocation of capital to
new businesses or for general corporate purposes.
17
<PAGE>
At August 31, 1997, SC Realty, a wholly owned subsidiary of Security
Capital, had $165.5 million in outstanding borrowings under its $400 million
revolving line of credit with Wells Fargo. The weighted average interest rate
on the line of credit balance at August 31, 1997 was 7.1808%. 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 August 31, 1997,
the aggregate market value of the securities pledged pursuant to the line of
credit was approximately $3.0 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.
18
<PAGE>
BUSINESS
OVERVIEW AND STRATEGY
Security Capital is a real estate research, investment and operating
management company. Management has assembled a superior team of operating and
investment professionals to implement the firm's strategy. Prior to the
Warrant Issuance and 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. The Company currently is considering several new
business initiatives, both domestically and globally in which it has
recently made or has agreed to make investments. While none of the new
business initiatives is material at present to Security Capital's results
of operations or financial condition, such initiatives are expected to be
an important part of Security Capital's future growth. See "--Future
Strategy." 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. See "--Operating Strategy--Security
Capital Strategic Group."
. 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 September 12, 1997, Security Capital has invested an aggregate of
approximately $2.3 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 $3.3 billion
(based on the closing price of those securities on the principal exchange on
which the securities are listed on September 12, 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.
19
<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 Capital Management Group ("CMG")
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
SECURITY CAPITAL GROUP
INCORPORATED
REAL ESTATE RESEARCH,
INVESTMENT AND OPERATING
MANAGEMENT
---------------------------------------------------------------
| | | |
- ----------------- ------------------ -------------------- ------------------
REAL ESTATE CAPITAL MANAGEMENT STRATEGIC GROUP FINANCIAL
RESEARCH GROUP GROUP (SG) SERVICES GROUP
(RERG) (CMG) (FSG)
BUSINESS STRATEGY,
REAL ESTATE REAL ESTATE OPERATING ADMINISTRATIVE
RESEARCH SECURITIES AND AND CAPITAL
MANAGEMENT CAPITAL MARKETS SERVICES
(Intermediate DEPLOYMENT
Term) OVERSIGHT
Brussels-Chicago- Chicago-El Paso-
Brussels-Chicago- Brussels-Chicago London-Luxembourg- London-Luxembourg-
Santa Fe New York-Santa Fe New York-Santa Fe
- ----------------- ----------------- -------------------- ------------------
CLIENTS CLIENTS CLIENTS CLIENTS
Investment Special Security Capital Limited to
Research Group Opportunity Pacific Trust Direct/Indirect
Investments Affiliates
Strategic Group (Security Security Capital
Capital U.S. Atlantic
Realty) (1) Incorporated
Security Capital Homestead Village
Employee REIT Incorporated
Fund
Security Capital
Security Capital Industrial Trust
Preferred Growth
Incorporated (2) Strategic Hotel
Capital
Security Capital Incorporated (2)
EuroPacific
Real Estate SCG Box X-3 (2)(3)
Shares (2)
Security Capital
Global Realty (2)(4)
Security Capital
U.S. Realty (1)
CarrAmerica
Realty
Corporation (5)
Storage USA,
Inc. (5)
Regency Realty
Corporation (5)
Pacific Retail
Trust (5)
Parking Services
International
Incorporated--
national
parking
operator (2)(5)
Urban Growth
Property Trust
--national
urban property
(2)(5)
City Center
Retail Trust
--urban
retail (2)(5)
- --------
(1) The European management and Board of Directors of SC-USREALTY receive
operating and investment advice from Security Capital (EU) Management S.A.,
which subcontracts certain research and advisory activities from its
affiliates CMG 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 Security Capital has committed to make
investments in excess of $25 million in the new business.
(4) The European management and Board of Directors of Security Capital Global
Realty ("SC-GR") will receive operating and investment advice from Security
Capital Global Management S.A., which will subcontract certain research and
advisory activities from its affiliates CMG and SG.
(5) This company is an investee of SC-USREALTY through its subsidiary and is
not directly advised by SG.
20
<PAGE>
- ----------------- ---------------------------------------------
REAL ESTATE SECURITY
RESEARCH GROUP CAPITAL
(RERG)
---------------------------------------------
REAL ESTATE | | | |
RESEARCH --------- --------- --------- ---------
RERG
Brussels-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.
21
<PAGE>
- ------------------ ----------------------------------------------------------
------------
CAPITAL SECURITY
MANAGEMENT GROUP CAPITAL
(CMG) ------------
|
REAL ESTATE ----------------------------------------------
SECURITIES | | | |
MANAGEMENT --------- --------- --------- ---------
(INTERMEDIATE CMG
TERM) --------- --------- --------- ---------
Brussels-Chicago
- ------------------ ----------------------------------------------------------
Security Capital (US) Management Group (CMG)
CMG manages or advises capital invested in focused funds that seek to
maximize total return over an intermediate time horizon of up to 42 months.
CMG'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. CMG, 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. CMG 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 CMG
may take larger ownership positions.
CMG currently provides investment research and advice to Security Capital
(EU) Management S.A., the advisor to SC-USREALTY, in connection with certain
investments in publicly traded companies. In addition, CMG currently manages
Security Capital Employee REIT Fund ("SC-ERF") and SC-PG.
. Security Capital U.S. Realty: Special Opportunity Investments Portfolio.
SC-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 September 12,
1997, the SC-USREALTY Special Opportunity Investments Portfolio had a fair
market value of $360 million. For the period from December 31, 1995 to
September 12, 1997, the SC-USREALTY Special Opportunity Investment Portfolio
achieved an average annual total return of approximately 42.7%, 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.
The average annual total return has been calculated based on the following
principal assumptions: (i) investments were made on the dates SC-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 September 12, 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 became effective with the Commission in April 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. At September 12, 1997, Security Capital had
invested $100 million in SC-ERF.
. 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
22
<PAGE>
seeks to provide these companies with an opportunity for repositioning or
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. As of September 12, 1997, SC-PG
has received commitments to purchase approximately $470.2 million of its
common stock including Security Capital's commitment of $50 million.
. Security Capital EuroPacific Real Estate Shares (SC-EP). Security Capital
has committed to invest up to $50 million in a mutual fund known as SC-EP that
will invest in securities of real estate companies publicly traded outside the
United States. SC-EP is intended to be formed as a real estate securities
mutual fund and will be domiciled in the United States. SC-EP's investment
objective will be to obtain above average total returns over the short to
intermediate term, through investment in shares of public companies which are
engaged in real estate activities in Europe and the Asia Pacific region. Long
term, SC-EP's objective is to achieve top quartile total returns as compared
to other mutual funds that invest in real estate companies outside the United
States. SC-EP's investment policy will be driven by international real estate
market research and capital market intelligence of Security Capital (EU)
Management Group S.A. ("SC(EU)MG"), the adviser for SC-EP. The operating and
investment underwriting processes utilized for SC-EP by SC(EU)MG will parallel
those employed by other CMG affiliates.
23
<PAGE>
---------------- ---------------------------------------------------------
STRATEGIC GROUP
(SG)
----------
BUSINESS STRATEGY SECURITY
AND CAPITAL
---------
CAPITAL |
DEPLOYMENT ----------------------------------------------------------
OVERSIGHT | | | |
----------- ----------- ----------- -----------
Brussels-Chicago- SG
London- ----------- ----------- ----------- -----------
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 SC-USREALTY and indirect
investments made by SC-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)
------- ---------------- ------------------
(in millions)
<S> <C> <C>
Security Capital Pacific Trust....... 30% $2,424
Security Capital Atlantic
Incorporated........................ 49% $1,099
Homestead Village Incorporated (3)... 31% $ 996
Security Capital Industrial Trust.... 37% $2,835
SC-USREALTY (4)...................... 33% $2,084
CarrAmerica Realty Corporation (5).. 37% $2,019
Storage USA, Inc. (5)............... 34% $1,241
Regency Realty Corporation (5)...... 38% $ 756
Pacific Retail Trust (5)............ 69% $ 614
</TABLE>
- --------
(1) Ownership and market capitalization are as of September 12, 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 September 12, 1997, Security Capital's percentage ownerships in its
investees, based on common shares outstanding on such date, were 33% of
PTR, 50% of ATLANTIC, 68% of Homestead, 43% of SCI and 33% of SC-
USREALTY. Equity market capitalization, as of September 12, 1997, based
on common shares outstanding was $2.2 billion for PTR, $1.1 billion for
ATLANTIC, $444 million for Homestead, $2.4 billion for SCI and $2.1
billion for SC-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 SC-USREALTY receive
operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from
its affiliates CMG and SG.
(5) This company is an investee of SC-USREALTY through its subsidiary and is
not directly advised by Security Capital. The ownership percentage
reflected is that of SC-USREALTY.
24
<PAGE>
For further information with respect to (i) Security Capital's direct
ownership interests in PTR, ATLANTIC, Homestead, SCI and SC-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."
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 (and, in the case of PTR, became the REIT Manager thereof),
(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 September 12, 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 July 31, 1997, PTR's portfolio of multifamily
communities included 40,786 operating units, 6,672 units under construction
and an estimated 8,092 units in planning, owned or under control. In addition,
PTR owns or controls land for future development of an expected 3,300
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 35% of
the fully converted common shares of Homestead. Since February 1991, when
Security Capital took its initial position in PTR, through September 12, 1997,
PTR's equity market capitalization has increased from $34 million to $2.4
billion. From February 1991 through September 12, 1997, the compound annual
return for PTR was 31.0%.
. 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 July 31,
1997, ATLANTIC's portfolio included 19,265 operating multifamily units, 4,983
units under construction and an estimated 5,280 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 September 12, 1997, ATLANTIC had an equity market
capitalization of $1.1 billion. Since its inception in December 1993 through
September 12, 1997, the compound annual return for ATLANTIC was 14.3%.
. 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
25
<PAGE>
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 July 31, 1997,
Homestead had developed, owned and operated 45 properties representing in the
aggregate 6,143 units and had 44 properties under construction totaling 5,922
units. At September 12, 1997, Homestead had an equity market capitalization of
$1.0 billion. From its spin-off in October 1996 through September 12, 1997,
Homestead had an annualized return of 26.2%. This 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 September 12, 1997 is represented by the closing sales price of the shares
on the American Stock Exchange. There can be no assurance that a comparable
rate of return will be obtained in the future by Security Capital or other
investors.
. Security Capital Industrial Trust (NYSE: SCN). SCI, a highly focused
Denver-based real estate operating company, is the largest publicly held,
global owner and operator of distribution properties headquartered 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. The
cornerstone of SCI's operating strategy is The SCI International Operating
System(TM) which is committed to creating shareholder value through its
dedication to serving the 1,000 largest users of distribution facilities
globally and providing exceptional customer service at the international,
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 Europe and the acquisition, through an
entity in which SCI has a majority economic interest, of the refrigerated
warehousing and distribution operations of Christian Salvesen, Inc. in the
United States and Canada. At July 31, 1997, SCI had distribution properties
operating or under development in 37 national markets and five international
markets, totaling 94.2 million square feet. At September 12, 1997, SCI had an
equity market capitalization of $2.8 billion. Since October 1992 through
September 12, 1997, the compound annual return for SCI was 25.2%.
. 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 May 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. Each of (i)
Security Capital, and (ii) Whitehall Street Real Estate Limited Partnership
VII (together with certain other affiliates of Goldman, Sachs & Co.) have
committed to invest $300 million of capital on an equal basis in SHC. At
September 12, 1997, Security Capital had invested $28 million in SHC, and two
hotels had been purchased by SHC.
. Security Capital Global Realty (SC-GR). Security Capital has made an
initial commitment to invest $300 million in SC-GR which will make strategic
investments in securities of real estate companies which operate outside the
United States. SC-GR will follow the strategy of SC-USREALTY (described below)
as it relates to investment strategy, management, governance, operating
strategies, capital policies and stock listings. The only contrast to SC-
USREALTY is that SC-GR will invest in companies which operate outside the
United States. SC-GR will be a research-driven, European-based company which
will have the objective of becoming the preeminent publicly traded real estate
operating company that will own strategic control positions in highly focused,
fully integrated real estate operating companies outside the United States.
SC-GR will initially focus its investment activities on real estate companies
which operate in Europe or the Asia-Pacific region. SC-GR expects to deploy
its capital into real estate operating companies seeking long-term,
sustainable per share cash flow growth. Each company in which SC-GR invests
will seek to be recognized by the public marketplace as a highly focused,
fully integrated operating company and a leader among its peers. Similar to
SC-USREALTY, SC-GR will be organized under Luxembourg law. The European
management and Board of Directors of SC-GR will receive operating and
investment advice from Security Capital Global Management S.A., which will
subcontract certain research and advisory activities from its affiliates
including CMG and SG.
26
<PAGE>
. Security Capital U.S. Realty (Amsterdam Stock Exchange: SCUSR). SC-
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, SC-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 SC-USREALTY
receive operating and investment advice from Security Capital (EU) Management
S.A., which subcontracts certain research and advisory activities from its
affiliates including CMG and SG. Security Capital has advised SC-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 September 12, 1997, SC-
USREALTY had an equity market capitalization of $2.1 billion. Since its
inception in October 1995 through September 12, 1997, the compound annual
return for SC-USREALTY was 22.5%. The Board has authorized an additional
investment of $50 million in SC-USREALTY.
SC-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.
SC-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. SC-USREALTY seeks to
have 10% to 25% of its assets deployed in such publicly traded positions and,
as of September 12, 1997, SC-USREALTY had $360 million (market value) of
publicly traded positions in 27 companies. See "--Security Capital Investment
Research Group--SC-USREALTY: Special Opportunity Investments Portfolio."
SC-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 SC-USREALTY to participate in the full activities of
Security Capital. As of September 12, 1997, SC-USREALTY owned 52,431 Class A
Shares and $55 million principal amount of 2016 Convertible Debentures. In the
initial public offering, SC-USREALTY purchased 1,964,286 Class B Shares. SC-
USREALTY purchases securities of the Company at arm's-length prices.
SC-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 September 12, 1997, CarrAmerica had
an equity market capitalization of $2.0 billion.
. 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
September 12, 1997, Storage USA had an equity market capitalization of $1.2
billion.
. 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 eastern United
States. REGENCY is utilizing the equity from SC-USREALTY's investment to take
advantage of attractive acquisition and development opportunities in its
target market. At September 12, 1997, REGENCY had an equity market
capitalization of $756 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-
27
<PAGE>
store-anchored neighborhood infill shopping centers in the western United
States. A fully integrated operating company, PACIFIC RETAIL plans to go
public in 1998, after it reaches critical mass in several key growth markets.
At September 12, 1997, PACIFIC RETAIL had a private equity market
capitalization of $614 million, based on the per share sales price obtained in
PACIFIC RETAIL's most recent private offering of its common shares.
SC-USREALTY has committed to invest in two real estate operating companies:
City Center Retail Trust, a REIT which intends to invest in urban retail
development properties ($150 million commitment for an approximate 100%
ownership interest); and Urban Growth Property Trust, a REIT which intends to
invest in strategically located urban properties including parking garages, as
well as corporate and retail land leases ($150 million commitment for an
approximate 100% ownership interest). Although both companies currently are
privately held, it is expected that both companies ultimately will conduct
initial public offerings. As of August 31, 1997, SC-USREALTY had invested $65
million in City Center Retail Trust.
28
<PAGE>
- ------------------ ---------------------------------------------------------
FINANCIAL
SERVICES GROUP ----------
(FSG) SECURITY
CAPITAL
ADMINISTRATIVE ----------
AND CAPITAL |
MARKET SERVICES ----------------------------------------------------------
| | | |
----------- ----------- ----------- -----------
FSG
----------- ----------- ----------- -----------
Chicago-El Paso-
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 SC-USREALTY. As of
September 12, 1997, SC-USREALTY had an equity market capitalization of $2.1
billion. See "Business--Security Capital Strategic Group--Security Capital
U.S. Realty."
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
September 12, 1997, approximately $416 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 September 12,
1997, Homestead had an equity market capitalization of $1.0 billion. See
"Business--Security Capital Strategic Group--Homestead Village Incorporated."
Security Capital is considering the following new business initiatives in
which it has recently made or agreed to make investments. While none of these
initiatives is material at present to Security Capital's results of
29
<PAGE>
operations or financial condition, an important new component of Security
Capital's future growth is expected to come from these and future new business
initiatives which are in varying stages of research and development. No
assurances can be given that these initiatives will be successful.
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 (City Center Retail Trust), parking
facility ownership (Urban Growth Property Trust) and parking facility
operations (Parking Services International Incorporated), which new businesses
recently began operations. See "Business--Security Capital Strategic Group--
Security Capital USREALTY's Strategic Investees."
In 1996, Security Capital committed to make an initial $50 million
investment in SC-PG (previously known as SCG Box X-4) and committed to make a
$100 million investment in SC-ERF (previously known as SCG Box X-2). In 1997,
Security Capital committed to make an initial $300 million investment in SC-
GR, committed to make a $50 million investment in SC-EP and continued its
research and development activities with respect to its additional new
investments. See "Business--Security Capital Investment Research Group." 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.
30
<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
[FLOWCHART APPEARS HERE]
-------------------------
Security Capital Group
Incorporated
-------------------------
/\ /\
/ \
DIVIDENDS/ / \ SERVICE
CAPITAL / \ MANAGEMENT
APPRECIATION / \ FEES
/ \
----------- ---------------------
CAPITAL SERVICES
DIVISION DIVISION (1)
----------- ---------------------
/\ /\ /\
/ \ |
/ \ |
/ \ |
-------------------- ----------------- --------------
PUBLIC COMPANIES PRIVATE/START-UP SERVICE/
-------------------- COMPANIES MANAGEMENT
----------------- COMPANIES
--------------
Security Capital Security Capital SCGroup
Pacific Trust Employee REIT Fund (4) Incorporated (1)
Security Capital Security Capital Security Capital
Atlantic Incorporated Preferred Growth Markets Group
Homestead Village Incorporated (4) Incorporated (1)
Incorporated (2)
Strategic Hotel Capital Security Capital
Security Capital Incorporated (2)(4) Real Estate
Industrial Trust Research Group
SCG Box X-3 (2)(4) Incorporated (1)
Security Capital U.S.
Realty (2)(3) Security Capital Security Capital
EuroPacific Real Estate (EU) Management
Shares (4) Group S.A. (1)
Security Capital Global Security Capital
Realty (2)(4)(5) (US) Management
Group (1)(4)
- -------
(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 (US) Management Group and Security Capital
Financial Services Group and, prior to the Mergers, the REIT management and
property management companies.
(2) Represents non-dividend paying entity.
(3) The European management and Board of Directors of SC-USREALTY receive
operating and investment advice from Security Capital (EU) Management S.A.,
which subcontracts certain research and advisory activities from its
affiliates CMG and SG.
(4) Italics represent new business initiatives.
(5) The European management and Board of Directors of SC-GR will receive
operating and investment advice from Security Capital Global Management
S.A., which will subcontract certain research and advisory activities from
its affiliates CMG and SG.
31
<PAGE>
OPERATING COMPANIES MARKET PRICE INFORMATION AND FINANCIAL PERFORMANCE
The following table sets forth, for the periods indicated, the high and low
sales prices of the common shares of SCI, ATLANTIC, PTR, Homestead and SC-
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 SC-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
First Quarter.......... $17 3/4 $15 1/4 $0.23375 -- -- $0.40 $18 3/8 $16 3/8 $0.2875
Second Quarter......... 17 1/2 14 1/2 0.23375 -- -- 0.40 18 1/8 16 5/8 0.2875
Third Quarter.......... 16 1/2 15 0.23375 -- -- 0.40 19 1/4 17 0.2875
Fourth Quarter......... 17 5/8 16 0.23375 -- -- 0.40 20 1/2 17 1/4 0.2875
1996
First Quarter.......... 18 7/8 16 1/2 0.2525 -- -- 0.42 22 1/4 19 1/4 0.31
Second Quarter......... 18 16 7/8 0.2525 -- -- 0.42 22 3/8 20 1/2 0.31
Third Quarter.......... 18 1/4 16 7/8 0.2525 -- -- 0.42 22 5/8 20 1/4 0.31
Fourth Quarter......... 22 1/2 17 7/8 0.2525 $24 5/8 $20 7/8 0.39 23 5/8 19 0.31
1997
First Quarter.......... 22 1/2 19 7/8 0.2675 26 1/2 22 0.39 25 1/8 21 0.325
Second Quarter......... 21 3/4 18 7/8 0.2675 24 1/8 20 3/4 0.39 24 1/4 21 1/2 0.325
Third Quarter (through
September 12)......... 22 7/8 20 3/4 0.2675 24 3/16 22 3/16 0.39 23 15/16 21 5/8 0.325
<CAPTION>
HOMESTEAD SC-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
First Quarter.......... 20 7/8 16 5/8 -- 14.50 12.50 --
Second Quarter......... 18 1/2 15 7/8 -- 16.00 13.40 --
Third Quarter (through
September 12)......... 18 1/2 16 -- 15.30 14.00 --
</TABLE>
On September 12, 1997, the last reported sale price of a common share of (i)
SCI was $22 1/4, (ii) ATLANTIC was $22 9/16, (iii) PTR was $23 13/16, (iv)
Homestead was $17 1/2 and (v) SC-USREALTY was $14.60. On September 12, 1997,
Security Capital owned (i) 46,778,747 common shares of SCI, (ii) 23,853,211
shares of common stock of ATLANTIC, (iii) 30,687,072 common shares of PTR,
(iv) 17,257,703 shares of common stock of Homestead (includes 1,162,902 shares
held in escrow, see "Relationships with Operating Companies--Homestead--
Homestead Escrow Agreement") and (v) 46,737,646 shares of common stock of SC-
USREALTY. Security Capital has announced that it may over time reduce its
beneficial ownership in ATLANTIC to below 50%.
32
<PAGE>
The following table presents the average annual return for all common share
investors in PTR, ATLANTIC, SCI and SC-USREALTY for the periods indicated
through September 12, 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 (and, in the case
of PTR, became the REIT Manager thereof), (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 September 12, 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.
<TABLE>
<CAPTION>
BEGINNING
DATE OF AVERAGE
MEASUREMENT ANNUAL
PERIOD RETURN
----------- -------
<S> <C> <C>
PTR.......................... 02/28/91 19.9%
ATLANTIC..................... 12/31/93 13.6%
SCI.......................... 10/20/92 27.3%
SC-USREALTY.................. 10/31/95 24.2%
</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 September 12, 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 September 12, 1997:
<TABLE>
<CAPTION>
SECURITY
MARKET VALUE TOTAL CAPITAL'S
OPERATING COMPANY AND TOTAL PER SHARE OR MARKET VALUE UNREALIZED
SECURITY COST BASIS WARRANT (1) (2) APPRECIATION
- --------------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
PTR Common Shares....... $ 457,259,720 $23.8125 $ 730,735,902 $273,476,182
ATLANTIC Common Shares.. 472,341,291 22.5625 538,188,073 65,846,782
Homestead Common Shares. 175,565,408 17.500 302,009,803 126,444,395
Homestead Warrants...... 2,477,829 7.500 2,426,445 (51,384)
SCI Common Shares....... 664,669,326 22.250 1,040,827,149 376,157,823
SC-USREALTY
Common Shares.......... 535,786,332 14.600 682,369,634 146,583,302
-------------- -------------- ------------
Total at September 12,
1997................... $2,308,099,906 $3,296,557,006 $988,457,100
============== ============== ============
</TABLE>
- --------
(1) Represents the closing price of the common shares and warrants on
September 12, 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
Security Capital has approximately 350 employees, none of whom are covered
by collective bargaining agreements. 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. Security Capital's operating companies compete on a regional and
national basis with no individual market material to Security Capital as a
whole. 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.
33
<PAGE>
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.
PROPERTIES OF THE OPERATING COMPANIES
The following discussion sets forth, with respect to the operating companies
in which Security Capital has a direct ownership, the markets in which each of
such companies operates as well as a description of the general competitive
conditions faced by such companies. Information regarding permit levels is
based on U.S. Bureau of the Census statistics. No single property is
materially important to any of the operating companies, and there are no
mortgages, liens or other encumbrances against any properties which are
material to any such operating company. Whereas none of the operating
companies has at present any material plans for the renovation or improvement
of properties in operation, each operating company budgets for regular
maintenance, repair and upgrades to its properties. As set forth below, each
such company is actively engaged in the development of additional properties.
In the opinion of management of Security Capital, the properties of the
operating companies are adequately covered by insurance.
PTR
PTR's multifamily communities are located in 23 metropolitan areas in 12
states. The table below summarizes the geographic distribution of PTR's
multifamily communities which are operating or under construction, based on
total expected investment, as of June 30, 1997 in each of its primary market
regions.
<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS
NUMBER OF BASED ON TOTAL
COMMUNITIES EXPECTED INVESTMENT(1)
----------- ----------------------
<S> <C> <C>
Albuquerque, New Mexico................ 10 5%
Austin, Texas.......................... 5 3
Dallas, Texas.......................... 7 3
Denver, Colorado....................... 8 5
El Paso, Texas......................... 9 3
Houston, Texas......................... 8 5
Las Vegas, Nevada...................... 4 4
Northern California.................... 9 14
Phoenix, Arizona....................... 15 11
Portland, Oregon....................... 9 5
Salt Lake City, Utah................... 10 5
San Antonio, Texas..................... 15 5
Seattle, Washington.................... 13 9
Southern California.................... 20 18
Tucson, Arizona........................ 3 2
Other.................................. 6 3
--- ---
Total................................ 151 100%
=== ===
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction, represents total budgeted
development cost, which includes the cost of land, fees, permits, payments
to contractors, materials, architectural and engineering fees and interest
and property taxes to be capitalized during the construction period.
34
<PAGE>
PTR selectively develops multifamily communities where land costs,
demographics and market trends indicate a high likelihood of achieving
sustainable operating results and consistent cash flow growth. This
disciplined approach to development has produced multifamily property
developments with desired characteristics including state-of-the-art product,
locations with limited competing product and attractive returns. Through June
30, 1997, completed development communities, communities under construction
and communities in planning and owned represented 41.0% of PTR's multifamily
portfolio, based on total expected investment. At June 30, 1997, PTR's
multifamily development portfolio consisted of the following:
<TABLE>
<CAPTION>
NUMBER OF TOTAL EXPECTED
UNITS INVESTMENT (1)
--------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Communities completed (since
inception)............................ 9,366 $ 464,976
Communities under construction......... 6,672 435,195
Communities in planning and owned(2)... 3,106 207,509
------ ----------
Total owned development
communities....................... 19,144 $1,107,680
====== ==========
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted development
expenditures at June 30, 1997, which include the cost of land, fees,
permits, payments to contractors, materials, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period. Does not include land held for future development,
which is less than 2% of assets, based on cost.
(2) Does not include land in planning and under control for the development of
4,278 units with a total budgeted development cost of $399.9 million.
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with PTR in seeking land for development,
communities for acquisition and disposition and residents for communities. All
of PTR's multifamily communities are located in developed areas that include
other multifamily communities. The number of competitive multifamily
communities in a particular area could have a material adverse effect on PTR's
ability to lease units and on the rents charged. In addition, other forms of
single family and multifamily residential communities provide housing
alternatives to residents and potential residents of PTR's multifamily
communities.
The Southern California and Northern California markets have attractive
economic fundamentals which have produced revenue growth for PTR. Rent growth
in California markets has resulted from strong demand caused by job growth,
high occupancy rates and limited new supply of multifamily units in most
markets (Source: California REALFACTS). Permit levels for multifamily units
have recently increased in certain California markets which may lead to a
greater level of supply in certain of those markets in 1997. Occupancy rates
and rent growth for Phoenix fell slightly in 1996 from very strong levels of
growth in 1994 and 1995 due to increases in supply in certain submarkets in
1995 and 1996 (Source: Real Data, Inc.). Permit levels in certain submarkets
in Phoenix increased in 1996 indicating greater additions to existing
inventory in 1997.
35
<PAGE>
ATLANTIC
ATLANTIC's multifamily communities are located in 15 metropolitan areas in
seven states and the District of Columbia. The table below demonstrates the
geographic distribution of ATLANTIC's portfolio (which includes operating
communities and owned communities under construction and in planning) as of
June 30, 1997 in each of its primary market regions.
<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS
NUMBER OF BASED ON TOTAL
COMMUNITIES EXPECTED INVESTMENT(1)
----------- ----------------------
<S> <C> <C>
Atlanta, Georgia...................... 25 29%
Birmingham, Alabama................... 5 5
Charlotte, North Carolina............. 6 6
Ft. Lauderdale/West Palm Beach,
Florida.............................. 10 11
Ft. Myers, Florida.................... 1 1
Greenville, South Carolina............ 1 1
Jacksonville, Florida................. 6 6
Memphis, Tennessee.................... 4 3
Nashville, Tennessee.................. 3 4
Orlando, Florida...................... 6 4
Raleigh, North Carolina............... 8 8
Richmond, Virginia.................... 6 7
Sarasota, Florida..................... 1 2
Tampa, Florida........................ 5 4
Washington, D.C....................... 6 9
--- ---
Total............................. 93 100%
=== ===
</TABLE>
- --------
(1) For operating communities, represents cost through June 30, 1997 including
budgeted renovations. For communities under construction and in planning,
represents cost plus additional budgeted development expenditures, which
include the cost of land, fees, permits, payments to contractors,
architectural and engineering fees and interest and property taxes to be
capitalized during the construction period. Does not include land held for
future development, which is less than 1% of assets, based on cost.
ATLANTIC has selectively developed multifamily communities where land costs
and demographic and market trends indicate a high likelihood of achieving
attractive, sustainable operating results. Through June 30, 1997, ATLANTIC's
completed developed communities and its owned communities under construction
and in planning together comprised 38.5% of its multifamily portfolio, based
on total expected investment cost. At June 30, 1997, the development portion
of ATLANTIC's multifamily portfolio consisted of the following:
<TABLE>
<CAPTION>
NUMBER TOTAL
OF EXPECTED
UNITS INVESTMENT(1)
------ -------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Communities completed................................ 1,898 $101,922
Communities under construction....................... 5,487 347,177
Communities in planning and owned(2)................. 1,480 98,959
----- --------
Total............................................ 8,865 $548,058
===== ========
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted
development expenditures at June 30, 1997, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period. Does not include land held for future
development, which is less than 1% of assets, based on cost.
(2) Does not include land in planning and under control for the development of
3,406 units with a total budgeted development cost of $222.8 million.
36
<PAGE>
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with ATLANTIC in seeking land for
development, communities for acquisition and disposition and residents for
communities. All of ATLANTIC's multifamily communities are located in
developed areas that include other multifamily communities. The number of
competitive multifamily communities in a particular area could have a material
adverse effect on ATLANTIC's ability to lease units and on the rents charged.
In addition, other forms of single family and multifamily residential
communities provide housing alternatives to residents and potential residents
of ATLANTIC's multifamily communities.
The Atlanta market has experienced substantial job growth in recent years
but has also attracted strong competition from institutional capital sources
and other developers and operators for the acquisition or development of
multifamily communities. There have been substantial increases to existing
inventory in this market which has resulted in a temporary oversupply of
multifamily product in this market (Source: Dale Henson Associates).
Multifamily permits decreased in 1996, indicating a lower level of additional
inventory in 1997 for this market. The Ft. Lauderdale/West Palm Beach market
has experienced high net in-migration and expanding business with South and
Latin American countries (Source: U.S. Bureau of the Census). Although this
market has high barriers to entry, there has been strong investment interest
in this market by institutional capital sources, which has resulted in a
temporary oversupply of multifamily product (Source: Reinhold Wolff Economic
Research). ATLANTIC expects this oversupply will be absorbed within six to
twelve months.
Homestead
Homestead's properties are located in 31 metropolitan areas in 22 states and
the District of Columbia. The table below demonstrates the geographic
distribution of Homestead's portfolio (which includes operating properties and
owned properties under construction and in planning) as of June 30, 1997 in
each of its primary market regions.
<TABLE>
<CAPTION>
PERCENTAGE OF
ASSETS BASED
ON TOTAL
NUMBER OF EXPECTED
PROPERTIES INVESTMENT(1)
---------- -------------
<S> <C> <C>
Albuquerque, New Mexico.......................... 2 2%
Atlanta, Georgia................................. 7 7
Austin, Texas.................................... 3 2
Bay Area, California............................. 7 9
Birmingham, Alabama.............................. 1 1
Boston, Massachusetts............................ 1 1
Charlotte, North Carolina........................ 1 1
Chicago, Illinois................................ 3 4
Cleveland, Ohio.................................. 1 1
Dallas, Texas.................................... 9 5
Denver, Colorado................................. 4 4
Houston, Texas................................... 8 5
Jacksonville, Florida............................ 2 2
Kansas City, Missouri/Kansas..................... 3 3
Las Vegas, Nevada................................ 1 1
Los Angeles, California.......................... 3 4
Minneapolis, Minnesota........................... 2 2
Nashville, Tennessee............................. 2 2
Orange County, California........................ 2 3
Philadelphia, Pennsylvania....................... 1 1
Phoenix, Arizona................................. 5 4
Portland, Oregon................................. 2 3
Raleigh, North Carolina.......................... 4 4
Richmond, Virginia............................... 1 1
Salt Lake City, Utah............................. 2 2
San Antonio, Texas............................... 3 2
San Diego, California............................ 2 2
SE Florida, Florida.............................. 6 8
Seattle, Washington.............................. 4 5
Tampa Area, Florida.............................. 3 3
Washington, D.C.................................. 5 6
--- ---
Total.......................................... 100 100%
=== ===
</TABLE>
37
<PAGE>
- --------
(1) For operating properties, represents cost. For properties under
construction and in planning, represents cost plus additional budgeted
development expenditures, which include the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the construction period. Does
not include land held for sale or for future development, which is less
than 2% of assets, based on cost.
Homestead's strategy for future growth includes developing new properties
and efficiently delivering them to the market place. Homestead expects to have
a total of 79 properties operational by the end of 1997. Homestead plans to
continue an active development program thereafter. Homestead's plans call for
the average property to have approximately 136 extended-stay rooms and to take
approximately eight to ten months to construct.
The table below (dollars in thousands) illustrates the growth in the
Homestead product resulting from this strategy since the Homestead product was
conceived and developed.
<TABLE>
<CAPTION>
TOTAL EXPECTED
INVESTMENT(1) HISTORICAL COST AT DECEMBER 31,
-------------- ----------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
-------------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Properties.... $209,715 $135,339 $ 77,537 $41,629 $ 8,894 $6,108
Properties in
development:
Properties under
construction.......... 312,549 108,692 28,218 14,303 15,274 899
Properties in planning
and owned............. 114,644 12,256 4,440 4,281 -- --
-------- -------- -------- ------- ------- ------
Total............... $636,908 $256,287 $110,195 $60,213 $24,168 $7,007
======== ======== ======== ======= ======= ======
</TABLE>
- --------
(1) Total expected investment represents budgeted development cost for
properties under construction and properties in planning and owned.
Properties in planning and owned represent projects where land has been
acquired and pre-construction planning activities are in progress.
Budgeted development cost includes the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the development period. Land
held for future development or for sale, which is less than 2% of property
assets based on historical cost as of June 30, 1997, are not included
above.
Competition within the extended-stay segment of the lodging industry has
begun to increase because the growth prospects of the segment have attracted
numerous participants from both within and outside the industry. While the
majority of currently operating extended-stay properties are oriented toward
the upscale and mid-price segments, there have been numerous public
announcements of aggressive development plans for companies that operate
within all segments of the industry. Homestead may compete for development
sites with any or all of these entities, some of which may have greater
financial resources than Homestead and better relationships with lenders and
sellers. These entities also may be able to accept more risk than Homestead
believes it can prudently manage. Further, there can be no assurance that new
or existing competitors will not significantly reduce their room rates or
offer greater convenience, services or amenities or significantly expand or
improve or develop properties in a market in which Homestead competes, thereby
adversely affecting Homestead's operations.
38
<PAGE>
SCI
SCI's properties are located in 37 national markets and 4 international
markets. The table below demonstrates the geographic distribution of SCI's
portfolio (which includes operating properties and properties under
development at June 30, 1997) in each of its primary market regions.
<TABLE>
<CAPTION>
PERCENTAGE OF
ASSETS BASED
NUMBER OF ON TOTAL EXPECTED
PROPERTIES INVESTMENT(1)
---------- -----------------
<S> <C> <C>
NATIONAL MARKETS
Atlanta, Georgia............................. 103 8.3%
Austin, Texas................................ 32 2.4
Birmingham, Alabama.......................... 6 1.2
Charlotte, North Carolina.................... 24 2.4
Chattanooga, Tennessee....................... 5 0.6
Chicago, Illinois............................ 31 4.6
Cincinnati, Ohio............................. 36 2.8
Columbus, Ohio............................... 17 2.3
Dallas/Forth Worth, Texas.................... 70 5.2
Denver, Colorado............................. 21 2.1
East Bay (San Francisco), California......... 42 4.2
El Paso, Texas............................... 25 2.8
Ft. Lauderdale/Miami, Florida................ 6 1.1
Houston, Texas............................... 70 5.1
Indianapolis, Indiana........................ 42 4.1
Kansas City, Kansas/Missouri................. 28 1.9
Las Vegas, Nevada............................ 14 1.8
Los Angeles/Orange County, California........ 16 3.9
Louisville, Kentucky......................... 3 0.6
Memphis, Tennessee........................... 26 1.9
Nashville, Tennessee......................... 25 2.0
New Jersey/I-95 Corridor..................... 8 2.7
Oklahoma City, Oklahoma...................... 10 0.5
Orlando, Florida............................. 15 1.2
Phoenix, Arizona............................. 25 1.7
Portland, Oregon............................. 27 2.4
Reno, Nevada................................. 17 1.8
Rio Grande Valley, Texas..................... 14 0.9
St. Louis, Missouri.......................... 4 0.5
Salt Lake City, Utah......................... 8 2.1
San Antonio, Texas........................... 55 3.9
San Diego, California........................ 3 0.5
Seattle, Washington.......................... 9 1.5
South Bay (San Francisco), California........ 70 8.0
Tampa, Florida............................... 61 4.3
Tulsa, Oklahoma.............................. 10 0.5
Washington, D.C./Baltimore................... 36 4.8
Other........................................ 8 0.4
INTERNATIONAL MARKETS
Juarez, Mexico............................... 1 0.1
Monterrey, Mexico............................ 4 0.4
Reynosa, Mexico.............................. 2 0.2
Netherlands.................................. 1 0.3
----- -----
Total...................................... 1,030 100.0%
===== =====
</TABLE>
- --------
(1) For operating properties, represents cost. For properties under
construction and in planning, represents cost plus additional budgeted
development expenditures, which include the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the construction period. Does
not include land held for future development, which is less than 5% of
assets, based on cost.
39
<PAGE>
SCI selectively develops distribution properties where land costs,
demographics and market trends indicate a high likelihood of achieving
sustainable operating results and consistent cash flow growth. This
disciplined approach to development has produced distribution property
developments with desired characteristics including state-of-the-art product
and attractive returns. Through June 30, 1997, completed developments,
properties under construction and properties in planning and owned represented
35.2% of SCI's distribution property portfolio, based on total expected
investment. At June 30, 1997, SCI's distribution property portfolio consisted
of the following:
<TABLE>
<CAPTION>
NUMBER OF TOTAL EXPECTED
PROPERTIES INVESTMENT(1)
---------- --------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Properties completed (since inception).......... 184 $724,113
Properties under construction................... 33 186,127
Properties in planning and owned................ 21 83,849
--- --------
Total owned development properties.......... 238 $994,089
=== ========
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted development
expenditures at June 30, 1997, which include the cost of land, fees,
permits, payments to contractors, materials, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period. Does not include land held for future development,
which is less than 5% of assets, based on cost.
There are numerous other industrial properties located in close proximity to
each of SCI's properties. The amount of rentable space available in any target
market city could have a material effect on SCI's ability to rent space and on
the rents charged. In addition, in many of SCI's submarkets, institutional
investors and owners and developers of industrial facilities compete for the
acquisition, development and leasing of industrial space. Many of these
persons have substantial resources and experience.
SCI operates nationally and internationally and has no markets with a
concentration of investment in excess of 10% of its total portfolio
investment. In SCI's major markets, absorption has exceeded completion in each
of the years 1992 through 1996 and vacancy rates have decreased during the
same period (Source: CB Commercial/Torto Wheaton Research). Competition for
acquisition of existing distribution facilities from institutional capital
sources and other REITs has increased substantially in the past several years.
PROPERTIES OF SC-USREALTY INVESTEES
The following discussion sets forth, with respect to the real estate
operating companies in which SC-USREALTY has acquired a material long-term
strategic ownership position, the markets in which each of such companies
operates as well as a description of the general competitive conditions faced
by such companies. No single property is materially important to any of the
strategic investees of SC-USREALTY and there are no mortgages, liens or other
encumbrances against any properties which are material to any such strategic
investee of SC-USREALTY. Whereas none of the strategic investees of SC-
USREALTY has at present any material plans for the renovation or improvement
of properties in operation, each strategic investee of SC-USREALTY budgets for
regular maintenance, repair and upgrades to its properties. To the extent set
forth below, certain investees are actively engaged in the development of
additional properties that would be material to the investee. In the opinion
of management of SC-USREALTY, the properties of the strategic investees of SC-
USREALTY are adequately covered by insurance.
40
<PAGE>
CarrAmerica
CarrAmerica's office properties are located in 13 target markets. The table
below summarizes the geographic distribution of CarrAmerica's operating office
properties, based on total invested capital, at June 30, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF
ASSETS BASED
NUMBER OF ON TOTAL
MARKET PROPERTIES INVESTED CAPITAL
------ ---------- ----------------
<S> <C> <C>
Atlanta, Georgia.............................. 43 8.2%
Austin, Texas................................. 11 4.9
Chicago, Illinois............................. 10 10.4
Dallas, Texas................................. 9 4.2
Denver, Colorado.............................. 11 4.0
North California.............................. 47 18.2
Phoenix, Arizona.............................. 4 2.1
Portland, Oregon.............................. 1 0.4
Salt Lake City, Utah.......................... 8 2.4
Seattle, Washington........................... 17 3.8
South Florida................................. 1 0.7
South California.............................. 30 7.0
Washington, D.C............................... 17 33.7
--- -----
Total..................................... 209 100.0%
=== =====
</TABLE>
At June 30, 1997, CarrAmerica's development portfolio consisted of the
following:
<TABLE>
<CAPTION>
BUILDABLE
NUMBER OF SQUARE TOTAL EXPECTED
BUILDINGS FOOTAGE INVESTMENT(1)
--------- --------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Properties Completed................... 1 101,000 $ 9.5
Properties Under Construction.......... 9 1,212,000 158.5
Properties Held for Development(2)..... 60 5,600,000 749.7
--- --------- ------
Total.............................. 70 6,913,000 $917.7
=== ========= ======
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted development
expenditures at June 30, 1997, which include the cost of land, fees,
permits, payments to contractors, materials, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period.
(2) No assurances can be given that any of the property held for development
will be developed.
CarrAmerica believes that, as a result of its national operating system,
market research capabilities, access to capital, and experience as an owner,
operator and developer of real estate, it will continue to be able to identify
and consummate acquisition opportunities and to operate its portfolio more
effectively than competitors without such capabilities. CarrAmerica, however,
competes in many of its target markets with other real estate operators, some
of whom may have been active in such markets for a longer period than
CarrAmerica. In CarrAmerica's major markets of Washington, D.C. and North
California, rental rates for office buildings have increased and vacancy rates
have decreased over the last five years (Source: CB Commercial/Torto Wheaton
Research).
41
<PAGE>
Storage USA
Storage USA's properties are located in target markets in 30 states and the
District of Columbia. The table below summarizes the geographic distribution
of Storage USA's operating properties, based on total invested capital, at
June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
MARKET PROPERTIES OF ASSETS
------ ---------- ----------
<S> <C> <C>
Birmingham, Alabama................................. 2 0.4%
Tucson/Phoenix, Arizona............................. 14 4.0
Northern California................................. 18 6.3
Southern California................................. 56 22.6
Denver, Colorado.................................... 1 0.3
Connecticut......................................... 6 2.1
District of Columbia................................ 1 0.5
Wilmington, Delaware................................ 1 0.3
Central Florida..................................... 5 1.8
Southern Florida.................................... 23 12.0
Atlanta, Georgia.................................... 6 1.6
Chicago, Illinois................................... 1 0.3
Indianapolis, Indiana............................... 1 0.1
Kansas City, Kansas................................. 4 0.8
Louisville, Kentucky................................ 2 0.5
Massachusetts....................................... 11 3.5
Washington/Baltimore, Maryland...................... 11 5.6
Detroit, Michigan................................... 6 1.8
Kansas City, Missouri............................... 2 0.4
Charlotte, North Carolina........................... 2 0.8
Raleigh, North Carolina............................. 4 1.0
New Jersey.......................................... 12 5.8
Albuquerque, New Mexico............................. 10 2.0
Las Vegas, Nevada................................... 7 2.4
New York............................................ 1 0.8
Akron, Ohio......................................... 3 0.6
Cleveland, Ohio..................................... 5 1.0
Oklahoma City, Oklahoma............................. 10 1.5
Tulsa, Oklahoma..................................... 6 1.2
Portland, Oregon.................................... 3 1.4
Philadelphia, Pennsylvania.......................... 7 2.4
Memphis, Tennessee.................................. 12 2.1
Nashville, Tennessee................................ 10 3.5
Dallas, Texas....................................... 10 2.9
Houston, Texas...................................... 3 0.8
Salt Lake City, Utah................................ 3 0.8
Northern Virginia................................... 10 3.8
Vancouver, Washington............................... 1 0.3
--- -----
Total........................................... 290 100.0%
=== =====
</TABLE>
Storage USA has recently taken advantage of its in-house development
capability to selectively develop new facilities in areas where suitable
acquisitions may not be available. The development activities consist
primarily of additions to existing facilities and construction of new
facilities. Since 1985, Storage USA and predecessor organizations have
developed and constructed 21 facilities, 15 of which Storage USA owns.
42
<PAGE>
At June 30, 1997, Storage USA's development portfolio consisted of the
following:
<TABLE>
<CAPTION>
NET
RENTABLE TOTAL
NUMBER OF SQUARE EXPECTED
FACILITIES FEET INVESTMENT(1)
---------- --------- -------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Facilities under construction......... 21 1,516,000 $ 76,923
Expansions of existing facilities
under construction................... 21 412,000 17,466
Facilities in planning:
New................................... 23 1,475,825 85,240
Expansion............................. 8 114,500 6,550
--- --------- --------
Total............................. 73 3,518,325 $186,179
=== ========= ========
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted development
expenditures at June 30, 1997, which include the cost of land, fees,
permits, payments to contractors, materials, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period.
Competition exists in all of the market areas in which the facilities are
located. Storage USA principally faces competitors who seek to attract tenants
primarily on the basis of lower prices. However, Storage USA usually does not
seek to be the lowest price competitor. Rather, based on the quality of its
facilities and its customer service-oriented managers and amenities, Storage
USA's strategy is to lead particular markets in terms of prices.
The pool of self-storage users has increased in recent years due to greater
consumer awareness, cost reduction programs by businesses, increased mobility
in the general population and an increasing mix of products and services
offered by self-storage facilities. Although circumstances vary among markets,
Storage USA believes that current demand for self-storage facilities is strong
when compared to the available supply of self-storage space. At the same time,
Storage USA believes that few operators of self-storage facilities are
currently constructing additional facilities or have access to the capital and
the development and construction expertise necessary to do so. Therefore,
Storage USA believes that the supply of self-storage facilities will remain
relatively limited for some time, and that the industry generally will
continue to experience strong occupancy and increasing rental rates. Storage
USA believes that its access to capital markets as a public company, the
systems and methods it has developed and the skilled personnel it has gathered
and trained for acquiring and managing self-storage facilities with potential
for increased occupancy and rental rates, and its expertise in facility
development and construction, place Storage USA in a position to capitalize on
these market conditions for the benefit of its shareholders.
Certain of Storage USA's competitors operate more facilities and have
substantially greater financial resources than Storage USA. The three largest
self-storage managers, based on industry data as to the number of facilities
operated (whether or not the facilities are owned) are: (1) Public Storage
Management, Inc. (67 million square feet); (2) Storage USA (19.8 million
square feet); and (3) U-Haul International, Inc. (19.7 million square feet).
(Source: Inside Self-Storage, August 1997 edition). Storage USA is the second
largest self-storage manager, with 19.8 million square feet in 290 facilities
as of June 30, 1997. These other entities may generally be able to accept more
risk than Storage USA can prudently manage, including risks with respect to
the geographic proximity of its investments and the payment of higher facility
acquisition prices. This competition may generally reduce the number of
suitable acquisition opportunities offered to Storage USA and increase the
price required to be able to consummate the acquisition of particular
facilities. Further, Storage USA believes that competition from entities
organized for purposes substantially similar to Storage USA's objectives could
increase. Nevertheless, Storage USA believes that the operations, development
and financial experience of its executive officers and directors and its
customer-oriented approach to management of self-storage facilities should
enable Storage USA to compete effectively.
43
<PAGE>
PACIFIC RETAIL
PACIFIC RETAIL properties are located in 10 primary target markets in the
Pacific and Southwest regions. The table below demonstrates the geographic
distribution of PACIFIC RETAIL's portfolio (which includes operating
properties and a property under redevelopment at June 30, 1997).
<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS
NUMBER OF BASED ON TOTAL
MARKET PROPERTIES EXPECTED INVESTMENT(1)
------ ---------- ----------------------
<S> <C> <C>
Dallas/Ft. Worth, Texas................. 14 35%
Houston, Texas.......................... 1 2
Austin, Texas........................... 3 10
Phoenix, Arizona........................ 1 2
Denver, Colorado........................ 4 7
Sacramento, California.................. 1 3
San Francisco, California............... 7 17
Los Angeles, California................. 4 7
San Diego, California................... 2 7
Seattle, Washington..................... 5 10
--- ---
Total............................... 42 100%
=== ===
</TABLE>
- --------
(1) For operating properties and the one property under redevelopment,
represents the total expected investment. At June 30, 1997, PACIFIC RETAIL
had four new retail centers in planning representing 436,000 square feet.
There are numerous shopping center developers, real estate companies and
other owners of real estate that operate in the Pacific and Southwest that
compete with PACIFIC RETAIL in seeking retail tenants to occupy vacant space,
for the acquisition of shopping centers, and for the development of new
shopping centers. However, ownership of neighborhood infill centers
historically has been highly fragmented with local ownership, as institutional
capital has generally avoided the relatively small size of the centers and
their management intensive nature. In addition, such centers targeted by
PACIFIC RETAIL are generally located within densely populated neighborhoods
where little or no land is available for development of competing centers.
REGENCY
REGENCY's properties are located in nine primary target markets in the
Southeast region. The table below demonstrates the geographic distribution of
REGENCY's portfolio at June 30, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF ASSETS BASED
MARKET PROPERTIES ON COST(1)
------ ---------- -------------
<S> <C> <C>
Atlanta Area Market.............................. 30 38%
Charlotte Area Market............................ 6 5
Cincinnati, Ohio................................. 1 5
Jacksonville Area Market......................... 14 15
Miami, Florida................................... 2 2
Orlando, Florida................................. 2 2
Palm Beach Area Market........................... 15 18
Tampa Area Market................................ 9 11
Alabama/Mississippi.............................. 7 4
--- ---
Total........................................ 86 100%
=== ===
</TABLE>
- --------
(1) Includes eight retail centers under construction or redevelopment with a
total expected investment of approximately $61.4 million.
44
<PAGE>
There are numerous shopping center developers, real estate companies and
other owners of real estate that operate in the Southeast that compete with
REGENCY in seeking retail tenants to occupy vacant space, for the acquisition
of shopping centers, and for the development of new shopping centers. However,
ownership of neighborhood infill centers historically has been highly
fragmented with local ownership, as institutional capital has generally
avoided the relatively small size of the centers and their management
intensive nature. In addition, such centers targeted by REGENCY are generally
located within densely populated neighborhoods where little or no land is
available for development of competing centers.
PROPERTIES OF SECURITY CAPITAL
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 affiliates also have administrative offices in El Paso, Texas. The
Santa Fe office is leased from an unaffiliated third party and the El Paso
offices are leased from SCI at an annual rental of $802,577. 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).
Security Capital believes its properties are adequately insured. Although SCI,
PTR, ATLANTIC and Homestead own an extensive number of properties, no single
property is materially important to Security Capital and its affiliates.
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, if not maintained, expire over various periods of time beginning
in 2005. Certain variants of the name Security Capital have been 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.
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 MERGERS
In December 1996, management of Security Capital proposed to the 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 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 the Merger Agreements. Pursuant to the Merger Agreements, on
September 9, 1997, Security Capital caused 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 became officers and employees of the REITs,
respectively, as follows:
. Security Capital transfered 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 2,306,591 shares of
ATLANTIC's common stock.
. Security Capital transfered 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 3,295,533 common shares of PTR.
45
<PAGE>
. Security Capital transferred its interests in its wholly owned
subsidiaries, Security Capital Industria l 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 3,692,023 common shares of SCI.
. Security Capital licensed to each of ATLANTIC, PTR and SCI the trademarks
and tradenames used in their respective businesses.
. 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. The
shareholders of ATLANTIC, PTR and SCI approved their respective Merger
Agreements on September 8, 1997 and the Mergers closed on September 9,
1997.
. The number of shares of ATLANTIC common stock and common shares of PTR
and SCI issued to Security Capital was 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.
. In order to allow the common shareholders to maintain (and, to the extent
a shareholder oversubscribed for common shares pursuant to the
oversubscription privilege described below, to increase) 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 conducted a rights offering entitling its common
shareholders, other than Security Capital, to purchase additional common
shares. Shareholders were entitled to subscribe for common shares not
purchased by other common shareholders pursuant to an oversubscription
privilege. The rights offering price was at a discount to the price at
which shares were issued to Security Capital under the respective Merger
Agreements. The exercise prices in the rights offerings, the prices of
the common shares being issued to Security Capital in the Mergers, the
closing prices of the common shares on August 5, 1997 (the day prior to
the record dates for the Mergers) and the five-day trailing average
closing prices on August 5, 1997 were as follows:
<TABLE>
<CAPTION>
ATLANTIC PTR SCI
-------- -------- -------
<S> <C> <C> <C>
Exercise Price in Rights Offering............... $22.375 $21.8125 $21.000
Price to Security Capital in Merger............. $23.675 $23.0125 $22.175
NYSE Closing Price on August 5, 1997............ $24.000 $23.4375 $21.875
Five-Day Trailing Average Closing Price on
August 5, 1997................................. $23.675 $23.0125 $22.175
</TABLE>
Any common shares not subscribed for by common shareholders in the rights
offerings will be made available for purchase by third parties. The
rights offerings were fully subscribed and closed on September 12, 1997
and PTR and SCI sold an additional 1,486,686 and 994,070 common shares,
respectively, to cover oversubscriptions and third party demand.
. As part of the transactions contemplated by the Merger Agreements,
Security Capital issued, 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. The Warrants were issued as an incentive for the common
shareholders of ATLANTIC, PTR and SCI to vote in favor of the
transactions, to broaden Security Capital's shareholder base, to enable
Security Capital to raise additional equity capital at a relatively low
cost through the exercise of Warrants and to enable Security Capital to
raise additional equity capital in the long run by preserving and
enhancing its goodwill with the shareholders of ATLANTIC, PTR and SCI.
Security Capital issued, pro rata, Warrants to acquire an aggregate of
8,928,572 Class B Shares. Each Warrant is exercisable at a price of
$28.00 per Class B Share. The Warrants are listed on the NYSE under the
symbol "SCZ WS". The Warrants expire on September 18, 1998 and contain
customary provisions to protect holders from dilution in certain events,
including certain distributions and certain sales of shares at less than
market price.
46
<PAGE>
. In connection with voting on the Mergers, the shareholders of each of
ATLANTIC, PTR and SCI approved their respective 1997 Long-Term Incentive
Plan. Following such approval, (i) the officers and key employees of
ATLANTIC were granted options to purchase 1,276,525 common shares and
purchased 591,346 common shares of ATLANTIC, (ii) the officers and key
employees of PTR were granted options to purchase 1,851,791 common
shares and purchased 813,430 common shares of PTR, and (iii) the
officers and key employees of SCI were granted options to purchase
3,072,857 common shares and purchased 1,356,834 common shares of SCI.
THE WARRANT ISSUANCE
The Warrants were issued by Security Capital directly to Securityholders
(other than Security Capital). The Warrant Issuance will be made to
Securityholders of record at the close of business on September 16, 1997.
No certificates or scrip representing fractional Warrants were issued to
Securityholders as part of the Warrant Issuance. BankBoston, N.A., as warrant
issuance agent (the "Warrant Issuance Agent"), will, as soon as practicable
after the Warrant Issuance Date, aggregate and sell all fractional Warrants on
the NYSE or otherwise at then prevailing market prices and remit the net
proceeds (after deduction of brokerage fees) to holders of Securityholders who
would otherwise be entitled to receive fractional Warrants.
NO SECURITYHOLDER WILL BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION
FOR THE WARRANTS THEY RECEIVE OR TO SURRENDER OR EXCHANGE REIT SECURITIES IN
ORDER TO RECEIVE THE WARRANTS. THE WARRANT ISSUANCE WILL NOT AFFECT THE NUMBER
OF, OR THE RIGHTS ATTACHING TO, OUTSTANDING REIT SECURITIES.
For a description of the terms of the Warrants and the Class B Shares
issuable upon exercise thereof, see "Description of Capital Stock."
Based upon the number of securities outstanding on the Warrant Issuance
Date, for each common share, preferred share or limited partnership interest
held on such date, the equity holders of ATLANTIC, PTR and SCI will receive
the following number of Warrants:
<TABLE>
<CAPTION>
SCI COMMON
SHARE AND
ATLANTIC PTR PTR LIMITED SCI
COMMON COMMON PREFERRED PARTNERSHIP PREFERRED
SHARE SHARE SHARE INTEREST SHARE
-------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Number of Warrants Per Share
or Interest................. 0.071116 0.052646 0.070909 0.046549 0.059676
</TABLE>
47
<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
---- --- -------- ----------------
<S> <C> <C> <C>
Samuel W. Bodman........ 58 Director 2000
Hermann Buerger......... 53 Director 2000
John P. Frazee, Jr...... 52 Director 2000
Cyrus F. Freidheim, Jr.. 62 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 Officer and
Director 1999
Peter S. Willmott....... 60 Director 1999
C. Ronald Blankenship*.. 47 Managing Director, Security Capital --
Jeffrey A. Cozad........ 33 Managing Director, SC-USREALTY --
John H. Gardner, Jr. ... 43 Managing Director, Security Capital --
Management Group
C. Robert Heaton........ 52 Senior Vice President, Security Capital --
W. Joseph Houlihan...... 49 Managing Director, Security Capital (EU) --
Management Group
Gordon S. Kerr.......... 54 Managing Director, Security Capital --
Strategic Group
Jeffrey A. Klopf........ 49 Senior Vice President and Secretary,
Security Capital --
Anthony R. Manno, Jr.... 45 Managing Director, Security Capital --
Management Group
Todd W. Mansfield....... 39 Managing Director, Security Capital --
Strategic Group
Caroline S. McBride..... 44 Managing Director, Security Capital
Strategic Group --
Daniel F. Miranda....... 44 Managing Director, Security Capital --
Management Group
Mary Lou Rogers......... 46 Managing Director, Security Capital
Strategic Group --
Donald E. Suter......... 40 Managing Director, Security Capital Markets
Group --
Paul E. Szurek.......... 37 Managing Director, SCGroup and Chief
Financial Officer, Security Capital --
Robert S. Underhill..... 41 Managing Director, Security Capital
Strategic Group --
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.
48
<PAGE>
JOHN P. FRAZEE, JR. Chairman, President and Chief Executive Officer of
Paging Network Incorporated since August 1997. 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, and Homestead. 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.
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,
SC-USREALTY and Storage USA. 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 Non-Executive Chairman of PTR since June 1997. From June 1991 to June
1997, Mr. Blankenship was Chairman of PTR. Mr. Blankenship is a director of
Strategic Hotel Capital Incorporated and an advisory director of ATLANTIC and
49
<PAGE>
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 SC-USREALTY and Security Capital (EU)
Management Holdings S.A. 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.
JOHN H. GARDNER, JR. Managing Director of Capital Management Group since
July 1997. Prior thereto, Director of the PTR REIT Manager from February 1995
to June 1997 and Senior Vice President of PTR and the PTR REIT Manager from
September 1994 to June 1997, where he had overall responsibility for
multifamily dispositions; from December 1984 to January 1993, Vice President
of Asset Management and through September 1994, Managing Director and
Principal of Copley Real Estate Advisors in Boston, where he had overall
responsibility for the portfolio management function for eight accounts valued
at $7.5 billion; prior thereto, he was Real Estate Manager of Equity Real
Estate at John Hancock Companies.
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 Company's and the
operating companies' 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) Management
Group S.A. since April 1997 and located in Brussels, where he is responsible
for global investment research and strategic investments; former Director of
SC-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.
GORDON S. KERR. Managing Director of Information Technology for the
Strategic Group since July 1997. Prior thereto, Mr. Kerr was Senior Vice
President of Information Services for GE Capital Corporation from November
1994 to July 1997. From February 1987 to November 1994 Mr. Kerr was Senior
Vice President of MIS for Hyatt Hotels Corporation.
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 Security Capital (US)
Management 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.
TODD W. MANSFIELD. Managing Director of the Strategic Group since May 1997,
where he manages operations for companies in which Security Capital has direct
or indirect ownership positions. Prior thereto, from 1986 to May 1997, he was
Executive Vice President and general manager of Disney Development Company,
where he was responsible for Disney's non-theme-park real estate activities
worldwide.
50
<PAGE>
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 private equity and 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, CarrAmerica and Storage USA.
DANIEL F. MIRANDA. Managing Director of the Security Capital (US) Management
Group since March 1997; from September 1996 to March 1997 Managing Director of
Security Capital Investment Research Group Incorporated where he was
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 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.
DONALD E. SUTER. Managing Director of Security Capital Markets Group since
July 1997, where he provides capital markets services for affiliates of
Security Capital. From May 1996 to June 1997, Mr. Suter was Senior Vice
President of Security Capital Markets Group. 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.
PAUL E. SZUREK. Managing Director of SCGroup and Chief Financial Officer of
Security Capital since July 1997. From January 1996 to June 1997, Managing
Director of SC-USREALTY and Security Capital (EU) Management Holdings S.A.,
where he was 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.
ROBERT S. UNDERHILL. Managing Director of the Strategic Group since August
1997. Prior thereto, 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.
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
51
<PAGE>
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.
SENIOR OFFICERS OF SECURITY CAPITAL AND CERTAIN AFFILIATES AFTER THE MERGERS
ALBERT D. ADRIANI--31--Vice President of Security Capital (US) Management
Group since April 1996, where he is responsible for security trading and
portfolio management. From January 1995 to April 1996, he was Vice President,
Security Capital (UK) Management Limited and SC-USREALTY; from March 1994 to
January 1995, he was with Security Capital Markets Group. Prior thereto, he
was an investment analyst with HAL Investments BV from July 1992 to January
1994.
GEORGE W. AHL III--36--Vice President of Security Capital Markets Group in
its New York office since July 1997 where he provides capital markets services
for affiliates of Security Capital. Prior thereto, he was Vice President,
Investment Services, for the Union Bank of Switzerland, The Private Bank, from
March 1996 to July 1997. Mr. Ahl was with Crimson Capital Corporation from
January 1993 to March 1996, where he served as Managing Director in Warsaw,
Poland, and as Advisor to the Czech Ministry of Privatization. He was Vice
President of Investment Management at LaSalle Partners from 1988 to January
1993.
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.
KEVIN W. BEDELL--41--Vice President of Security Capital (US) Management
Group since July 1996, where he is responsible for researching corporate and
portfolio acquisitions. Prior thereto, from January 1987 to January 1996, he
was a Vice President with LaSalle Partners Limited.
NANSIE J. BERNARD--35--Vice President of Security Capital Markets Group in
its New York office since April 1997, where she provides capital markets
services for affiliates of Security Capital. Prior thereto, a member of the
Capital Markets Group team since February 1997. From August 1992 to February
1997, she was Vice President at Thompson Doyle & Company managing real estate
transactions and portfolios for corporate clients. From May 1989 to August
1992, she was Vice President at McFarland Associates, Inc.
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--Senior Vice President of Security Capital Markets Group
since May 1997, Vice President of Security Capital Markets Group from March
1997 to April 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--40--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
52
<PAGE>
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.
ELEANOR EVANS--31--Vice President and Corporate Counsel of SC-USREALTY and
Security Capital (EU) Management Holdings S.A. since May 1997. Prior thereto,
from September 1988 to May 1997, Ms. Evans was an assistant solicitor with
Norton Rose where she practiced corporate and financial law in both London and
Hong Kong.
ROBERT H. FIPPINGER--54--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--38--Senior Vice President of the Strategic Group since
June 1997, Vice President of the Strategic Group from March 1997 to May 1997,
where she oversees strategic communications for Security Capital and its
affiliates. Prior thereto, Ms. Hefele was with Security Capital Markets Group
from February 1994 to February 1997, where she provided capital markets
services for affiliates of Security Capital. 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 Management Development Program from May 1993 to
May 1994. He is a general securities representative registered with the NASD.
THOMAS J. IKELER--42--Vice President of Security Capital since May 1997 with
responsibilities for treasury and financial matters for affiliated companies.
Prior thereto, from June 1994 to May 1997, he was with 139 Culpeper, Ltd.,
providing real estate advisory services to institutional clients; from January
1990 to June 1994, Mr. Ikeler was Project Director for the Zeckendorf Company.
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.
53
<PAGE>
SUSAN LIOW--35--Vice President and Financial Controller of SC-USREALTY and
Security Capital (EU) Management Holdings S.A. since March 1996. Prior
thereto, from April 1994 to March 1996, U.K. Financial Controller for Arthur
Andersen Corporate Financial Services practice. From February 1992 to March
1994, Ms. Liow was a manager for Deloitte & Touche, responsible for the U.K.
Partnership's profit plans and treasury functions.
ROBERT I.S. MEYER--37--Vice President of SC-USREALTY and Security Capital
(EU) Management Holdings S.A. 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.
DONALD E. MYERS--53--Vice President of the Strategic Group since July 1997,
where he is responsible for due diligence on corporate and portfolio
acquisitions; from March 1993 to July 1997, he was Vice President of SCI and
its REIT Manager. Prior thereto, from July 1988 to March 1993, he was Senior
Vice President of Dreyfus Realty Advisors with responsibilities for asset
management.
JEFFREY C. NELLESSEN--36--Vice President and Controller of Security Capital
(US) Management Group since March 1997. Prior thereto, from June 1988 to March
1997, he was Controller, Manager of Client Administration and Compliance
Officer at Strong Capital Management, Inc.
MARK P. PEPPERCORN--34--Vice President of Security Capital Markets Group
since July 1997. From February 1995 to June 1997, Vice President of PTR and
the PTR REIT Manager, where he was responsible for the acquisition of land and
existing communities in Northern California; from September 1994 to February
1995, a member of the acquisitions group for ATLANTIC and, previously, for PTR
from June 1993 to September 1994; from March 1991 to June 1993, Mr. Peppercorn
was responsible for the multifamily brokerage division of Transwestern
Property Company in Houston; and prior thereto, an Associate Vice President of
Eastdil Realty Incorporated.
DAVID ROSENBAUM--28--Vice President of Security Capital (US) Management
Group since June 1997, where he is responsible for identifying and negotiating
investments on behalf of SC-PG. Prior thereto, from September 1996 to May
1997, he was a Vice President at Lazard Freres & Co., LLC.; from August 1991
to September 1996, he was a member of Lazard Freres Real Estate Investment
Banking Group.
DAVID A. ROTH--31--Vice President of SC-USREALTY, Security Capital (EU)
Management Holdings 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) Management 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.
JONATHAN L. SMITH--44--Senior Vice President of the Strategic Group since
June 1997, where he is responsible for retail companies such as REGENCY and
PACIFIC RETAIL. Prior thereto, from May 1991 to June 1997, he was Managing
Director of Citicorp Real Estate, Inc., where he managed shopping center and
residential commercial real estate lending units.
54
<PAGE>
KENNETH D. STATZ--38--Senior Vice President of the Security Capital (US)
Management 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.
CHRISTOPHER TANGHE--33--Senior Vice President of Security Capital (EU)
Management Holdings S.A. since July 1997, where he is responsible for
investments, mergers and acquisitions. Prior thereto, he was a Vice President
at J.P. Morgan Securities Limited in London with responsibilities for real
estate advisory and investment banking activities in Europe. Mr. Tanghe joined
J.P. Morgan in 1986, and was assigned to the New York, London, Paris and
Brussels offices of Morgan Guaranty Trust Company.
ANDREW N. WALKER--35--Vice President of SC-USREALTY and Security Capital
(EU) Management Holdings S.A. 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.
COMMITTEES OF SENIOR MANAGEMENT OF SECURITY CAPITAL
Security Capital has three senior management committees: the Capital
Allocation Committee, the Operating Committee and the Finance Committee. The
Capital Allocation Committee, the members of which are Thomas Wattles,
Chairman, C. Ronald Blankenship, William Sanders and a rotating member,
currently Caroline McBride, reviews and recommends to the Board investments in
new start-up companies and additional investments in strategic investees. In
addition, it provides investment guidance to Security Capital strategic
investees and financial service affiliates. The Operating Committee, the
members of which are C. Ronald Blankenship, Chairman, William Sanders, Thomas
Wattles, and three rotating members, currently Jeffrey A. Cozad, Gordon Kerr
and Todd W. Mansfield, provides operating guidance for new start-up companies,
strategic investees and financial service affiliates. The Finance Committee,
the members of which are William Sanders, Chairman, C. Ronald Blankenship,
Donald Suter, Paul Szurek and Thomas Wattles, reviews and approves financial
strategies for Security Capital, new start-up companies and strategic
investees. In addition, it provides financial guidance to Security Capital
strategic investees and financial service affiliates.
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
55
<PAGE>
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.
56
<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 -- $250,000(1) 60,000(1) --
</TABLE>
- --------
(1) Represents 25,000 restricted shares of Homestead common stock purchased
from Homestead, and options to purchase 60,000 shares of Homestead common
stock granted by Homestead, in October 1996. At December 31, 1996, the
value of the restricted shares of Homestead common stock was $450,000.
These restricted shares of Homestead common stock will vest upon the
earlier to occur of (i) October 15, 1998, (ii) the date on which Mr.
Dressler terminates his employment with Homestead or its affiliates by
reason of death or disability or (iii) immediately prior to a change-in-
control (as defined) of Homestead. Although Homestead does not currently
intend to pay dividends on its shares of common stock, to the extent it
pays dividends in the future, it will pay dividends with respect to these
restricted shares.
57
<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
- ---- -------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
William D. Sanders...... 1,097.5 2.29% $1,139 12/3/06 $497,705(1)
C. Ronald Blankenship... 1,031.6 2.15 1,139 12/3/06 467,843(1)
Thomas G. Wattles....... 921.9 1.92 1,139 12/3/06 418,072(1)
K. Dane Brooksher....... 658.5 1.37 1,139 12/3/06 298,623(1)
David C. Dressler, Jr... 439.0 .91 1,139 12/3/06 199,082(1)
60,000(2) 10.34(2) 10.00(2) 10/15/06(2) 385,320(2)(3)
</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) Represents options to purchase 60,000 shares of Homestead common stock at
$10 per share which were granted on October 15, 1996 to Mr. Dressler by
Homestead, and which expire on October 15, 2006. The options vest ten
percent in the second year after the date of grant, twenty percent in the
third year after the date of grant, thirty percent in the fourth year
after the date of grant and forty percent in the fifth year after the date
of grant.
(3) The amounts shown are based on the Black-Scholes option pricing model. The
material assumptions incorporated in the Black-Scholes model in estimating
the value of the options include the following: an exercise price of $10
per share equal to the estimated fair market value of a share of Homestead
common stock on the date of grant; average expected option term of 5.5
years; a risk-free interest rate of 6.23%; no expected dividend yield; and
expected volatility of 37%. The actual value, if any, an optionee will
realize upon exercise of an option will depend on the excess of the market
value of the shares over the exercise price on the date the option is
exercised. There can be no assurance that the value realized by an
optionee will be at or near the value estimated by using the Black-Scholes
model.
58
<PAGE>
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
-----------------------------------------------------------------------------
CLASS A CLASS A HOMESTEAD COMMON STOCK 2014 CONVERTIBLE
SHARES SHARE OPTIONS (#) OPTIONS (#) DEBENTURE OPTIONS
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
C. Ronald
Blankenship.... -- -- 3,558.8 2,955.4 -- -- 2,014,341 1,071,792
Thomas G.
Wattles........ -- -- 2,918.5 2,486.0 -- -- 1,651,728 874,547
K. Dane
Brooksher...... -- -- 854.6 2,583.3 -- -- 426,000 1,362,449
David C.
Dressler, Jr.(3). -- -- 1,330.3 1,648.4 -- 60,000 752,979 687,976
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(1)
-------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
<S> <C> <C>
William D.
Sanders(2)..... $4,300,573 $ 356,110
C. Ronald
Blankenship.... 4,010,002 1,868,414
Thomas G.
Wattles........ 3,288,369 1,491,834
K. Dane
Brooksher...... 960,971 2,687,823
David C.
Dressler, Jr.(3). 1,499,024 1,562,507
</TABLE>
- --------
(1) Based on a December 31, 1996 estimate of fair market 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) Includes 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.
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
59
<PAGE>
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.
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.
60
<PAGE>
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 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 5.3% of the outstanding Class A Shares
on a fully diluted basis as of June 30, 1997) 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 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
61
<PAGE>
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 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.
62
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for Security
Capital as of and for the six months ended June 30, 1997, for the six months
ended June 30, 1996 and 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. Arthur Andersen LLPs 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-23. 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>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ----------------------------------------------------------------
1997 1996 1996 1995 (1) 1994 1993 1992 1991
---------- ------------- ----------- ----------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except per share data
OPERATING DATA:
Equity in earnings...... $ 78,083 $ 39,738 $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues......... 105,321 63,685 145,907 103,634 55,071 10,916 1,592 --
Services Division
revenues (2)........... 49,018 33,653 77,512 49,404 -- -- -- --
Total revenues.......... 239,993 139,588 398,122 200,534 156,855 17,503 3,534 467
Rental expenses......... 41,370 25,234 58,259 40,534 23,052 1,428 292 --
Services Division
expenses (2)........... 42,472 32,805 79,296 56,317 -- -- -- --
General, administrative
and other (2).......... 35,571 14,396 32,617 20,197 6,172 2,555 679 205
Costs incurred in
acquiring Services
Division (2)........... -- -- -- 158,444 -- -- -- --
Interest expense:
Security Capital:
Convertible Debentures/
notes (3)............. 54,623 45,000 93,912 78,785 29,647 1,616 180 --
Line of credit......... 2,608 3,081 6,256 5,977 6,424 1,808 960 88
Majority-owned
subsidiaries (4)...... 9,402 8,123 17,056 19,042 8,057 362 -- --
---------- ---------- ----------- ----------- ---------- -------- -------- --------
Total interest expense. 66,633 56,204 117,224 103,804 44,128 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares................. $ 2,368 $ (10,862) $ 32,067 $ (201,634) $ (7,685) $ 5,155 $ 1,014 $ 141
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ----------------------------------------------------------------
1997 1996 1996 1995 (1) 1994 1993 1992 1991
---------- ------------- ----------- ----------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Series A Preferred Stock
dividends.............. $ 37.50 $ 18.75 $ 56.25 -- -- -- -- --
Net earnings (loss)
attributable to Class A
Shares................. $ 1.75 $ (10.79) $ 28.28 $ (224.87) $ (16.74) $ 39.12 $ 21.61 $ 3.96
Class A Share
distributions paid (5). -- -- -- -- $ 33.50 $ 60.00 $ 55.00 $ 24.95
Weighted average Class A
Shares outstanding..... 1,355,349 1,007,009 1,133,711 896,681 458,945 131,776 46,913 35,565
<CAPTION>
AS OF DECEMBER 31,
AS OF ----------------------------------------------------------------
JUNE 30, 1997 1996 1995 (1) 1994 1993 1992 1991
------------- ----------- ----------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
BALANCE SHEET DATA:
Investments, at equity.. $1,551,010 $1,438,937 $ 930,043 $ 230,756 $161,270 $ 68,160 $24,911
Real estate, net of
accumulated
depreciation (1)....... 1,575,945 1,365,373 865,367 2,005,957 478,630 41,577 --
Total assets............ 3,410,395 2,929,284 1,855,056 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3)... 1,038,268 940,197 718,611 514,383 48,970 6,532 --
Majority-owned
subsidiaries (4)...... 298,006 257,099 118,524 301,787 47,988 -- --
Minority interests...... 475,909 394,537 159,339 554,752 157,545 4,884 --
Total shareholders'
equity................. $1,029,071 $ 918,702 $ 528,539 $ 359,859 $293,823 $ 57,847 $16,314
</TABLE>
63
<PAGE>
- --------
(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.
64
<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 engages in real estate research, investment and operating
management. Security Capital's strategy is to create the optimal organization
to lead and profit from global real estate securitization. Security Capital
has invested in various operating and other entities (the Capital Division)
and provides various management and financial services through a Services
Division. The Capital Division invests in real estate-related companies with
the objective of generating capital gains and growing dividends. 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 for the companies
in which Security Capital and its affiliates have invested.
Security Capital has obtained its income historically from two sources: (1)
Security Capital's share of earnings in ATLANTIC, PTR, SCI, SC-USREALTY,
Homestead and SC-ERF, some of which Security Capital accounts for by the
equity method where it owns less than a 50% controlling interest (PTR, SCI and
SC-USREALTY) and others of which are consolidated in Security Capital's
consolidated financial statements (ATLANTIC, Homestead and SC-ERF) and (2)
financial services revenues earned by the Real Estate Research Group, the
Capital Management 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 Security Capital 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."
SC-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 SC-USREALTY using the
equity method and, as a consequence, the Company's results of operations are
affected by changes in the fair value of SC-USREALTY's investments. SC-
USREALTY values its investments in publicly traded companies at market
determined by using closing market prices as of the relevant balance sheet
date. SC-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,
SC-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 SC-USREALTY, the
Services Division also earns advisory fee revenues based on a percentage of
the fair value of SC-USREALTY's investments (not including short-term
investments and investments in Security Capital). See "Relationships with
Operating Companies--SC-USREALTY--Advisory Agreement" and "--Sub-Advisory
Agreement."
SC-ERF, in accordance with generally accepted accounting principles,
accounts for its investments at market value and reflects changes in such
values in its statement of income pursuant to fair value accounting
principles. All of its investments are in publicly traded real estate
companies located in the United States.
65
<PAGE>
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.
In connection with the Mergers, Security Capital exchanged 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 Mergers on the 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
SC-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
occupancy level (91.2% as of December 31, 1996 compared to 93.5% as of
December 31, 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 $39.9 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 SC-USREALTY's earnings increased substantially
from $0.1 million in 1995 to $103.2 million in 1996. SC-USREALTY effectively
commenced its investment activities in October 1995, and at December 31, 1996,
SC-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 SC-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 SC-USREALTY was 39% and 32%, respectively.
66
<PAGE>
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-off 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 $17.8 million, or 44%, to $58.3 million in 1996
from $40.5 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, which include the expenses
of the ATLANTIC property manager, increased $13.7 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.
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 SC-USREALTY, Security Capital earns revenues based on
a percentage of the fair value of
SC-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 SC-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 Mergers. See "--Overview."
Expenses
Services Division expenses increased by $23.0 million, or 41%, in 1996 to
$79.3 million from $56.3 million in 1995. The increase was primarily
attributable to growth of the REIT and property management companies,
including the hiring of additional professionals. In particular, expenses
applicable to the SCI and PTR REIT and property management companies and the
advisor to SC-USREALTY increased by $9.2 million, $7.6 million and $1.6
million, respectively. In addition, the aggregate expenses of the Capital
Management Group and Security Capital Markets Group increased by $4.6 million.
As outlined in the above discussion regarding revenues and expenses, the
Services Division has incurred operating losses in 1996 and 1995. Security
Capital has made and will continue to make substantial investments in
personnel, operating systems and research capabilities in order to take
advantage of future growth opportunities. Such opportunities are expected to
generate increased revenues that will result in operating income. Services
Division expenses will be reduced following the Mergers as a result of the
transfer of personnel employed by Security Capital to PTR and SCI. See "--
Overview."
67
<PAGE>
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for Security Capital was $26.6 million
and $18.1 million in 1996 and 1995, respectively. Of those amounts, $22.1
million and $15.9 million represented depreciation and amortization from
rental operations (i.e., ATLANTIC and Homestead) 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 and amortization for Homestead was $1.3 million for the two
and one-half month period ended December 31, 1996. The remaining depreciation
and amortization of $4.5 million and $2.2 million in 1996 and 1995,
respectively, is attributable to the Services Division and the administrative
support functions, representing an increase of $2.3 million over such
depreciation and amortization for 1995 of $2.2 million. The $2.3 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
-------- ------- -------- ------- --------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
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 $ 2,073 11,557 7,662
Capitalized interest.... -- -- (10,250) (4,404) (1,198) (11,448) (4,404)
-------- ------- -------- ------- ------- -------- --------
Total................... $100,168 $84,762 $ 16,181 $19,042 $ 875 $117,224 $103,804
======== ======= ======== ======= ======= ======== ========
</TABLE>
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-off 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-off.
68
<PAGE>
GENERAL, ADMINISTRATIVE AND OTHER
General, administrative and other expenses increased by $12.4 million, or
61%, in 1996 to $32.6 million from $20.2 million in 1995. This increase
results primarily from the consolidation of Homestead's accounts ($2.5
million), the inclusion of ATLANTIC's provision for a possible loss on
investments ($2.5 million), increased payroll and related expenses applicable
to the growth of the ATLANTIC REIT manager ($2.4 million), as well as
additional personnel and related costs applicable to information systems,
human resources and other administrative support functions.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1996 was primarily attributable to
deferred income taxes on the equity in earnings of SC-USREALTY. 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.
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 occupancy level (93.5% as of December 31, 1995 compared
to 92.4% as of December 31, 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
69
<PAGE>
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 $48.5
million, or 88%, to $103.6 million in 1995 from $55.1 million in 1994. Rental
expenses, as a result of the 1995 Merger, include the expenses of the ATLANTIC
property manager commencing January 1, 1995. Rental expenses increased $17.4
million, or 75%, to $40.5 million in 1995 (excluding REIT and property
management fees) from $23.1 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.
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.
Expenses
During 1995, Security Capital incurred Services Division expenses (primarily
payroll, occupancy and related expenses) of $56.3 million as a result of the
acquisition of the Services Division companies in the 1995 Merger.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for Security Capital was $18.1 million
for 1995, which represented an increase of $9.3 million from depreciation and
amortization of $8.8 million for 1994. Depreciation and amortization from
rental operations (ATLANTIC) 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 $2.2 million in 1995 was attributable
to the Services Division and the administrative support functions and was
attributable to depreciation on furniture, fixtures and equipment (primarily
computer and communications equipment) which was not owned by Security Capital
in 1994.
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
70
<PAGE>
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
--------------- --------------- -----------------
1995 1994 1995 1994 1995 1994
------- ------- ------- ------ -------- -------
DOLLARS IN THOUSANDS
<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.
GENERAL, ADMINISTRATIVE AND OTHER
General, administrative and other expenses increased to $20.2 million in
1995 from $6.2 million in 1994 primarily as a result of the acquisition of the
Services Division in the 1995 Merger. Such expenses in 1995 relate primarily
to payroll, occupancy and related expenses applicable to (a) the ATLANTIC REIT
manager as well as (b) corporate administration, information systems, human
resources, legal and accounting departments. General, administrative and other
expenses 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 companies.
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.
COST INCURRED IN ACQUIRING SERVICES DIVISION FROM RELATED PARTY
The Services Division companies do not qualify as "businesses" for purposes
of applying APB Opinion No. 16, "Business Combinations". Accordingly, the
excess of the aggregate value of the securities issued ($233,708,000) over the
fair value of the net tangible assets acquired ($75,264,000) has been recorded
as "Costs incurred in acquiring Services Division from related party"
($158,444,000) in Security Capital's 1995 Consolidated Statement of
Operations.
71
<PAGE>
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.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $6.6 million, or 12%, from
$53.5 million for the six months ended June 30, 1996 to $60.1 million for the
six months ended June 30, 1997. The increase results primarily from (a) the
purchase of additional shares in SCI and ATLANTIC, (b) a dividend from SC-ERF
of approximately $2.5 million during the six months ended June 30, 1997 and
(c) an increase in per share dividend rates.
Equity in Earnings of Less Than 50% Owned Investees
Security Capital's equity in SCI's earnings increased 55% from $11.4 million
to $17.7 million for the six months ended June 30, 1996 and 1997,
respectively. This increase was primarily attributable to an increase in the
amount of distribution space owned and leased by SCI (85.3 million square feet
at June 30, 1997 compared to 70.1 million square feet at June 30, 1996) and
increased rental rates on renewal leases for previously occupied space. At
June 30, 1997 and 1996, Security Capital's ownership interest in the
outstanding common shares of beneficial interest of SCI was approximately 44%
and 48%, respectively.
Security Capital's equity in PTR's earnings increased 60% from $15.8 million
for the first six months of 1996 to $25.3 million for the first six months of
1997. This increase is primarily attributable to an increase ($29.1 million)
in gains on sales of properties offset by a slight net decrease in the number
of multifamily properties owned by PTR (40,786 units at June 30, 1997 compared
to 40,981 units at June 30, 1996). At June 30, 1997 and 1996, Security
Capital's ownership interest in the outstanding common shares of beneficial
interest of PTR was approximately 35% and 38%, respectively.
Security Capital's share of SC-USREALTY's earnings increased substantially
from $12.5 million for the six months ended June 30, 1996 to $35.1 million for
the six months ended June 30, 1997. SC-USREALTY effectively commenced its
investment activities in October 1995, and at June 30, 1996, SC-USREALTY had
investments at cost of approximately $519 million with a fair market value of
approximately $550 million. At June 30, 1997, SC-USREALTY had investments at
cost of $1.82 billion with a fair market value of $2.15 billion. Unrealized
appreciation on SC-USREALTY's investments increased by $66.2 million and $30.9
million for the six months ended June 30, 1997 and 1996, respectively. In
addition, SC-USREALTY recorded net investment income of $40.0 million and $1.8
million for the six months ended June 30, 1997 and 1996, respectively. At June
30, 1997 and 1996, Security Capital's ownership interest in the outstanding
common stock of
SC-USREALTY was approximately 32% and 39%, respectively.
Security Capital's initial investment (approximately $9.9 million) in SC-ERF
occurred in late December 1996. During the six months ended June 30, 1997,
Security Capital invested an additional $90.1 million in
SC-ERF. At June 30, 1997, SC-ERF had investments at cost and fair market value
of approximately $103.6 million and $107.1 million, respectively. Security
Capital owned 98.7% and 100% of the outstanding shares of SC-ERF at June 30,
1997 and December 31, 1996, respectively.
RENTAL OPERATIONS--FROM GREATER THAN 50% OWNED CONSOLIDATED INVESTEES
Rental Revenues
Rental revenues increased $41.6 million, or 65%, from $63.7 million for the
six months ended June 30, 1996 to $105.3 million for the same period in 1997.
This increase was attributable to an increase in the number of multifamily
units owned and operated by ATLANTIC (19,265 operating units at June 30, 1997
compared to
72
<PAGE>
17,109 operating units at June 30, 1996), coupled with stable occupancies
(approximately 95%) for both periods and increased rental rates. This resulted
in a $17.1 million increase in rental revenues between the six-month periods.
Also accounting for part of the increase in rental revenues is the
consolidation of Homestead after the spin-out transactions completed on
October 17, 1996 by Security Capital, ATLANTIC and PTR of their extended-stay
lodging assets. Homestead generated $24.5 million in revenues for the six
month period ended June 30, 1997.
Other Income, Net
The $5.1 million increase in Other Income primarily results from (a) the
inclusion of SC-ERF's net investment income (approximately $2.5 million) and
increase in unrealized appreciation on investments (approximately $3.5
million) for the six months ended June 30, 1997 offset by (b) a $0.9 million
decrease in fees applicable to consulting services performed by the Capital
Management Group.
Rental Expenses
Rental expenses increased by $16.1 million, or 64%, to $41.4 million for the
six months ended June 30, 1997 from $25.3 million for the same period in 1996.
The increase is attributable to the increase in the number of ATLANTIC's
operating multifamily communities and the consolidation of Homestead as
discussed above under "Rental Revenues". ATLANTIC's rental expenses, which
include the expenses of the ATLANTIC property manager, increased $5.7 million
(excluding REIT and property management fees) in the first six months of 1997
compared to the corresponding period of 1996. Homestead's rental expenses were
$10.4 million for the six months ended June 30, 1997.
SERVICES DIVISION
Revenues
Services Division revenues increased by 45% from $33.7 million for the six
months ended June 30, 1996 to $49.0 million for the same period in 1997. The
increase of $15.3 million in Services Division revenues in 1997 as compared to
1996 was primarily attributable to growth in operations at SC-USREALTY and
SCI. In particular, advisory revenues earned from SC-USREALTY increased $8.8
million and financial services revenues earned from SCI increased $6.3
million. Additionally, fees earned by Security Capital Markets Group and
Capital Management Group increased by $2.3 million and $0.2 million,
respectively, during the six months ended June 30, 1997 compared to the same
period in 1996, offset by a $2.3 million decrease in fees earned by the PTR
REIT and property management companies as a result of the spin-out of
Homestead assets by PTR in October, 1996.
Expenses
Services Division expenses increased by $9.7 million, or 30%, for the six
months ended June 30, 1997, to $42.5 million from $32.8 million for the same
period in 1996. This increase resulted from the expansion of the Services
Division, including the hiring of additional professionals primarily for the
REIT and property management companies and the Capital Management Group.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for Security Capital was $18.7 million
and $11.1 million for the six months ended June 30, 1997 and 1996,
respectively. Of those amounts, $16.2 million and $9.6 million represented
depreciation and amortization from rental operations for those same periods in
1997 and 1996, respectively. Depreciation for ATLANTIC increased $3.0 million
to $12.6 million for the first half of 1997 from $9.6 million for the first
half of 1996, an increase of 31%, due to the increase in the number of
operating multifamily communities between those periods. Depreciation for
Homestead was $3.6 million for the six months ended June 30, 1997. The
remaining depreciation and amortization of $2.5 million and $1.5 million in
1997 and 1996, respectively, is attributable to the Services Division and the
administrative support functions, representing an increase of $1.0 million
over such depreciation and amortization for the first half of 1996. The
increase of $1.0 million between 1997 and 1996 is primarily a result of
depreciation and amortization on additional computer hardware and software and
office leasehold improvements.
73
<PAGE>
INTEREST EXPENSE
Interest expense on the Convertible Debentures increased $9.6 million or 21%
to $54.6 million for the first half of 1997 compared to $45.0 million for the
same period in 1996. The increase is primarily attributable to receipt of the
subscriptions of the 2016 Convertible Debentures from a private placement
offering completed in March, 1996, which totaled $323 million.
Interest expense on other obligations increased by $0.8 million from the
first half of 1996 to the same period in 1997, largely due to ATLANTIC's
increased weighted average mortgage debt outstanding during the first six
months of 1997.
GENERAL, ADMINISTRATIVE AND OTHER
General, administrative and other expenses increased by $21.2 million, or
147%, for the six months ended June 30, 1997, to $35.6 million from $14.4
million for the same period in 1996. This increase resulted primarily from (a)
additional personnel and related costs and professional fees applicable to
researching new business opportunities, enhancing information systems designed
for global operations, and to a lesser extent, additional personnel for human
resources and other administrative support functions ($7.9 million), (b) a
noncash, non-recurring charge to earnings of $6.6 million in the second
quarter of 1997 associated with an exchange of Security Capital shares for
shares of a corporate entity owned by Security Capital's Chairman, whose sole
assets were warrants and options to purchase Security Capital shares. This
charge represents the value applicable to the holder's ability to defer
exercising the warrants and options until 2002 in accordance with their terms
(see "Certain Relationships and Transactions"), (c) consolidation of
Homestead's accounts in 1997 ($6.3 million), and (d) an increase in ATLANTIC's
administrative expenses ($0.4 million).
PROVISION FOR INCOME TAXES
The provision for income taxes increased by $13.4 million for the six months
ended June 30, 1997 as compared to the same period in 1996 primarily
attributable to deferred income taxes on the equity in earnings of Security
Capital's unconsolidated investees.
Prior to the second quarter of 1996, Security Capital did not record a
provision for income taxes as it had deferred tax assets that were completely
offset by a valuation allowance. Beginning in the second quarter of 1996, a
deferred tax liability was recorded primarily because of Security Capital's
equity in the earnings of SC-USREALTY. The effective rate for the three- and
six-month periods ended June 30, 1997 is also affected by the $6.6 million
nondeductible charge to earnings as described above under General
Administrative and Other expenses.
MINORITY INTERESTS
Minority interests increased from $5.3 million for the six months ended June
30, 1996 to $11.4 million for the six months ended June 30, 1997 primarily due
to increased earnings of ATLANTIC and Homestead, coupled with an increase in
minority ownership interests in ATLANTIC in conjunction with its public
offerings in October 1996 and May 1997 and the spin-out of Homestead which
also occurred 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 Shares carry a
7.5% preferential cash dividend rate, payable when and if authorized by the
Board of Directors quarterly in arrears. Security Capital paid $5.2 million
and $2.6 million in dividends on the Series A Preferred Shares for the six
months ended June 30, 1997 and 1996, respectively.
74
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 activities of Security Capital's operating companies consist
primarily of the acquisition and development of real estate. In addition, SC-
ERF invests in the securities of publicly traded real estate companies.
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), proceeds from the initial public offering and
the exercise of Warrants and funds currently available under its $400 million
revolving line of credit will be sufficient to enable Security Capital to
satisfy its anticipated cash requirements for operating and investing
activities for existing businesses for the next twelve months. Security
Capital intends to finance its long-term business activities (including
investments in new business initiatives) through the proceeds from the initial
public offering and the exercise of Warrants, borrowings under an expanded
line of credit and the exercise of the Warrants to be issued as described
below. In addition, Security Capital 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.
Concurrent with the Warrant Issuance, Security Capital has sold 22,596,710
Class B Shares to the public in its initial public offering.
Security Capital's consolidated investees have undertaken the following
recent financing activities:
. In May 1997, ATLANTIC completed an $87 million (gross proceeds) equity
offering to finance development and acquisition plans for 1997. In
addition, in August 1997, ATLANTIC completed a $50 million preferred
stock offering and a $150 million unsecured senior debt securities
offering to the public. Proceeds from these securities offerings and
borrowings under its $350 million line of credit are expected to provide
the 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 $199 million and $111 million, respectively, in financing,
as well as through outstanding warrants to purchase approximately $44
million (approximately $15.5 million owned by Security Capital) of
Homestead common stock outstanding as of June 30, 1997 (if such warrants
are exercised). In May 1997, Homestead obtained a $50 million 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 $27.1 million.
Also in 1996, ATLANTIC increased its line of credit to $350 million, and
Security Capital increased its line of credit to $300 million.
75
<PAGE>
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 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 SC-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 8.3 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.
76
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of $452 million for the six months
ended June 30, 1997 consisting primarily of (i) $96 million invested by
ATLANTIC for the development and acquisition of multifamily communities; (ii)
$131 million invested by Homestead for the development of extended-stay
lodging properties; (iii) $75 million invested by Security Capital for common
shares of SC-USREALTY; (iv) $94 million invested by SC-ERF in publicly traded
real estate securities; and (v) $23 million and $5 million invested by
Security Capital in the common shares of SHC and SC-PG, respectively. Other
investing activities (net) amounted to $28 million.
Security Capital obtained financing of $427 million during the six months
ended June 30, 1997 primarily from (i) proceeds from the sale of common stock
of $101 million net of expenses and repurchases and convertible debentures of
$98 million; (ii) net proceeds from line of credit borrowing of $124 million;
(iii) ATLANTIC's net proceeds from sale of common shares to its minority
interest owners of $83 million; (iv) Homestead's issuance of convertible
mortgage notes to PTR for $42 million; and (v) other financing transactions
resulting in an aggregate use of cash of $21 million.
LINES OF CREDIT
Security Capital
SC Realty, a wholly owned subsidiary of Security Capital, has a $400 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, SC-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 Security Capital, including a minimum
shareholders' equity test, a total liabilities to net worth ratio and an
interest coverage ratio, as well as restrictions on Security Capital's ability
to incur indebtedness and effect consolidations, mergers (other than a
consolidation or merger in which Security Capital is the surviving entity) and
sales of assets. The guaranty also contains a restricted payments covenant
which prohibits dividends and distributions on Security Capital's capital
stock in excess of 95% of Security Capital's cash flow available for
distribution (as defined). As of June 30, 1997, Security Capital and SC Realty
were in compliance with all financial covenants.
As of August 31, 1997, SC Realty had borrowed $165.5 million under the line
of credit. The weighted average interest rate on the line of credit from
January 1, 1997 through August 31, 1997 was 7.1808%. See "Use of Proceeds."
ATLANTIC
ATLANTIC has obtained a $350 million unsecured line of credit from Morgan
Guaranty Trust Company of New York ("Morgan Guaranty"). The line of credit
matures in December 1998 and may be extended for one year with the approval of
Morgan Guaranty and the other participating lenders. Borrowings on the line of
credit bear interest at ATLANTIC's option at prime or LIBOR plus a margin
(1.375% through July 2, 1997 and 1.125% thereafter). ATLANTIC pays a
commitment fee ranging from .125% to .25% per annum based on the average
unfunded line of credit balance. ATLANTIC's line of credit is not guaranteed
by Security Capital.
77
<PAGE>
ATLANTIC's line of credit contains restrictive covenants which prohibit
dividends and distributions on ATLANTIC's capital stock in excess of 95% of
ATLANTIC's Funds from Operations (as defined). The line of credit also
contains various financial and other covenants, including a net worth test, a
total liabilities to net worth ratio, an interest coverage ratio and a fixed
charge coverage ratio, as well as restrictions on ATLANTIC's ability to incur
indebtedness and effect consolidations, mergers and sales of assets. As of
June 30, 1997 the outstanding balance on this line of credit was $278,750,000
and ATLANTIC was in compliance with all financial covenants.
As of August 31, 1997, ATLANTIC had borrowed $254.8 million under the line
of credit.
Homestead
On May 6, 1997, Homestead entered into a secured revolving line of credit
facility with Commerzbank AG, New York Branch, which provides for borrowings
up to $50,000,000, subject to collateral requirements. Borrowings bear
interest at the Eurodollar rate plus 2.5% per annum. Additionally, there is a
commitment fee of 0.325% per annum on the average unfunded line of credit
balance. The line of credit matures May 1998 and may be extended with the
approval of the lenders. As of June 30, 1997, there was no outstanding balance
on this line of credit and Homestead was in compliance with all financial
covenants. As of August 31, 1997, Homestead had borrowed $20.8 million under
the line of credit.
MORTGAGE NOTES PAYABLE
Mortgage notes payable totalled $298.0 million at June 30, 1997 and
consisted of the following: (i) conventional fixed rate mortgage obligations
of ATLANTIC in the amount of $33.9 million; (ii) tax exempt mortgage
obligations of ATLANTIC of $121.1 million; and (iii) convertible mortgage
obligations of Homestead of $143.0 million. Mortgage note obligations of
ATLANTIC and Homestead are not guaranteed by Security Capital.
The Homestead convertible mortgage notes are convertible, at the option of
PTR, into common shares of Homestead common stock. The conversion price is
equal to one share of common stock for every $11.50 of principal amount
outstanding.
CONVERTIBLE DEBENTURES
2014 Convertible Debentures
At August 31, 1997, the Company had approximately $715.2 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. On conversion, any accrued and unpaid deferred interest shall be
deemed to be paid in full upon delivery of the Class A Shares.
2016 Convertible Debentures
At August 31, 1997, the Company had approximately $323.0 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
78
<PAGE>
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 2016 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.
On September 29, 1997, Security Capital announced that it has called for
redemption all $715.8 million principal amount of its outstanding 2014
Convertible Debentures on December 1, 1997. The 2014 Convertible Debentures
will be redeemed at a redemption price of $1,000 per $1,000 principal amount
of 2014 Convertible Debentures plus accrued and unpaid interest through
December 1, 1997. As a result of the call, the 2014 Convertible Debentures are
convertible, beginning October 10, 1997 and ending on November 28, 1997, into
Class A Shares, at the conversion rate of $1,046 per $1,000 principal amount
of 2014 Convertible Debentures outstanding. If all outstanding 2014
Convertible Debentures are converted into Class A Shares, Security Capital
will issue an additional 684,358 Class A Shares.
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
Prior to the Mergers, ATLANTIC's REIT manager, Security Capital (Atlantic)
Incorporated (the "ATLANTIC REIT Manager"), was owned by Security Capital. The
ATLANTIC REIT Manager's sole business and principal occupation since its
formation in October 1993 was 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 were 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 was paid monthly and was $6.2
million for the six months ended June 30, 1997, and $10.4 million, $6.9
million and $3.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively. This agreement was terminated on September 9, 1997 and all the
employees of the ATLANTIC REIT Manager became 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 July 31, 1997, the ATLANTIC Property
Manager managed approximately 92.6% of ATLANTIC's multifamily units. The
agreement was to terminate September 30, 1997, subject to earlier termination
by ATLANTIC on 30 days' notice, was renewable annually upon approval of
ATLANTIC's independent directors and contemplated a fee to the ATLANTIC
Property Manager of 3.5% of property revenues for properties located in
Atlanta and Washington, D.C. markets and 3.75% of property revenues for all
other properties, paid monthly, which was $2.7 million for the six months
ended June 30, 1997, and $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 were expected to be at
market rates. This agreement was terminated on September 9, 1997 and all
employees of the ATLANTIC Property Manager became employees of ATLANTIC.
79
<PAGE>
ATLANTIC Investor Agreement
On September 9, 1997, ATLANTIC and Security Capital amended and restated
their investor agreement (as so amended and restated, the "ATLANTIC Amended
Investor Agreement"), which provides that, without first having consulted with
the nominees of Security Capital designated in writing, ATLANTIC may 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 has 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 September 9, 1997 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 also provides 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 is 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
80
<PAGE>
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 of 1933, as amended (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
On September 9, 1997, ATLANTIC and Security Capital entered 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 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 September
9, 1997, 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
On September 9, 1997, ATLANTIC and Security Capital entered into a license
agreement pursuant to which Security Capital granted 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 is 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
On September 9, 1997, ATLANTIC and Security Capital entered into a
protection of business agreement (the "ATLANTIC Protection of Business
Agreement"), which prohibits 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 terminates 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 September 9, 2000.
ATLANTIC Development Agreements
ATLANTIC is a party to several development agreements with unaffiliated
third-party developer/managers which provide that ATLANTIC will make certain
earnout payments to the developer/managers either in the form of cash, shares
of ATLANTIC's common stock or shares of Security Capital's common stock, as
determined in
81
<PAGE>
the sole discretion of the developer/managers. 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, ATLANTIC paid $800,000 to one such
developer/manager with respect to one community. At August 31, 1997, such
developer/manager had earned $4.0 million on four additional communities. The
earnout for the two remaining communities cannot exceed $2.2 million of which
none was earned at August 31, 1997.
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(R) 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(R) 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 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 August
31, 1997, Security Capital had purchased in the open market warrants to
purchase 2,865,106 shares of Homestead common stock and has exercised warrants
to purchase 7,363,302 shares of Homestead common stock, and as a result, as of
August 31, 1997 owned 17,257,703 (including 1,162,902 shares held in escrow)
shares of Homestead common stock and warrants to purchase 231,826 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,
82
<PAGE>
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
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,
83
<PAGE>
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. As of August 31,
1997, 1,162,902 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 to Security Capital for administrative services
of $1,080,000 for the six months ended June 30, 1997 and $375,000 for the
period from October 17, 1996 (the spin-off date) to December 31, 1996.
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,
84
<PAGE>
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
Prior to the Mergers, Security Capital Pacific Incorporated (the "PTR REIT
Manager") was owned by Security Capital. All officers of PTR were employees of
the PTR REIT Manager and PTR had no employees. Pursuant to a REIT management
agreement (the "PTR REIT Management Agreement"), the PTR REIT Manager provided
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 required 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 received a fee
of 0.25% per year on the average daily balance of cash equivalent investments.
PTR was 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 was renewable by PTR annually, subject to a
determination by the independent trustees that the PTR REIT Manager's
performance had been satisfactory and that the compensation payable to the PTR
REIT Manager is fair. Each of PTR and the PTR REIT Manager could terminate the
PTR REIT Management Agreement on 60 days' notice. For the six months ended
June 30, 1997 and the years ended December 31, 1996, 1995 and 1994, the PTR
REIT Manager earned REIT management fees totalling $9.3 million, $22.2
million, $20.4 million and $13.2 million, respectively. This agreement was
terminated on September 9, 1997 and all employees of the PTR REIT Manager
became employees of PTR.
PTR Property Management
At July 31, 1997, SCG Realty Services Incorporated ("SCG Realty Services"),
as property manager for most of PTR's multifamily communities, managed
approximately 94.6% of PTR's operating multifamily units, with the balance in
various stages of transition to SCG Realty Services' management. Prior to
September 9, 1997, Security Capital owned 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 the six months ended
June 30, 1997 and the years ended December 31, 1996, 1995 and 1994, PTR paid
aggregate fees of $5.5 million, $9.7 million, $7.9 million and $7.1 million,
respectively, to SCG Realty Services. This agreement will be terminated on
September 9, 1997 and all employees of SCG Realty Services became employees of
PTR.
PTR Investor Agreement
On September 9, 1997, PTR and Security Capital amended and restated their
investor agreement. Such agreement is substantially similar to the ATLANTIC
Amended Investor Agreement described above except: (i) it restricts 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 permits PTR to increase the size of the PTR Board of
Trustees to eight members.
Administrative Services Agreement
On September 9, 1997, PTR and Security Capital entered 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
85
<PAGE>
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 September
9, 1997 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
On September 9, 1997, PTR and Security Capital entered into a license
agreement (the "PTR License Agreement") pursuant to which Security Capital
granted 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 is 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 agrees 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
On September 9, 1997, PTR and Security Capital entered into a protection of
business agreement (the "PTR Protection of Business Agreement"), which
prohibits Security Capital and its affiliates from providing, anywhere within
the United States, directly or indirectly, substantially the same services as
those 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 terminates 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 September 9, 2000.
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. As of June 30, 1997 and December 31, 1996, PTR had
mortgage loans outstanding to PTR Development Services aggregating $19.4
million and $18.8 million, respectively, 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
Prior to the Mergers, Security Capital Industrial Incorporated (the "SCI
REIT Manager") was owned by Security Capital. All officers of SCI were
employees of the SCI REIT Manager and SCI had no employees. Pursuant to a REIT
management agreement (the "SCI REIT Management Agreement"), the SCI REIT
Manager
86
<PAGE>
provided 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 required 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 received a fee of 0.20% per year on the average daily balance of cash
equivalent investments. SCI was 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 was renewable
annually by SCI, subject to a determination by the independent trustees that
the SCI REIT Manager's performance had been satisfactory and that the
compensation payable to the SCI REIT Manager was fair. Each of SCI and the SCI
REIT Manager could terminate the SCI REIT Management Agreement on 60 days'
notice. For the six months ended June 30, 1997 and the years ended December
31, 1996, 1995 and 1994, the SCI REIT Manager earned REIT management fees of
$12.8 million, $21.5 million, $14.2 million and $8.7 million, respectively,
pursuant to the SCI REIT Management Agreement. This agreement was terminated
on September 9, 1997 and all employees of the SCI REIT Manager became
employees of SCI.
SCI Property Management
SCI Client Services Incorporated ("Client Services"), an affiliate of the
SCI REIT Manager, began providing property management services for certain SCI
properties in January 1994. At July 31, 1997, the Property Manager was
providing property management services in 30 target market cities and was
actively managing 82.3 million square feet, 95.6% of SCI's operating portfolio
of 85.9 million square feet. Rates for services performed by Client Services
range between 1.5% and 3.0% per annum of property revenues and were subject to
annual approval by SCI's independent trustees and were at or below market
rates. SCI could terminate the property management agreements on 60 days'
notice. During the six months ended June 30, 1997 and the year ended December
31, 1996, SCI paid property management fees and leasing commissions of $7.3
million and $10.1 million to Client Services, respectively, and reimbursed
Client Services for maintenance recovery expenditures collected from SCI's
customers of $994,000 and $1.7 million, respectively. The management
agreements between SCI and Client Services were terminated on September 9,
1997, and all employees of Client Services became employees of SCI.
SCI Investor Agreement
On September 9, 1997, SCI and Security Capital amended and restated their
investor agreement. Such agreement is substantially similar to the ATLANTIC
Amended Investor Agreement described above.
Administrative Services Agreement
On September 9, 1997, 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 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 September
9, 1997, 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.
87
<PAGE>
License Agreement
On September 9, 1997, SCI and Security Capital entered into a license
agreement (the "SCI License Agreement") pursuant to which Security Capital
granted 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 is 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 agrees 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
On September 9, 1997, SCI and Security Capital entered into a protection of
business agreement (the "SCI Protection of Business Agreement"), which
prohibits 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 September 9, 2000.
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 the six months ended June 30, 1997 and the years ended
December 31, 1996 and 1995 was approximately $1.1 million, $1.3 million and
$700,000, respectively (there was no fee incurred in 1994). During the six
months ended June 30, 1997 and the years ended December 31, 1996, 1995 and
1994, SCI earned $10.4 million, $8.5 million, $2.2 million and $17,000,
respectively, in interest income and had $4.4 million, $7.4 million, $1.9
million and $17,000, respectively, in accrued interest receivable from SCI
Development Services. As of June 30, 1997 and December 31, 1996, 1995 and
1994, SCI had outstanding $174.2 million, $162.0 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.
SC-USREALTY
Advisory Agreement
Pursuant to an agreement dated July 1, 1997 (the "Advisory Agreement"), SC-
USREALTY appointed Security Capital (EU) Management S.A. ("USREALTY Adviser")
as operating advisor to provide SC-USREALTY with advice with respect to
strategy, investments, financing, administrative and all other operating
88
<PAGE>
matters affecting SC-USREALTY. The USREALTY Adviser receives a single all-
inclusive annual advisory fee equal to 1.25% of SC-USREALTY's average monthly
market value of assets, excluding investments in Security Capital 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 SC-USREALTY exceed .25% of assets per annum.
The USREALTY Adviser is responsible for paying all fees of Security Capital
Investment Research (described below) and any other Security Capital advisory
affiliates for services related to advising SC-USREALTY. The Advisory
Agreement is automatically renewable for successive two-year periods, unless
either the USREALTY Adviser, on one hand, or SC-USREALTY and Security Capital
Holdings S.A., a wholly owned subsidiary of SC-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 SC-USREALTY and USREALTY Holdings, acting together, may terminate
the agreement on not less than sixty days' prior written notice to the
USREALTY Adviser. During the six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, the USREALTY Adviser received fees of $10.6
million, $8.0 million and $99,000, respectively, pursuant to the Advisory
Agreement.
Sub-Advisory Agreement
Pursuant to an agreement dated July 1, 1997 (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. Pursuant to its Sub-Advisory Agreement, Security Capital Investment
Research receives (i) an annual fee based on .06% on the aggregate average
monthly value of strategic investments up to $1 billion and .03% on the
aggregate average monthly market value of strategic investments in excess of
$1 billion, (ii) a one-time fee equal to .10% of the consideration payable
each time SC-USREALTY makes a strategic investment, (iii) an annual fee equal
to .50% on SC-USREALTY's other investments and (iv) reimbursement of certain
expenses. The Sub-Advisory Agreement expires on July 1, 1999 and is
automatically renewable for successive two-year periods unless the USREALTY
Adviser notifies Security Capital Investment Research that such Sub-Advisory
Agreement will not be renewed; provided, however, after the first anniversary
date of the agreement or at any time during a renewal period, the USREALTY
Adviser may terminate such agreement on not less than sixty days' prior
written notice to Security Capital Investment Research. During the six months
ended June 30, 1997, the year ended December 31, 1996 and the period ended
December 31, 1995, Security Capital Investment Research earned $1.5 million,
$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 shares were
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, $100 million of
SCI's common shares in 1995 at a price of $15.375 per share and $64 million of
SCI's common shares in 1996 at a price of $17.25 per share. All such purchases
were made on the same terms and at the same time as such shares were made
available to other investors.
89
<PAGE>
In offerings from October 1995 to July 1997, Security Capital purchased
approximately $490 million of SC-USREALTY's common shares at prices ranging
from $10.00 to $14.50 per share. All such purchases were made on the same
terms and at the same time as shares were made available to other investors.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
On March 31, 1995, Security Capital entered into an unsecured, full recourse
promissory note with R. Scot Sellers, then a Managing Director of PTR and
PTR's REIT Manager. Under the terms of the promissory note, Security Capital
lent Mr. Sellers $249,997, 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, 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.
90
<PAGE>
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 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 estimated fair market 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
91
<PAGE>
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 noncash, non-recurring charge to earnings of the Company in 1997 of
approximately $6.6 million.
On April 24, 1997, SCI Logistics Services Incorporated, an entity in which
SCI owns a majority of the economic interest, 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 entity in which SCI owns a
majority of the economic interest and 40% owned by an affiliate of Hunt
Financial Corporation. This related entity 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, with approximately 80%
being funded through debt and 20% being funded through equity capital by each
entity. Under the terms of its agreement with Hunt Financial Corporation's
affiliate, the SCI related entity has the option to increase its ownership
interest in CSI to 80% as such entity invests additional equity 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.
On September 8, 1997, Security Capital entered into a promissory note with
R. Scot Sellers, President and Chief Executive Officer of PTR. Under the terms
of the promissory note, Security Capital lent Mr. Sellers $100,000, which
amount is due on the earlier of January 10, 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 0.25% and is payable semi-annually on each January 10 and July
10. The proceeds of the promissory note were used by Mr. Sellers to purchase
common shares of PTR.
On September 8, 1997, Security Capital entered into a promissory note with
Gordon M. Kerr, Managing Director of Strategic Group. The loan was made as
part of Mr. Kerr's original employment agreement under which Security Capital
agreed to lend Mr. Kerr funds to purchase shares of Security Capital. Under
the terms of the promissory note, Security Capital lent Mr. Kerr $500,000,
which amount is due on the earlier of September 8, 2007 or 90 days after Mr.
Kerr is no longer employed by Security Capital. No interest shall be charged
on the unpaid balance.
On September 11, 1997, Security Capital entered into a secured promissory
note and related pledge agreement with David C. Dressler, Jr., a Co-Chairman
of Homestead. Under the terms of the secured promissory note, Security Capital
has agreed to loan Mr. Dressler up to $1,300,000, which amount is due on the
earliest of December 31, 1998, 90 days after the sale of certain real estate
owned by Mr. Dressler or 120 days after Mr. Dressler is no longer an officer
of an affiliate of Security Capital. Interest on the unpaid balance accrues at
seven and one-half percent per year and is payable annually on January 15 each
year the secured promissory note is outstanding. The proceeds of the note will
be used to pay personal obligations of Mr. Dressler. The secured promissory
note is secured by Class A Shares of Security Capital, 2014 Convertible
Debentures and options to purchase Class A Shares and 2014 Convertible
Debentures owned by Mr. Dressler. In addition, Mr. Dressler has agreed to
obtain a life insurance policy on himself in the amount of $1,300,000 which
policy names Security Capital as beneficiary. Mr. Dressler 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. The net
proceeds (after payment of minimum withholding taxes) of any securities
obtained upon exercise of such options and disposed of by Mr. Dressler and 50%
of Mr. Dressler's share of the net proceeds of sale of certain real estate
owned by Mr. Dressler shall be immediately applied to the outstanding and
unpaid interest and principal on the secured promissory note.
92
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 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 CLASS B
SHARES(1)(2) SHARES(1)(2)(3)
NAME AND ADDRESS ----------------- -------------------
OF BENEFICIAL OWNER NUMBER % NUMBER %
------------------- -------- ----- ---------- -----
<S> <C> <C> <C> <C>
Samuel W. Bodman................... 4,090 * 204,500 *
Hermann Buerger.................... 75(4) * 3,750 *
John P. Frazee, Jr................. 3,677(5) * 183,850 *
Cyrus F. Freidheim, Jr............. 2,912 * 145,600 *
H. Laurance Fuller................. 3,120(6) * 156,000 *
Ray L. Hunt........................ 20,191(7) 1.49 1,009,550(7) 1.12
John T. Kelley III................. 2,808(8) * 140,400 *
William D. Sanders................. 42,919(9) 3.17 2,145,950 2.38
Peter S. Willmott.................. 3,510(10) * 175,500 *
C. Ronald Blankenship.............. 3,852 * 192,600 *
Thomas G. Wattles.................. 3,179(11) * 158,950 *
K. Dane Brooksher.................. 1,371 * 68,550 *
David C. Dressler, Jr.............. 3,181 * 159,050 *
All directors and executive
officers
as a group (28 persons)........... 97,000(12) 7.17 4,850,000 5.37
The Allstate Corporation
2775 Sanders Road
Northbrook, IL 60062.............. 69,474 5.13 3,473,700 3.85
</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 (1,512), Buerger (75),
Frazee (1,512), Freidheim (1,512), Fuller (1,512), Hunt (1,512), Kelley
(1,512), Sanders (5,667), Willmott (1,512), Blankenship (3,559), Wattles
(2,918), Brooksher (855) and Dressler (2,050).
(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.
(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 one share held by Mr. Fuller's wife, and three shares held by
his children.
93
<PAGE>
(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 and 14,962 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.
(8) Includes 1,296 shares held by a trust of which Mr. Kelley is trustee.
(9) Includes 430 shares held by the Sanders Foundation; an aggregate of 93
shares held by Mr. Sanders' wife and children; and one share held by a
partnership.
(10) Includes two shares held by Mr. Willmott's children.
(11) Includes one share held by Mr. Wattles' wife; five shares held by his
children; and 93 shares held in an IRA account.
(12) Includes options and warrants to purchase 24,988 Class A Shares
exercisable within 60 days.
The following table sets forth, as of September 26, 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>
ATLANTIC HOMESTEAD PTR SCI
(1) (1)(2) (1) (1) SC-USREALTY(1)
------------- ---------------- --------------- --------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
- ------------------------ ------ --- ------- ---- ------- --- ------- --- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Samuel W. Bodman(3)..... -- -- -- -- 2,325 -- 48,308 * 196,705 *
Hermann Buerger(4)...... -- -- 12,000 -- -- -- -- -- -- --
John P. Frazee, Jr.(5).. 6,250 * 6,758(6) * 7,637 * 40,223 * -- --
Cyrus F. Freidheim,
Jr.(7)................. 2,500 * 1,102 * 3,055 * 5,545 * 5,000 *
H. Laurance Fuller(8)... 500 * 216 * 610 * 2,850 * -- --
Ray L. Hunt............. 17,000(9) * 85,567(10) * 390,404(11) * 160,135(12) * 2,131,056(13) 1.55
John T. Kelley III(14).. 250 * 2,739 * 16,835 * 90,570 * 25,000 *
William D. Sanders(15).. 6,155 * 232,486 * 315,645 * 285,654 * 611,038 *
Peter S. Willmott(16)... 1,250 * 3,447 * 15,327 * 10 * -- --
C. Ronald
Blankenship(17)........ 500 * 7,311 * 34,385 * 453 * -- --
Thomas G. Wattles(18)... 12 * 1,837 * 8,750 * 26,206 * -- --
David C. Dressler(19)... 500 * 25,629 * 6,611 * 3,997 * 1,600 *
K. Dane Brooksher(20)... 1,209 * 325 * 698 * 30,749 * 5,000 *
All directors and
executive officers as a
group (28 persons)..... 40,683 * 382,804 1.37% 813,516 * 707,940 * 3,052,330 2.14%
</TABLE>
- --------
*Less than 1%
(1) 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. Does not
give effect to the concurrent rights offerings being conducted by
ATLANTIC, PTR and SCI, respectively, pursuant to the terms of the
respective Merger Agreements.
(2) Includes common shares and warrants.
(3) SCI shares are owned by the Bodman Foundation, a charitable trust of
which Mr. Bodman is a trustee. PTR shares are held in an IRA account by
Mr. Bodman's wife (775 shares), owned by Perry O. Barber Jr. Family Trust
for which Mrs. Bodman is a trustee (1,300 shares) and held for the
benefit of Mrs. Bodman's children (250 shares). SC-USREALTY shares
include 49,176 shares owned by Elizabeth L. Bodman Trust. Mr. Bodman
claims no beneficial interest in these shares.
(4) 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.
94
<PAGE>
(5) 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.
(6) Includes options to acquire 4,000 shares.
(7) SC-USREALTY shares are held by Mr. Freidheim's wife.
(8) 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.
(9) 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.
(10) Includes 198 shares held by family trusts for which Mr. Hunt is trustee,
594 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, 833 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.
(11) 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.
(12) 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.
(13) 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.
(14) ATLANTIC shares, SCI shares and Homestead shares are held in a trust for
which Mr. Kelley is trustee.
(15) Homestead shares includes 40,340 shares and 61,080 shares held by
partnerships and 3,500 shares held by a limited partnership. PTR shares
include 96,716 shares held by partnerships and 26,844 shares held by the
Sanders Foundation. SCI shares include 80,732 shares and 22,666 shares
held by partnerships and an aggregate of 2,730 shares held by Mr.
Sanders' wife and children. SC-USREALTY shares include 207,117 shares
held by partnerships and an aggregate of 510 shares held by Mr. Sanders'
children.
(16) Includes eight SCI shares held by Mr. Willmott's children.
(17) 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.
95
<PAGE>
(18) 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 2,048 shares held by Mr.
Wattles' children, five shares held by his wife, and 7,422 shares held in
an IRA account.
(19) 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 2,488 shares held by Mr.
Dressler's children in trust accounts for which Mr. Dressler is trustee.
(20) SCI shares include 724 shares held in Mr. Brooksher's wife's name; SC-
USREALTY shares are held in an IRA account.
DESCRIPTION OF CAPITAL STOCK
The following summary of terms of the stock of Security Capital does not
purport to be complete and is subject to and qualified in its entirety by
reference to Maryland law and to the Charter and Bylaws, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
The authorized 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 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 and the Warrants is
BankBoston, N.A., 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 authorized by the Board out of funds legally available therefor.
Holders of Class B Shares are entitled to dividends equal to one-fiftieth
96
<PAGE>
(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 Warrant Issuance and 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 Warrant Issuance and
the Offering other than as contemplated by the Rights Agreement (as defined
below).
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
97
<PAGE>
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 SC-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 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
98
<PAGE>
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.
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
99
<PAGE>
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.
WARRANTS
The Warrants are issued under a Warrant Agreement (the "Warrant Agreement")
between Security Capital and BankBoston, N.A., as Warrant Agent (the "Warrant
Agent"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following is a summary of
the material terms of the Warrants and the Warrant Agreement. The summary is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Warrants and the Warrant Agreement, including the
definitions therein of certain terms.
General
Each Warrant will entitle the registered holder thereof, subject to and upon
compliance with the provisions thereof and of the Warrant Agreement, at such
holder's option, to purchase one Class B Share at an exercise price (the
"Exercise Price") per share equal to the closing price of the Class B Shares
on the day on which the Warrants are delivered to the Warrant Agent for
subsequent distribution to Securityholders. The number of Class B Shares for
which a Warrant may be exercised is subject to adjustment as set forth in the
Warrant Agreement.
Warrants may be exercised at any time by surrendering the certificate
evidencing such Warrants (the "Warrant Certificates") with the form of
election to purchase Class B Shares set forth on the reverse side thereof duly
completed and executed by the holder thereof and paying in full the Exercise
Price for such Warrant at the office or agency designated for such purpose,
which will initially be the corporate trust office of the Warrant Agent in New
York, New York. Each Warrant may be exercised only in whole and the exercise
price may be paid only in cash or by certified or official bank check. The
Warrants will expire at 5:00 p.m., New York time, on the first anniversary of
the Warrant Issuance Record Date.
The Warrant Certificates evidencing the Warrants may be surrendered for
exercise or exchange, and the transfer of Warrant Certificates will be
registrable, at the office or agency of Security Capital maintained for such
purpose, which initially will be the corporate trust office of the Warrant
Agent in New York, New York. The Warrant Certificates will be issued only in
fully registered form. No service charge will be made for any exercise,
exchange or registration of transfer of Warrant Certificates, but Security
Capital may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
100
<PAGE>
Fractional Class B Shares will not be issued upon exercise of Warrants. In
lieu thereof Security Capital will pay a cash adjustment based on the
difference between the Current Market Value (as defined in the Warrant
Agreement) of a Class B Share on the date the Warrant Certificate is
surrendered for conversion and the exercise price of the Warrants.
Holders of Warrants will not be entitled, by virtue of being such holders,
to receive dividends, vote, receive notice of any meetings of stockholders or
otherwise have any right of stockholders of Security Capital.
Adjustments
The number of Class B Shares issuable upon exercise of a Warrant (the
"Exercise Rate") is subject to adjustment upon the occurrence of certain
events, including (a) dividends or distributions on Class B Shares payable in
Class B Shares or certain other stock of Security Capital; (b) subdivisions,
combinations or certain reclassifications of Class B Shares; (c) distributions
to all holders of Class B Shares of rights, warrants or options entitling them
to subscribe for Class B Shares at a price per share less than 94% of the
Current Market Value at the Time of Determination (each as defined in the
Warrant Agreement); (d) sales by Security Capital of Class B Shares or of
securities convertible into or exchangeable or exercisable for Class B Shares
(other than pursuant to (1) the exercise of the Warrants (2) any security
convertible into, or exchangeable or exercisable for, Class B Shares as to
which the issuance thereof has previously been the subject of any required
adjustment pursuant to the Warrant Agreement and (3) the conversion of Class A
Shares into Class B Shares pursuant to their terms) at a price per share less
than the Current Market Value at the Time of Determination; and (e)
distributions to stockholders of assets or debt securities of Security Capital
or certain rights, warrants or options to purchase assets or debt securities
or other securities of Security Capital (excluding cash dividends or other
cash distributions from consolidated retained earnings other than any
Extraordinary Cash Dividend (as defined in the Warrant Agreement)). No
adjustment in the Exercise Rate will be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Exercise
rate; provided that any adjustment that is not made will be carried forward
and taken into account in any subsequent adjustment.
If Security Capital is a party to a consolidation or merger, or certain
transfers of all or substantially all of its assets occur, a Warrant shall
automatically become exercisable for the kind and amount of securities, cash
or other assets which the holder of Warrants would have received immediately
after the consolidation, merger or transfer if the holder exercised the
Warrant immediately before the effective date of the transaction.
In the event of a taxable distribution to holders of Class B Shares which
results in an adjustment to the number of Class B Shares or other
consideration for which a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States Federal income tax.
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 IRS or an opinion of counsel or other evidence satisfactory to
the Board and upon such other conditions as the Board
101
<PAGE>
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
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 SC-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.
102
<PAGE>
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.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF SECURITY CAPITAL'S CHARTER 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 to
the Charter and Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
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 vote 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 limits 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,
103
<PAGE>
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. 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 or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. In addition, Maryland law
permits a corporation to advance reasonable expenses to a director or officer
upon the corporation's receipt of (a) a 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 the corporation and (b) a written
statement by or on his or her behalf to repay the amount paid or reimbursed by
the corporation 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
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes 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 conditions, 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
104
<PAGE>
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 SC-USREALTY and its affiliates and successors. As a
result, SC-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
supermajority 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 (except solely by
virtue of a revocable proxy), 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.
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 by the acquiror 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 SC-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
105
<PAGE>
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 August 31, 1997, Security Capital had 1,327,740 Class A Shares issued and
outstanding, which will be convertible beginning January 1, 1998 into a total
of 66,387,000 Class B Shares. Security Capital has outstanding Warrants to
purchase a total of 8,928,572 Class B Shares. To the extent such Warrants are
exercised, the Class B Shares may be sold in the public markets without
limitation. In addition, Security capital has 22,569,710 Class B Shares
outstanding. 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 $715 million principal
amount of its 2014 Convertible Debentures, convertible into an aggregate of
683,771 Class A Shares, (ii) approximately $323 million principal amount of
its 2016 Convertible Debentures, convertible into an aggregate of 279,941
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 132,604 Class A Shares
and $45,157,000 principal amount of 2014 Convertible Debentures (convertible
into 43,259 Class A Shares) reserved for issuance upon exercise of options
under Security Capital's employee benefit plans. On September 29, 1997,
Security Capital announced that it has called for redemption all $715.8
million principal amount of its outstanding 2014 Convertible Debentures on
December 1, 1997. The 2014 Convertible Debentures will be redeemed at a
redemption price of $1,000 per $1,000 principal amount of 2014 Convertible
Debentures plus accrued and unpaid interest through December 1, 1997. As a
result of the call, the 2014 Convertible Debentures are convertible, beginning
October 10, 1997 and ending on November 28, 1997, into Class A Shares, at the
conversion rate of $1,046 per $1,000 principal amount of 2014 Convertible
Debentures outstanding. If all outstanding 2014 Convertible Debentures are
converted into Class A Shares, Security Capital will issue an additional
684,358 Class A Shares. 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. 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 or upon the exercise of Warrants, 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 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."
106
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of Security Capital's policies with respect to
investments, financing, and certain other activities. These policies are
determined by the Board and may be amended or revised from time to time at the
discretion of the Board without notice to or a vote of the shareholders of
Security Capital.
INVESTMENT POLICIES
Security Capital will deploy its capital (both its corporate and third-party
managed capital) through the direct and indirect ownership of public and
private companies with highly focused business strategies which are engaged in
real estate activities. 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, although
there can be no assurance that such growth and increases will continue. See
"Business."
Investments in Real Estate or in Interests in Real Estate. Security Capital
does not invest directly in real estate or in interests in real estate. All
such activities are conducted by its current direct investees (SCI, PTR,
ATLANTIC and Homestead), its indirect investees (CarrAmerica, Storage USA,
REGENCY and PACIFIC RETAIL) and through recently formed or future direct
(Strategic Hotel Capital Incorporated) and indirect (Parking Services
International Incorporated, Urban Growth Property Trust and City Center Retail
Trust) investees and future direct and indirect (through SC-USREALTY and SC-
GR) investees which are highly focused, value added operating companies
engaged in real estate activities (collectively, "Operating Companies"). In
addition, Security Capital manages or advises or expects to manage or advise
capital invested in focused funds which invest in securities of real estate
operating companies (SC-USREALTY Special Opportunity Investment Portfolio, SC-
ERF, SC-PG and SC-EP, collectively, "Funds"). See "Business--Operating
Strategy--Security Capital Investment Research Group." The Operating Companies
have each been focused on specific types of real estate and in certain cases
are geographically limited. See "Business--Operating Strategy--Security
Capital Strategic Group." The Operating Companies are expected to acquire
additional similar properties and where appropriate, subject to applicable
REIT qualification rules, to sell certain of their properties. Existing and
future Operating Companies may acquire additional properties in existing
markets or new markets targeted by the management of those companies. Future
investments by Security Capital in companies which are engaged in real estate
activities, however, including those described below, will not be limited to
any geographic area, product type or to a specified percentage of Security
Capital's assets. The Funds are not limited as to product type for real estate
operating companies but are limited as to concentration in any particular real
estate operating company and may be limited as to geographic area based on the
particular Fund's investment limitations contained in its organizational
documents.
Investments in Real Estate Mortgages. Security Capital does not invest
directly in real estate mortgages and, except as described below, its
Operating Companies have not invested substantial amounts in mortgages or
similar interests in properties. Certain Operating Companies have invested in
mortgage loans to third-party owner/developers in connection with the
development of properties that are contractually required to be sold to the
Operating Company upon completion of convertible mortgage loans to affiliates
in which the Operating Company owns a substantial economic interest, or
convertible mortgage loans where the board of the Operating Company believes
that such loans are in the best interest of the Operating Company.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Security Capital has since its founding
invested, and will continue to invest, directly or indirectly in securities of
entities engaged in real estate activities, including for the purpose of
exercising control. See "Business--Overview and Strategy and Operating
Strategy." Security Capital does not intend that its investment in securities
will require it to register as an investment company under the Investment
Company Act, although certain Funds which Security Capital advises may be
registered under the Investment Company Act. See "Risk Factors--Certain Risks
Relating to the Investment Company Act."
FINANCING POLICIES
There are no limits on total debt, or ratio of debt to equity, or similar
restrictions, in Security Capital's Charter or Bylaws. Security Capital,
however, intends to maintain a prudent policy on indebtedness. Security
107
<PAGE>
Capital's Line of Credit imposes limitations on indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Lines of Credit." Security
Capital intends to comply with such limitations. Security Capital uses its
$400 million floating rate, secured line of credit for the purpose of
facilitating investments as well as for working capital. Security Capital
currently has long-term, fixed rate, convertible subordinated indebtedness
aggregating $1.1 billion which is due between 2014 and 2016. Security Capital
may issue unsecured, fixed rate long-term debt in the future and does not
intend to incur long-term floating rate debt. Security Capital may also
determine to issue securities senior to the Class B Shares, including
preferred stock and debt securities (either of which may be convertible into
Class B Shares). Security Capital's financing policies are to replace line of
credit borrowings with the proceeds of equity offerings or unsecured long-
term, fixed rate, fully amortizing debt. The proceeds of any borrowings by
Security Capital may be used to provide working capital, to pay existing
indebtedness or to finance investments in, or expansions or development of,
new business initiatives.
Security Capital has issued options to employees and directors to purchase
Class A Shares and intends to issue additional options under its long term
incentive plans and Outside Directors Plan. See "Management--Outside Directors
Plan" and "--1995 Option Plan" and "Business--The Merger Transactions."
CONFLICT OF INTEREST POLICIES
Other than as described in "Certain Relationships and Transactions,"
Security Capital does not intend to engage in principal transactions with
officers and Directors or to engage independent Directors to provide services
to Security Capital. For a discussion of Security Capital's policies with
respect to conflicts of interest, see "Risk Factors--Conflicts of Interest."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Security Capital may make investments in addition to those previously
described. The Board has authority to reclassify unissued Shares into senior
securities, to offer Shares or other securities and, subject to certain
restrictions, to repurchase or otherwise reacquire Shares or any other
securities and may engage in such activities in the future. Security Capital
has not engaged directly in trading, underwriting or agency distribution or
sale of securities of other issuers, although its wholly owned subsidiary,
Security Capital Markets Group, has, and intends to continue to, engage in
trading, agency distribution or sales of securities of Security Capital and
its affiliates.
Security Capital will make annual and quarterly reports to shareholders. The
annual reports will contain audited financial statements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain U.S. federal income tax consequences
to Securityholders resulting from receiving, holding and disposing of the
Warrants. To the extent such summary discusses matters of law, such summary
represents the opinion of Mayer, Brown & Platt or a private letter ruling from
the IRS. The following discussion is based upon current provisions of the
Code, its legislative history, administrative pronouncements, judicial
decisions and Treasury Regulations, all of which are subject to change,
possibly with retroactive effect. The following discussion does not purport to
be a complete discussion of all U.S. federal income tax considerations
resulting from receiving, holding and disposing of the Warrants. The following
discussion does not address the tax consequences from receiving, holding and
disposing of the Warrants under state, local or non-U.S. tax laws. In
addition, the following discussion may not apply, in whole or in part, to
particular categories of Securityholders, such as dealers in securities,
insurance companies, foreign persons, tax-exempt organizations and financial
institutions. THE FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION
ONLY. ALL SECURITYHOLDERS ARE URGED TO CONSULT THEIR TAX
108
<PAGE>
ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES FROM HOLDING AND DISPOSING
OF THE WARRANTS, INCLUDING ANY STATE, LOCAL OR NON-U.S. TAX CONSEQUENCES.
RECEIPT OF WARRANTS
Pursuant to the Warrant Issuance, (i) a Securityholder will have ordinary
income upon receipt of a Warrant pursuant to the Warrant Issuance in an amount
equal to the fair market value of the Warrants received on the Warrant
Issuance Date, (ii) a holder's tax basis in the Warrants received will equal
the fair market value of the Warrants received on the Warrant Issuance Date,
and (iii) a holder's holding period for the Warrants received will begin on
the Warrant Issuance Date. Section 511 of the Code imposes on organizations
exempt from federal income tax under Section 501(a) of the Code a tax at
corporate income tax rates on such organizations' "unrelated business taxable
income." In the opinion of Mayer, Brown & Platt, the receipt by a tax-exempt
Securityholder of the Warrants pursuant to the Warrant Issuance will be
treated as unrelated business taxable income.
SALE, DISPOSITION, EXERCISE OR EXPIRATION OF WARRANTS
In general, upon a sale or other disposition of a Warrant, a holder of
Warrants will recognize gain or loss measured by the difference between the
amount realized on the sale or other disposition and the Warrant holder's tax
basis in the Warrant. In general, such gain or loss will be a capital gain or
loss if the stock into which the Warrants are exercisable would be a capital
asset in the Warrant holder's hands and will be a short-term capital gain or
loss because the Warrants will expire in one year from the date of issuance.
EXERCISE OF WARRANTS
Except as discussed below with respect to cash received in lieu of
fractional Class B Shares, a Warrant holder will not recognize gain or loss
upon the exercise of a Warrant. A Warrant holder's tax basis in the Class B
Shares received upon exercise of a Warrant will be equal to the sum of (1) the
Warrant holder's tax basis in the Warrant exercised and (2) the exercise price
paid. The holding period of the Class B Shares received upon the exercise of a
Warrant will begin on the date of exercise. Holders receiving cash in lieu of
fractional Class B Shares upon exercise of a Warrant will recognize gain to
the extent that the cash received exceeds the Warrant holder's tax basis in
the portion of the Warrant exercised for cash in lieu of fractional Class B
Shares.
EXPIRATION OF THE WARRANTS
If a Warrant holder's Warrants expire without being exercised, the Warrant
Holder will recognize a loss equal to its tax basis in the expired Warrants.
In general, such loss will be a capital loss if the stock into which the
Warrants were exercisable would be a capital asset in the Warrant Holder's
hands and will be a short-term loss because the Warrants will expire in one
year from the date of issuance.
ADJUSTMENT OF CONVERSION RATIO
The terms of the Warrants distributed pursuant to the Merger Agreements
provide for adjustment of the price for exercise if Security Capital makes
certain distributions of stock, cash or other property to its shareholders.
While Security Capital does not presently contemplate making such a
distribution, if Security Capital makes a distribution of cash or property
resulting in an adjustment to the exercise price, the holders of the Warrants
may be viewed as receiving a "deemed distribution" under Section 305 of the
Code, even if such Warrant holder does not hold any Class B Shares at such
time. The deemed distribution would constitute a taxable dividend, taxable as
ordinary income, to the extent that the earnings and profits of Security
Capital were allocable to the deemed distribution. The amount of the deemed
distribution which exceeded the allocated earnings and profits of Security
Capital would be considered a return of capital, and would reduce the Warrant
holder's tax basis in the Warrants (but not below zero) by the value of the
deemed distribution. To the extent
109
<PAGE>
that the value of the deemed distribution exceeds the Warrant holder's tax
basis in its Warrants, the deemed distribution would result in gain to such
Warrant holder. In such event, the Warrant holder's tax basis in its Warrants
would then immediately be increased by the value of the property deemed to
have been distributed.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS B SHARES
The following is a summary 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"). To the extent such summary discusses matters of law, such summary
represents the opinion of Mayer, Brown & Platt. 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 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
110
<PAGE>
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).
In the opinion of Mayer, Brown & Platt, based on certain representations of
Security Capital, Security Capital was not, as of September 17, 1997, a
"United States real property holding corporation." However, such opinion is
not binding on the IRS nor will it preclude the IRS from adopting a contrary
position, and since no ruling from the IRS will be sought, there can be no
complete assurance that the IRS will agree with the conclusions set forth
herein. Moreover, such opinion is based on certain factual matters as of
September 17, 1997, which may change, such as the relative fair market value
of Security Capital's assets and investments made by Security Capital as of
September 17, 1997. 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.
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
111
<PAGE>
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.
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.
112
<PAGE>
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 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.
113
<PAGE>
PLAN OF DISTRIBUTION
Security Capital will issue and sell Class B Shares to the holders of the
outstanding Warrants upon the exercise of such Warrants in accordance with
their terms. See "Description of Capital Stock--Warrants." It is expected that
Security Capital will engage Security Capital Markets Group to assist it from
time to time in seeking to arrange or solicit the exercise of Warrants.
Security Capital Markets Group is a wholly owned subsidiary of Security
Capital and from time to time provides capital markets advice and services to
Security Capital and its affiliates.
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 herein 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 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.
With respect to the unaudited condensed interim financial statements for the
three- and six-month periods ended June 30, 1997 and 1996, included in this
Prospectus, Arthur Andersen LLP and KPMG Peat Marwick LLP have reported that
they have applied limited procedures in accordance with professional standards
for a review of such information. However, their separate reports each state
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted considering the limited nature of the
review procedures applied. Neither of such accountants are subject to the
liability provisions of Section 11 of the Securities Act for their reports on
the unaudited interim financial information because neither of those reports
is a "report" or a "part" of the Registration Statement prepared or certified
by the accountants within the meaning of Sections 7 and 11 of the Securities
Act.
The financial statements and related schedules of SC-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
Warrants and the Class B Shares offered hereby will be passed upon for
Security Capital by Mayer, Brown & Platt, Chicago, Illinois. 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 Offering and the Mergers. As to certain matters
of Maryland law, Mayer, Brown & Platt may rely upon the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland.
114
<PAGE>
AVAILABLE INFORMATION
Security Capital has filed with the Commission a registration statement (of
which this Prospectus forms a part) on Form S-11 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 Warrants 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.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Security Capital Group Incorporated
Report of Independent Public Accountants............................... F-3
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.. F-4
Consolidated Statements of Operations for the three and six month
periods ended June 30, 1997
and 1996.............................................................. F-5
Consolidated Statement of Shareholders' Equity for the six month period
ended June 30, 1997 .................................................. F-6
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1997 and 1996................................................ F-7
Notes to Consolidated Financial Statements............................. F-8
Report of Independent Public Accountants............................... F-17
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-18
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-19
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995
and 1994.............................................................. F-20
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-21
Notes to Consolidated Financial Statements............................. F-24
Schedule I--Condensed Financial Information of Registrant.............. F-42
Schedule III--Real Estate and Accumulated Depreciation................. F-47
Security Capital Group Incorporated (acquired company)
Report of Independent Public Accountants............................... F-56
Consolidated Balance Sheet as of December 31, 1994..................... F-57
Consolidated Statement of Operations for the year ended December 31,
1994.................................................................. F-58
Consolidated Statement of Shareholders' Equity for the year ended
December 31, 1994..................................................... F-58
Consolidated Statement of Cash Flows for the year ended December 31,
1994.................................................................. F-59
Notes to Consolidated Financial Statements............................. F-60
Security Capital Pacific Trust
Report of Independent Public Accountants............................... F-65
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996..... F-66
Condensed Statements of Earnings for the three and six month periods
ended June 30, 1997 and 1996.......................................... F-67
Condensed Statement of Shareholders' Equity for the six month period
ended June 30, 1997................................................... F-68
Condensed Statements of Cash Flows for the six month periods ended June
30, 1997 and 1996..................................................... F-69
Notes to Condensed Financial Statements................................ F-70
Report of Independent Public Accountants............................... F-79
Balance Sheets as of December 31, 1996 and 1995........................ F-80
Statements of Earnings for the years ended December 31, 1996, 1995 and
1994.................................................................. F-81
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994................................................... F-82
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994.............................................................. F-83
Notes to Financial Statements.......................................... F-84
Schedule III--Real Estate and Accumulated Depreciation................. F-102
Security Capital Industrial Trust
Report of Independent Public Accountants............................... F-108
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.. F-109
Consolidated Statements of Operations for the three and six month
periods ended June 30, 1997
and 1996.............................................................. F-110
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1997 and 1996................................................ F-111
Notes to Consolidated Financial Statements............................. F-112
Report of Independent Public Accountants............................... F-118
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-119
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-120
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995
and 1994.............................................................. F-121
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-122
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Notes to Consolidated Financial Statements............................. F-123
Report of Independent Public Accountants............................... F-139
Schedule III--Real Estate and Accumulated Depreciation................. F-140
Security Capital U.S. Realty
Report of Independent Public Accountants............................... F-156
Consolidated Statement of Net Assets at December 31, 1996.............. F-157
Consolidated Statement of Operations for the year ended December 31,
1996.................................................................. F-158
Consolidated Statement of Cash Flows for the year ended December 31,
1996.................................................................. F-159
Consolidated Statement of Changes in Net Assets for the year/period
ended December 31, 1996 and 1995...................................... F-160
Consolidated Statement of Changes in Shares Outstanding for the
year/period ended December 31, 1996 and 1995.......................... F-160
Consolidated Financial Highlights for the year/period ended December
31, 1996 and 1995..................................................... F-160
Consolidated Schedule of Investments in Strategic Positions at December
31, 1996.............................................................. F-161
Consolidated Schedule of Investments in Special Opportunity Positions
at December 31, 1996.................................................. F-161
Notes to the Consolidated Financial Statements......................... F-162
Report of Independent Public Accountants............................... F-167
Statement of Net Assets at December 31, 1995........................... F-168
Statement of Operations for the period from incorporation (July 7,
1995) to December 31, 1995............................................ F-169
Statement of Changes in Net Assets for the period from incorporation
(July 7, 1995) to December 31, 1995................................... F-170
Statement of Changes in Shares Outstanding for the period from
incorporation (July 7, 1995) to December 31, 1995..................... F-170
Financial Highlights for the period from incorporation (July 7, 1995)
to December 31, 1995.................................................. F-171
Schedule of Strategic Investments in Real Estate Companies at December
31, 1995.............................................................. F-171
Schedule of Special Opportunity Investments at December 31, 1995....... F-171
Notes to Financial Statements.......................................... F-172
Security Capital Atlantic Incorporated
Report of Independent Public Accountants............................... F-176
Homestead Village Incorporated
Report of Independent Public Accountants............................... F-177
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Security Capital Group
Incorporated:
We have reviewed the accompanying consolidated balance sheet of Security
Capital Group Incorporated and subsidiaries (see note 1) as of June 30, 1997,
and the related consolidated statements of operations for the three- and six-
month periods ended June 30, 1997 and 1996, the statement of shareholders'
equity for the six-month period ended June 30, 1997 and the statements of cash
flows for the six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of Management. We were furnished with the
reports of other accountants on their reviews of the financial statements of
Security Capital Pacific Trust, Security Capital Atlantic Incorporated and
Homestead Village Incorporated, whose total assets represent 61.7% of the total
assets of Security Capital Group Incorporated and subsidiaries as of June 30,
1997 and whose income represent 55.4% and 57.4% of the total income in the
consolidated statements of operations of Security Capital Group Incorporated
and subsidiaries for the six-month periods ended June 30, 1997 and 1996,
respectively.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware of
any material modifications that should be made to the financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Group
Incorporated and subsidiaries as of December 31, 1996, and, in our report dated
February 28, 1997, we expressed an unqualified opinion on that statement based
on our audit and reports of other auditors. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1996,
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
Arthur Andersen LLP
Chicago, Illinois
August 11, 1997
F-3
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
----------- ------------
<S> <C> <C>
ASSETS
------
Investments, at equity:
Security Capital Industrial Trust $ 542,802 $ 548,194
Security Capital Pacific Trust 381,832 374,317
Security Capital U.S. Realty 626,376 516,426
---------- ----------
1,551,010 1,438,937
---------- ----------
Real estate, less accumulated depreciation, held by:
Security Capital Atlantic Incorporated 1,184,691 1,116,069
Homestead Village Incorporated 391,254 249,304
---------- ----------
1,575,945 1,365,373
---------- ----------
Investments in publicly traded real estate
securities, at market value 107,127 10,247
---------- ----------
Total real estate investments 3,234,082 2,814,557
Cash and cash equivalents 16,506 23,662
Other assets 159,807 91,065
---------- ----------
Total assets $3,410,395 $2,929,284
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Lines of credit $ 386,250 $ 262,000
Mortgage notes payable 298,006 257,099
Convertible debt 1,038,268 940,197
Accrued interest on convertible debt 50,197 42,450
Accounts payable and accrued expenses 85,599 83,427
Deferred income taxes 47,095 30,872
---------- ----------
Total liabilities 1,905,415 1,616,045
---------- ----------
Minority interests 475,909 394,537
SHAREHOLDERS' EQUITY:
Class A common shares, $.01 par value; 20,000,000
shares authorized, 1,327,150 and 1,209,009 shares
issued and outstanding in 1997 and 1996,
respectively 13 12
Class B common shares, $.01 par value; 229,861,000
shares authorized; no shares issued and
outstanding -- --
Series A Preferred shares, $.01 par value; 139,000
shares issued and outstanding in 1997 and 1996;
stated liquidation preference of $1,000 per share 139,000 139,000
Additional paid-in capital 1,093,392 985,392
Accumulated deficit (203,334) (205,702)
---------- ----------
Total shareholders' equity 1,029,071 918,702
---------- ----------
Total liabilities and shareholders' equity $3,410,395 $2,929,284
========== ==========
</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 OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
------------------------------
-----------------
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME:
Equity in earnings of:
Security Capital Industrial
Trust $ 10,149 $ 5,739 $ 17,659 $ 11,444
Security Capital Pacific
Trust 10,702 8,459 25,326 15,815
Security Capital U.S.
Realty 18,197 10,577 35,098 12,479
Rental revenues 54,654 32,876 105,321 63,685
Services Division revenues
from related parties 26,048 18,245 49,018 33,653
Other income 6,212 2,153 7,571 2,512
---------- ---------- ---------- ----------
125,962 78,049 239,993 139,588
---------- ---------- ---------- ----------
EXPENSES:
Rental expenses 21,413 12,599 41,370 25,234
Services Division expenses 21,148 15,986 42,472 32,805
Depreciation and amortization 9,899 5,610 18,726 11,131
Interest expense--convertible
debt 27,958 22,709 54,623 45,000
Interest expense--other
obligations 5,837 4,622 12,010 11,204
General, administrative and
other 23,870 8,742 35,571 14,396
---------- ---------- ---------- ----------
110,125 70,268 204,772 139,770
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes and minority interests 15,837 7,781 35,221 (182)
Provision for income taxes 7,778 2,802 16,223 2,802
Minority interests in net
earnings of subsidiaries 6,433 3,381 11,417 5,272
---------- ---------- ---------- ----------
Net earnings (loss) 1,626 1,598 7,581 (8,256)
Less Series A Preferred Share
dividends 2,607 2,606 5,213 2,606
---------- ---------- ---------- ----------
Net earnings (loss)
attributable to common shares
and common equivalent shares $ (981) $ (1,008) $ 2,368 $ (10,862)
========== ========== ========== ==========
Weighted average common shares
and common equivalent shares
outstanding 1,297,066 1,019,230 1,355,349 1,007,009
========== ========== ========== ==========
Net earnings (loss) per common
share and common equivalent
share $ (.76) $ (.99) $ 1.75 $ (10.79)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
----------------------------------------------------------------------------
<CAPTION>
SERIES A
PREFERRED
SHARES 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, 1996 (Audited) 1,209,009 $12.090 $139,000 $ 985,392 $(205,702) $ 918,702
Issuance of common
shares 111,970 1.119 - 103,148 - 103,149
Interest Reinvestment
Plans 3,741 0.037 - 4,624 - 4,624
Exercise of stock
options 3,292 0.033 - 1,008 - 1,008
Repurchase of common
shares (862) (0.009) - (1,006) - (1,006)
Income tax benefit
from stock options
exercised - - - 226 - 226
Net earnings - - - - 7,581 7,581
Series A Preferred
Share dividends - - - - (5,213) (5,213)
--------- --------- --------- ---------- --------- ----------
Balances at June 30,
1997 (Unaudited)(a) 1,327,150 $13.270 $139,000 $1,093,392 $(203,334) $1,029,071
========= ========= ========= ========== ========= ==========
</TABLE>
- --------
(a) At June 30, 1997, common shares outstanding represent Class A Common
Shares.
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
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
--------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 7,581 $ (8,256)
Adjustments to reconcile net earnings (loss) to
cash flows provided by operating activities:
Provision for deferred income taxes 16,223 2,802
Minority interests 11,417 5,272
Equity in earnings of unconsolidated investees (78,083) (39,738)
Distributions from unconsolidated investees 40,855 36,855
Depreciation and amortization 18,726 11,131
Other 4,221 666
Increase in other assets (12,459) (6,291)
Increase in accrued interest on convertible debt 7,747 8,607
Increase in accounts payable and accrued expenses 1,203 20,842
--------- ---------
Net cash flows provided by operating activities 17,431 31,890
--------- ---------
INVESTING ACTIVITIES:
Real estate properties (227,265) (151,017)
Disposition of real estate properties 11,873 14,651
Investment in shares of:
Security Capital U.S. Realty (74,852) (179,746)
Strategic Hotel Capital Incorporated (22,642) -
Security Capital Preferred Growth Incorporated (5,000) -
Purchases of publicly traded real estate
securities, net (93,580) -
Purchases of Homestead Village Incorporated
warrants (18,654) -
Other (21,415) (5,799)
--------- ---------
Net cash flows used in investing activities (451,535) (321,911)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from lines of credit $ 415,750 $ 315,500
Payments on lines of credit (291,500) (365,000)
Proceeds from mortgage notes payable 41,250 5,000
Principal payments on mortgage notes payable (753) (480)
Proceeds from issuance of convertible debt 98,097 52,520
Repurchase of convertible debt (26) (7,412)
Proceeds from issuance of common shares, net of
expenses 102,181 51,390
Repurchase of common shares (1,006) (8,504)
Proceeds from issuance of preferred shares - 139,000
Distributions paid to minority interest holders (14,285) (7,749)
Proceeds from issuance of common shares to minority
interest holders 82,969 119,090
Preferred dividends paid (5,213) -
Other (516) (2,762)
--------- ---------
Net cash flows provided by financing activities 426,948 290,593
--------- ---------
Net increase (decrease) in cash and cash
equivalents (7,156) 572
Cash and cash equivalents, beginning of period 23,662 13,708
--------- ---------
Cash and cash equivalents, end of period $ 16,506 $ 14,280
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) GENERAL
Security Capital Group Incorporated (Security Capital) engages in real estate
research, investment and management. Its strategy is to create the optimal
organization to lead and profit from global real estate securitization.
Security Capital has invested in various operating and other entities (the
Capital Division) (see note 3) and provides various management and financial
services through a Services Division (see note 2). The Capital Division invests
in real estate-related companies with the objective of generating capital gains
and growing dividends. 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 for the companies in which Security Capital and its
affiliates have invested. Security Capital is a Maryland corporation.
The accompanying consolidated financial statements include the results of
Security Capital, its majority-owned Capital Division subsidiaries (Security
Capital Atlantic Incorporated, Homestead Village Incorporated, and Security
Capital Employee REIT Fund 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, Homestead Village
Incorporated, and Security Capital Employee REIT Fund 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.
The consolidated financial statements of Security Capital as of June 30, 1997
are unaudited and, pursuant to the rules of the Securities and Exchange
Commission (SEC), certain information and footnote disclosures normally
included in financial statements have been omitted. While management of
Security Capital believes that the disclosures presented are adequate, these
interim consolidated financial statements should be read in conjunction with
Security Capital's 1996 consolidated financial statements.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of Security Capital's consolidated financial
statements for the interim periods presented. Certain reclassifications have
been made in the 1996 consolidated financial statements and notes to
consolidated financial statements for the interim periods presented in order to
conform to the 1997 presentation. The results of operations for the three- and
six-month periods ended June 30, 1997 and 1996 are not necessarily indicative
of the results to be expected for the entire year.
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.
(2) SERVICES DIVISION
REIT Managers and Property Managers
Certain Security Capital Services Division subsidiaries, under the terms of
separate agreements, manage the operations of the separate 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 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, of
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.
F-8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In late January 1997, Security Capital made a proposal to Security Capital
Industrial Trust (SCI), Security Capital Pacific Trust (PTR) and Security
Capital Atlantic Incorporated (ATLANTIC) to exchange the REIT and Property
Managers for additional shares of the respective REITs. As a result of the
proposed transactions, each of the REITs would become internally managed. The
board of directors or trustees of each REIT appointed a special committee
comprised of independent directors or trustees to review the proposed
transaction.
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 mergers). 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. Shareholders of Security
Capital approved the transactions in the second quarter of 1997. Under the
terms of the agreement, SCI, PTR, and ATLANTIC will issue $81,870,626
(3,692,023 shares), $75,838,457 (3,295,533 shares) and $54,608,549 (2,306,591
shares) of their common stock, respectively, in exchange for Security Capital's
REIT management and property management companies and operating systems.
In order to allow existing common shareholders to maintain (and, to the extent
a shareholder oversubscribes for common shares pursuant to the oversubscription
privilege, increase) their relative ownership interests, SCI, PTR and ATLANTIC
commenced rights offerings on August 8, 1997 to their respective shareholders
and Security Capital agreed not to exercise or sell its rights in such
offerings. Also, as part of the transactions, Security Capital will issue
registered warrants to acquire $250 million of Class B shares to the common and
convertible preferred shareholders and unitholders of limited partnerships of
SCI, PTR and ATLANTIC. The warrants are expected to be publicly traded and have
a term of twelve months.
On April 29, 1997 Security Capital filed a registration statement with the SEC
covering its initial public offering of Class B shares, which is expected to be
effective in the third quarter of 1997.
In connection with the proposed exchange of the REIT and Property Managers for
additional shares of the respective REITs and the issuance of warrants to
purchase Class B shares as described above, Security Capital filed three
registration statements with the SEC (one for each of the merger transactions).
Each of these registration statements was declared effective by the SEC on
August 5, 1997.
Operating Advisor
Another Services Division subsidiary domiciled in Luxembourg (Operating
Advisor) advises on all investment and operational activities of Security
Capital U.S. Realty, a Luxembourg corporation (USREALTY). 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).
(3) REAL ESTATE INVESTMENTS
Security Capital holds investments at June 30, 1997 through its wholly-owned
subsidiary, SC Realty Incorporated (SC Realty), as follows:
. Security Capital Industrial Trust (SCI), a publicly held REIT, acquires,
develops, operates and owns distribution facilities throughout the
United States and in Mexico and Europe. At June 30, 1997 and December
31, 1996, Security Capital owned 44.07% and 46.00%, respectively, of the
issued and outstanding common shares of beneficial interest of SCI.
Security Capital accounts for its investment in SCI by the equity
method.
. Security Capital Pacific Trust (PTR), a publicly held REIT, primarily
owns, develops, acquires and operates income-producing multifamily
properties in the western United States. At June 30, 1997 and December
31, 1996, Security Capital owned 34.51% and 36.28%, 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.
. Security Capital Atlantic Incorporated (ATLANTIC), a publicly held REIT,
owns, acquires, develops and operates income-producing multifamily
properties in the southeastern United States. At June 30, 1997 and
December 31, 1996, Security Capital owned 51.34% and 56.86%,
respectively, of the issued and outstanding common shares of ATLANTIC.
Security Capital consolidates ATLANTIC's accounts in the accompanying
consolidated financial statements.
F-9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
. Security Capital U.S. Realty (SC-USREALTY) is a Luxembourg real estate
corporation formed with the sponsorship of Security Capital with the
objective of becoming one of Europe's preeminent publicly held real
estate entities. It principally owns real estate through strategic
positions in both public and private real estate operating companies in
the United States. During the six months ended June 30, 1997, Security
Capital purchased additional common shares of SC-USREALTY at a total
cost of $74,852,000. At June 30, 1997 and December 31, 1996 Security
Capital owned 31.82% and 39.44%, respectively, of the issued and
outstanding common shares of SC-USREALTY. Security Capital accounts for
its investment in SC-USREALTY by the equity method.
. Homestead Village Incorporated (Homestead), a publicly held corporation,
is a developer, owner and operator of moderate priced, extended stay
lodging properties throughout the United States. During the first six
months of 1997, Security Capital exercised $38,000,000 of warrants and
purchased 2,171,495 Homestead warrants in the open market for
$18,654,000. Unexercised warrants of $10,216,000 (1,557,917 warrants)
are included in other assets in the accompanying June 30, 1997
consolidated balance sheet. At June 30, 1997 and December 31, 1996,
Security Capital owned 65.63% and 59.14%, respectively, of the issued
and outstanding common shares of Homestead. Security Capital
consolidates Homestead's accounts in the accompanying consolidated
financial statements.
. Security Capital Employee REIT Fund Incorporated (SC-ERF) is a real
estate investment fund that invests in securities of publicly traded
real estate companies in the United States. During the six months ended
June 30, 1997, Security Capital invested $90,073,000 in SC-ERF. Shares
of SC-ERF are being offered only to Security Capital, directors,
trustees, employees of Security Capital and its affiliates and members
of their families and approved 401(k) plans of Security Capital and its
affiliates. Security Capital's ownership of SC-ERF's outstanding common
shares as of June 30, 1997 and December 31, 1996 was 98.68% and 100%,
respectively. Security Capital consolidates SC-ERF's accounts in the
accompanying consolidated financial statements.
. Strategic Hotel Capital Incorporated (SHC), a privately held
corporation, was formed in May 1997 and is focused on becoming the
preeminent owner of upscale hotel properties on a global basis. Security
Capital has committed to invest $200,000,000 of capital in SHC. At June
30, 1997, Security Capital had invested $22,642,000, and two hotels had
been purchased by SHC. This investment is included in other assets in
the accompanying June 30, 1997 consolidated balance sheet. Security
Capital owned 49.65% of SHC's common shares as of June 30, 1997.
. Security Capital Preferred Growth Incorporated (SC-PG), a private real
estate company formed in January 1997, will make intermediate-term
investments in undervalued, high-potential real estate operating
companies primarily through convertible securities. Security Capital has
committed to invest $50,000,000 of capital in SC-PG. As of June 30, 1997
Security Capital has invested $5,000,000. This investment is included in
other assets in the accompanying June 30, 1997 consolidated balance
sheet. Security Capital owned 20.79% of SC-PG's common shares as of June
30, 1997. An additional $10,000,000 was invested on July 30, 1997.
Security Capital received dividends from its investees for the six months ended
June 30, 1997 and 1996 as follows (in thousands):
<TABLE>
<CAPTION>
--------------------
1997 1996
--------- ---------
<S> <C> <C>
SCI $23,051 $19,873
PTR 17,804 16,982
ATLANTIC 16,806 16,698
SC-ERF 2,488 --
--------- ---------
$60,149 $53,553
========= =========
</TABLE>
F-10
<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 June 30, 1997 and December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Multifamily properties (ATLANTIC):
Operating properties $ 968,409 $ 952,770
Developments under construction 250,526 194,587
Developments in planning 15,904 7,795
Land held for future development 2,737 2,083
----------- ----------
Subtotal 1,237,576 1,157,235
----------- ----------
Extended-stay lodging properties (Homestead):
Operating properties 197,672 129,035
Developments under construction 170,913 108,691
Developments in planning 27,759 12,256
Land held for future development 1,455 1,448
Land held for sale 4,561 5,590
----------- ----------
Subtotal 402,360 257,020
----------- ----------
Total real estate, at cost 1,639,936 1,414,255
Less accumulated depreciation 63,991 48,882
----------- ----------
Total real estate $1,575,945 $1,365,373
=========== ==========
Presented below is the summary statement of earnings information for SCI for the
six months ended June 30, 1997 and 1996 (in thousands):
<CAPTION>
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Rental and other income $ 148,669 $ 106,081
Expenses:
Rental expenses, net of recoveries 12,825 13,392
Depreciation and amortization 37,024 27,215
Interest 24,558 17,359
General and administrative, including REIT
management fee 14,982 11,426
----------- ----------
89,389 69,392
----------- ----------
Net earnings before minority interest 59,280 36,689
Minority interest share in net earnings 1,835 1,640
----------- ----------
Net earnings 57,445 35,049
Less Preferred Share dividends 17,659 11,368
----------- ----------
Net earnings attributable to common shares $ 39,786 $ 23,681
=========== ==========
Security Capital share of net earnings $ 17,659 $ 11,444
=========== ==========
</TABLE>
F-11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presented below is the summary statement of earnings information for PTR for
the six months ended June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Rental and other income $169,674 $155,429
Expenses:
Rental expenses 60,111 61,752
Depreciation 24,688 21,242
Interest 29,759 13,777
General and administrative, including REIT management
fee 11,775 12,146
--------- ---------
126,333 108,917
--------- ---------
Earnings from operations 43,341 46,512
Gain on sale of investments 37,207 8,083
--------- ---------
Net earnings 80,548 54,595
Less Preferred Share dividends 9,840 12,774
--------- ---------
Net earnings attributable to common shares $ 70,708 $ 41,821
========= =========
Security Capital share of net earnings $ 25,326 $ 15,815
========= =========
Presented below is the summary statement of earnings information for USREALTY
for the six months ended June 30, 1997 and 1996 (in thousands):
<CAPTION>
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Dividends $ 44,651 $ 2,351
Realized gains 13,620 408
Increase in unrealized gains 66,200 30,852
Other income 1,364 1,510
--------- ---------
125,835 35,121
--------- ---------
Expenses:
Interest on line of credit 6,577 60
General and administrative, including advisory fee 13,094 2,425
--------- ---------
19,671 2,485
--------- ---------
Net earnings $106,164 $ 32,636
========= =========
Security Capital share of net earnings $ 35,098 $ 12,479
========= =========
</TABLE>
F-12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INDEBTEDNESS
Lines of Credit:
At June 30, 1997, Security Capital, ATLANTIC and Homestead had revolving bank
lines of credit. Security Capital has a $400,000,000 revolving line of credit
with Wells Fargo Realty Advisors, Incorporated (Wells Fargo) as agent for a
group of lenders. The line of credit was increased from $300,000,000 to
$400,00,000 on July 22, 1997. 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% 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 0.125% to
0.25% per annum based on the average unfunded line of credit balance. Security
Capital's line is secured by its holdings in SCI, PTR, ATLANTIC, SC-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. There were no unfunded
subscriptions as of June 30, 1997.
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. The
outstanding balance on Security Capital's line of credit at June 30, 1997 was
$107,500,000.
On December 18, 1996, ATLANTIC obtained a $350,000,000 unsecured line of credit
from Morgan Guaranty Trust Company of New York (Morgan Guaranty), as agent for
a group of lenders. Borrowings bear interest at prime, or at ATLANTIC's option,
LIBOR plus a margin (1.375% through July 2, 1997 and 1.125% thereafter).
ATLANTIC currently pays a commitment fee on the average unfunded line of credit
balance ranging from 0.125% to 0.25% per annum, depending on the amount of
undrawn commitments. The line of credit matures December 1998 and may be
extended for one year with the approval of Morgan Guaranty and the other
participating lenders. The outstanding balance on ATLANTIC's line of credit at
June 30, 1997 was $278,750,000.
On June 30, 1997, ATLANTIC entered into a $25,000,000 short-term, unsecured
borrowing agreement with Texas Commerce Bank National Association. The loan
matures on June 30, 1998 and bears interest at an overnight rate. There were no
borrowings outstanding under this agreement at June 30, 1997.
On May 6, 1997 Homestead entered into a secured revolving line of credit
facility with Commerzbank AG, New York Branch (Commerzbank), which provides for
borrowings of up to $50,000,000, subject to collateral requirements. Borrowings
bear interest at the Eurodollar rate plus 2.5% per annum. Additionally, there
is a commitment fee of 0.325% per annum on the average unfunded line of credit
balance. The line of credit matures May 1998 and may be extended with the
approval of the lenders. There was no outstanding balance on the line of credit
as of June 30, 1997.
Each line requires maintenance of certain financial covenants. Security
Capital, SC Realty, ATLANTIC and Homestead were in compliance with all such
covenants at June 30, 1997.
F-13
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage Notes Payable:
Mortgage notes payable, which are obligations of ATLANTIC and Homestead,
consisted of the following at June 30, 1997 and December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Mortgage Type
Conventional fixed rate (a) $ 33,932 $ 34,168
Tax exempt fixed and variable rate (a) 121,105 121,622
--------- ---------
155,037 155,790
--------- ---------
Convertible fixed rate (b) 158,557 112,639
Less discount (15,588) (11,330)
--------- ---------
142,969 101,309
--------- ---------
$298,006 $257,099
========= =========
</TABLE>
- --------
(a) Real estate with an aggregate undepreciated cost at June 30, 1997 of
$51,259,000 and $204,518,000 serves as collateral for the conventional mortgage
notes payable and the tax exempt mortgages, respectively.
(b) In connection with the October 1996 Homestead spin-out transaction,
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.
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. None of the mortgage notes were
converted as of June 30, 1997.
Convertible Debt:
Security Capital's convertible subordinated debentures due June 30, 2014 (the
2014 Convertible Debentures) totaling $715,244,000 at June 30, 1997 and
$713,677,000 at December 31, 1996 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 10.535% and 9.939% per annum for 1997 and 1996, respectively.
Security Capital's convertible subordinated debentures due March 29, 2016 (the
2016 Convertible Debentures) totaling $323,024,000 at June 30, 1997 and
$226,520,000 at December 31, 1996 accrue interest at 6.5% per annum and require
semi-annual interest payments on the last business day of June and December.
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.
F-14
<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 the six months ended June 30, 1997 and 1996,
the total interest paid on all outstanding debt was $59,663,000 and
$49,377,000, respectively, including $13,310,000 and $4,585,000, respectively,
which was capitalized. 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 six months ended June 30, 1997 and 1996 was $1,464,000
and $1,328,000, respectively.
(5) SHAREHOLDERS' EQUITY
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 (See note 2 regarding registration statements filed with the
SEC).
Included in general, administrative and other expenses is a $6.6 million non-
cash, nonrecurring charge associated with an exchange of Security Capital
shares for shares of a corporate entity owned by Security Capital's chairman,
whose sole assets were warrants and options to purchase Security Capital
shares. This charge represents the value applicable to the holder's ability to
defer exercising the warrants and options until 2002 in accordance with their
terms.
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
and preferred stock into common shares is not assumed as the effect would be
anti-dilutive.
In February 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS
No. 128). The new statement is effective December 31, 1997. At that time,
Security Capital will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options and warrants will be excluded. The result would be an increase in
earnings per share for the six months ended June 30, 1997 of $.13 per share,
with no material effect on the six months ended June 30, 1996 or the three
months ended June 30, 1997 and 1996.
(6) INCOME TAXES
Security Capital accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes (SFAS No. 109).
Security Capital files a consolidated federal income tax return. Homestead also
accounts for income taxes under SFAS No. 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 provision has been made in Security Capital's consolidated
financial statements for federal income taxes for ATLANTIC's operations.
Security Capital had tax net operating loss carryforwards of approximately
$64,000,000 at June 30, 1997. Approximately $20,000,000 of these loss
carryforwards relate to the REIT and property management companies that are
being sold (see note 2). Security Capital will be unable to use these
carryforwards if the transactions are consummated. 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.
F-15
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Security Capital's deferred tax assets relate primarily to its net operating
loss carryforwards and such deferred tax assets are completely offset by a
valuation allowance. Deferred tax liabilities result from Security Capital's
investments in equity method operating companies.
(7) 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 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.
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 its financial condition or results of operations.
At June 30, 1997, Security Capital had approximately $264,700,000 of unfunded
development commitments for developments under construction. ATLANTIC and
Homestead's commitments were $96,700,000 and $168,000,000, respectively.
(8) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB released Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure. Security Capital
already complies with the requirements of the Statement which is effective for
periods ending after December 15, 1997.
The FASB also released Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), governing the reporting and
display of comprehensive income and its components, and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), requiring that all public businesses report
financial and descriptive information about their reportable operating
segments. Both Statements are applicable to reporting periods beginning after
December 15, 1997. The impact of adopting SFAS No. 130 is not expected to be
material to the consolidated financial statements or notes to consolidated
financial statements. Management is currently evaluating the effect of SFAS No.
131 on consolidated financial statement disclosures.
F-16
<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 schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules 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 $2,315,847,000 (79.1%) and $1,316,951,000
(71.0%) of the total consolidated assets of Security Capital Group Incorporated
and subsidiaries as of December 31, 1996 and 1995, respectively, and
$289,515,000 (72.7%), $128,589,000 (64.1%) and $84,841,000 (54.1%) 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 audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The attached Schedules I
and III are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic consolidated
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, based on our audits and the reports of other auditors,
fairly state 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-17
<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
Other assets 101,312 45,938
---------- ----------
Total assets $2,929,284 $1,855,056
========== ==========
<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 (205,702) (237,769)
---------- ----------
Total shareholders' equity 918,702 528,539
---------- ----------
Total liabilities and shareholders' equity $2,929,284 $1,855,056
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<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 from related
parties 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 58,259 40,534 23,052
Services Division expenses 79,296 56,317 -
Depreciation and amortization 26,598 18,109 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
General, administrative and other 32,617 20,197 6,172
Costs incurred in acquiring Services
Division from related party - 158,444 -
Security Capital Industrial Trust
expenses - - 46,561
Security Capital Pacific Incorporated
expenses - - 15,030
---------- ---------- ---------
313,994 397,405 149,363
---------- ---------- ---------
Earnings (loss) before income taxes and
minority interests 84,128 (196,871) 7,492
Provision for income taxes 30,872 - -
Minority interests in net earnings of
subsidiaries 13,370 4,763 15,177
---------- ---------- ---------
Net earnings (loss) 39,886 (201,634) (7,685)
Less Series A Preferred Stock dividends 7,819 - -
---------- ---------- ---------
Net earnings (loss) attributable to
common shares and common equivalent
shares $ 32,067 $(201,634) $ (7,685)
========== ========== =========
Weighted average common shares
outstanding 1,133,711 896,681 458,945
========== ========== =========
Net earnings (loss) per common share and
common equivalent share $ 28.28 $ (224.87) $ (16.74)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<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 - - - - (201,634) (201,634)
--------- --------- --------- --------- --------- ----------
Balances at December 31, 1995 994,791 $ 9.947 $ - $ 766,298 $(237,769) $ 528,539
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 - - - - 39,886 39,886
Series A preferred stock
dividends - - - - (7,819) (7,819)
--------- --------- --------- --------- --------- ----------
Balances at December 31, 1996 1,209,009 $12.090 $139,000 $ 985,392 $(205,702) $ 918,702
========= ========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<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) $ 39,886 $(201,634) $ (7,685)
Adjustments to reconcile net earnings
(loss) to cash flows provided by
operating activities:
Costs incurred in acquiring Services
Division - 158,444 -
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 26,598 18,109 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-21
<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-22
<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 identifiable assets
acquired, net of cash $ - $ 86,476 $ -
Costs incurred in acquiring Services
Division - 158,444 -
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-23
<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. For purposes of determining the value
of GROUP's Services Division companies acquired by REALTY on January 1, 1995,
Security Capital calculated for the six month period ending December 31, 1994
and for each of the years ending December 31, 1997, 1996 and 1995, the
projected management fees, net of operating overhead, which Security Capital
would have received under existing management agreements for assets currently
owned or forecasted to be owned by the operating companies during this time
period. Security Capital then multiplied the 1997 net operating income derived
from such fees by a multiple of 9.0x and discounted this value along with the
net operating income derived from such fees between 1994 and 1996 back to July
1, 1994 using an annual discount rate of 17.5%. 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 Services Division companies do not qualify as "businesses" for purposes of
applying APB Opinion No. 16, "Business Combinations". Accordingly, the excess
of the aggregate value of the securities issued ($233,708,000) over the fair
value of the net tangible assets acquired ($75,264,000) has been recorded as
"Costs incurred in acquiring Services Division from related party"
($158,444,000) in the accompanying 1995 Consolidated Statement of Operations.
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.
F-24
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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 $11,448,000, $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
F-25
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 ("SC-
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 SC-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.
F-26
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
Services Division expenses in the accompanying Consolidated Statements of
Operations represent direct operating expenses consisting primarily of payroll,
occupancy and related costs.
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
F-27
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
. SC-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 SC-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 SC-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 SC-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 SC-USREALTY). In addition to the
subscriptions, on July 1, 1996, Security Capital purchased 9,132,420
shares of SC-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 SC-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 SC-USREALTY. Security Capital accounts for its
investment in SC-USREALTY by the equity method.
. On October 17, 1996, Security Capital, ATLANTIC and PTR completed the
spin-off 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
F-28
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-29
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-30
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-31
<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, SC-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.
Dividends, redemptions, repurchases of stock, or other payments or transfers in
respect of such stock are limited to 95% of Security Capital's cash flow
available for distribution if no event of default has occurred and is
continuing. During default, no such payments other than mandatory interest on
subordinated debentures may be made. Additionally, dividends, redemptions,
repurchases of stock, or other payments or transfers in respect of such stock
are limited to 100% of SC Realty's cash flow available for distribution if no
event of default has occurred and is continuing. During default, no such
payments may be made.
On December 18, 1996, ATLANTIC obtained a $350,000,000 unsecured line of credit
from Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), 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 Morgan Guaranty and the other participating
lenders.
F-32
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Morgan Guaranty took
effect. The Morgan Guaranty 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% depending on the
rating 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>
F-33
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(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.
F-34
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-35
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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). In the event that the holder of the
Series A Preferred Shares 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 common shares, then the conversion rights of
the shares of Series A Preferred Shares by such holder shall be modified as
follows: (i) the number of shares of Series A Preferred Shares held by such
holder which may then be converted by such holder without resulting in such
holder owning 5% or more of the common shares outstanding after such conversion
shall be convertible into common shares; and (ii) any shares of Series A
Preferred Shares 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
common 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
common 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 common shares as described above. 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.
F-36
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-37
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-38
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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) $29,445 $(68,904)
ATLANTIC minority interest (4,840) (1,667)
Change in valuation allowance (2,674) 15,315
Net deferred tax assets in consolidated
subsidiaries 10,824 -
Costs incurred in acquiring Services Division - 55,455
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.
F-39
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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 discussions
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.
F-40
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and the effect of the investees' accounting for
these acquisitions, Security Capital expects the gain on sale of the management
companies to SCI and PTR will be approximately $55,000,000. 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 (and, to the extent a
shareholder oversubscribes for common shares pursuant to the oversubscription
privilege, increase) 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-41
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (UNCONSOLIDATED)
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Investments in and advances to subsidiaries $1,882,028 $1,261,540
Cash and cash equivalents 7,876 535
Other assets 18,464 11,347
---------- ----------
Total assets $1,908,368 $1,273,422
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Convertible debt $ 940,197 $ 718,611
Accrued interest on convertible debt 42,450 24,523
Accounts payable and accrued expenses 7,019 1,749
---------- ----------
Total liabilities 989,666 744,883
---------- ----------
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 (205,702) (237,769)
---------- ----------
Total shareholders' equity 918,702 528,539
---------- ----------
Total liabilities and shareholders' equity $1,908,368 $1,273,422
========== ==========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-42
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (UNCONSOLIDATED)
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INCOME:
Equity in earnings of subsidiaries $130,445 $ 36,074 $ 34,554
Interest and other income 7,384 3,631 1,421
--------- --------- ---------
137,829 39,705 35,975
--------- --------- ---------
EXPENSES:
Interest expense--convertible debt 93,912 78,785 29,647
Interest expense--line of credit - 1,374 5,617
Loss on exchange of convertible notes for
stock and debentures - - 5,650
General, administrative and other 4,031 2,736 2,746
Costs incurred in acquiring Services
Division from related party - 158,444 -
Provision for income taxes - - -
--------- --------- ---------
97,943 241,339 43,660
--------- --------- ---------
Net earnings (loss) 39,886 (201,634) (7,685)
Less Series A Preferred Stock dividends 7,819 - -
--------- --------- ---------
Net earnings (loss) attributable to common
shares $ 32,067 $(201,634) $ (7,685)
========= ========= =========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-43
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (UNCONSOLIDATED)
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 39,886 $ (201,634) $ (7,685)
Adjustments to reconcile net earnings
(loss) to cash flows provided by
operating activities:
Equity in earnings of subsidiaries (130,445) (36,074) (34,554)
Distributions from subsidiaries 51,964 47,500 48,205
Costs incurred in acquiring Services
Division - 158,444 -
Increase in other assets (6,765) (3,388) (3,456)
Increase in accrued interest on
convertible debt 17,927 18,195 6,807
Increase (decrease) in accounts payable
and accrued expenses 5,269 (5,010) 6,124
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Net cash flows provided by (used in)
operating activities (22,164) (21,967) 15,441
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Investments in and advances to
subsidiaries (542,008) (245,244) (711,324)
Other (350) 5,166 8,000
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Net cash flows used in investing
activities (542,358) (240,078) (703,324)
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
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 line of credit - - 790,800
Payments on line of credit - (141,425) (662,275)
Proceeds from sale of preferred stock 139,000 - -
Distributions paid to shareholders - - (11,652)
Repurchase of common shares (11,483) (375) -
Retirement of convertible debt (7,840) (194) -
Preferred dividends paid (7,819) - -
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Net cash flows provided by financing
activities 571,863 261,782 667,661
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents 7,341 (263) (20,222)
Cash and cash equivalents, beginning of
year 535 798 21,020
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents, end of year $ 7,876 $ 535 $ 798
<CAPTION>
========= ========= =========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-44
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (UNCONSOLIDATED)
(IN THOUSANDS)
----------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Distribution of convertible subordinated
debentures $ - $ - $ 417,185
========= ========= =========
Purchase of GROUP on January 1, 1995:
Fair value of identifiable assets
acquired, net of cash $ - $ 86,476 $ -
Costs incurred in acquiring Services
Division - 158,444 -
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) -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Formation of SC Realty Incorporated:
Deferred loan fees assumed by SC Realty $ - $ 3,446 $ -
========= ========= =========
Line of credit assumed by SC Realty $ - $ (17,100) $ -
========= ========= =========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-45
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNCONSOLIDATED)
1. INVESTMENTS IN SUBSIDIARIES
Security Capital has investments in SC Realty Incorporated ("SC Realty") and a
Services Division. SC Realty and the entities that comprise the Services
Division are wholly-owned subsidiaries of Security Capital.
SC Realty commenced operations February 17, 1995 when Security Capital
contributed its investments in Security Capital Industrial Trust, Security
Capital Pacific Trust, Security Capital Pacific Incorporated and Security
Capital Atlantic Incorporated. At December 31, 1996, SC Realty holds interests
in the above-mentioned companies as well as Security Capital U.S. Realty and
Homestead Village Incorporated. The Services Division subsidiaries provide
management and property management services to the companies in which SC Realty
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 accounting
services. As described in note 1 to Security Capital's consolidated financial
statements, the Services Division companies were acquired January 1, 1995.
Dividends from consolidated subsidiaries amounted to $51,964,000, $47,500,000
and $35,036,000, during 1996, 1995 and 1994 respectively. In addition, during
1994 Security Capital received dividends from an unconsolidated subsidiary
amounting to $13,169,000.
Effective February 17, 1995, SC Realty became the primary obligor under
Security Capital's revolving bank line of credit. The line is guaranteed by
Security Capital and it contains financial covenants that are applicable to
both SC Realty and Security Capital. The line of credit agreement generally
requires some or all of the following: minimum net worth, liabilities to net
worth, specified interest coverage ratios and limitations on the amount
available for dividends. At December 31, 1996, SC Realty's net assets were
approximately $1.9 billion substantially all of which were restricted and
unavailable for dividends.
The SC Realty line of credit agreement provides for loans of up to $50,000,000
to Security Capital. Any unpaid principal amounts are due thirty days after
written notice from SC Realty. Interest on unpaid principal amounts is payable
monthly at the rate per annum equal to the average interest rate paid by SC
Realty under the terms of the credit agreement. If SC Realty had no borrowings
outstanding under the credit agreement, then interest would be computed using
the "base rate" (defined as the higher of the Wells Fargo prime rate or the
Federal Funds Rate plus .50%). At December 31, 1996 and 1995, Security
Capital's loans payable to SC Realty amounted to $0 and $16,408,000,
respectively. Interest expense on these loans during 1996 and 1995 was
approximately $369,000 and $293,000, respectively, and is included in general,
administrative and other expenses in the accompanying condensed Statements of
Operations.
2. INCOME TAXES
Security Capital files a consolidated Federal income tax return which includes
SC Realty and the Services Division companies. At December 31, 1996 Security
Capital's consolidated net operating loss ("NOL") carryforwards amounted to
approximately $61,000,000. The deferred tax asset applicable to this NOL
carryforward is entirely offset by a valuation allowance. In 1996, a deferred
tax liability was recorded by SC Realty applicable to its equity method
investments. Accordingly, Security Capital's equity in earnings of SC Realty
for 1996 has been reduced by deferred income tax expense of $30,872,000.
F-46
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
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 ACQUISITION LAND IMPROVEMENTS (C) DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- -------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $ 15,500 $ 3,717 $ 21,076 $ 975 $ 3,717 $ 22,051 $ 25,768 $ 715
Balmoral
Village......... - 2,871 16,270 74 2,871 16,344 19,215 73
Cameron
Ashford......... - 3,672 20,841 399 3,672 21,240 24,912 1,551
Cameron
Briarcliff...... (b) 2,105 11,953 191 2,105 12,144 14,249 897
Cameron Brook... 19,500 3,318 18,784 326 3,318 19,110 22,428 1,279
Cameron Creek
I............... - 3,627 20,589 328 3,627 20,917 24,544 1,473
Cameron Crest... - 3,525 20,009 290 3,525 20,299 23,824 1,426
Cameron
Dunwoody........ - 2,486 14,114 252 2,486 14,366 16,852 1,050
Cameron Forest.. - 884 5,008 352 884 5,360 6,244 145
Cameron Place... - 1,124 6,372 579 1,124 6,951 8,075 185
Cameron Pointe.. - 2,172 12,306 413 2,172 12,719 14,891 192
Cameron
Station......... 14,500 2,338 13,246 496 2,338 13,742 16,080 354
Clairmont
Crest........... 11,600 1,603 9,102 315 1,603 9,417 11,020 626
The Greens...... 10,400 2,004 11,354 382 2,004 11,736 13,740 794
Lake Ridge...... - 2,001 11,359 4,012 2,001 15,371 17,372 1,200
Morgan's
Landing......... - 1,168 6,646 857 1,168 7,503 8,671 608
Old Salem....... - 1,053 6,144 919 1,053 7,063 8,116 485
Trolley Square.. - 2,031 11,528 347 2,031 11,875 13,906 911
Vinings
Landing......... - 1,363 7,902 714 1,363 8,616 9,979 613
WintersCreek.... 5,000 1,133 6,434 220 1,133 6,654 7,787 233
Woodlands....... - 3,785 21,471 485 3,785 21,956 25,741 761
Birmingham,
Alabama:
Cameron on the
Cahaba I........ - 1,020 5,784 352 1,020 6,136 7,156 281
Cameron on the
Cahaba II....... 8,021 1,688 9,580 501 1,688 10,081 11,769 463
Colony Woods I.. - 1,560 8,845 281 1,560 9,126 10,686 676
Morning Sun
Villas.......... - 1,260 7,309 732 1,260 8,041 9,301 554
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 5,979 1,203 6,808 381 1,203 7,189 8,392 137
Cameron Oaks.... - 2,255 12,800 306 2,255 13,106 15,361 974
<CAPTION>
------------ --------
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... 1987 1995
Balmoral
Village......... 1990 1996
Cameron
Ashford......... 1990 1994
Cameron
Briarcliff...... 1989 1994
Cameron Brook... 1988 1994
Cameron Creek
I............... 1988 1994
Cameron Crest... 1988 1994
Cameron
Dunwoody........ 1989 1994
Cameron Forest.. 1981 1995
Cameron Place... 1979 1995
Cameron Pointe.. 1987 1996
Cameron
Station......... (c) 1995
Clairmont
Crest........... 1987 1994
The Greens...... 1986 1994
Lake Ridge...... 1979 1993
Morgan's
Landing......... 1983 1993
Old Salem....... 1968 1994
Trolley Square.. 1989 1994
Vinings
Landing......... 1978 1994
WintersCreek.... 1984 1995
Woodlands....... (d) 1995
Birmingham,
Alabama:
Cameron on the
Cahaba I........ 1987 1995
Cameron on the
Cahaba II....... 1990 1995
Colony Woods I.. 1991 1994
Morning Sun
Villas.......... 1985 1994
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 1988 1996
Cameron Oaks.... 1989 1994
</TABLE>
F-47
<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
MULTIFAMILY COMMUNITIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (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
MULTIFAMILY COMMUNITIES 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-48
<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 COMMUNITIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C) DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... $ - $ 2,878 $ 16,339 $ 293 $ 2,878 $ 16,632 $ 19,510 $ 1,240
Potomac Hunt.... (b) 1,486 8,452 181 1,486 8,633 10,119 464
Sarasota,
Florida:
Camden at Palmer
Ranch........... - 3,534 20,057 607 3,534 20,664 24,198 1,469
Tampa, Florida:
Camden Downs.... - 1,840 10,447 305 1,840 10,752 12,592 780
Cameron
Bayshore........ - 1,607 9,105 - 1,607 9,105 10,712 -
Cameron Lakes... - 1,126 6,418 1,107 1,126 7,525 8,651 365
Country Place
Village I....... 2,004 567 3,219 140 567 3,359 3,926 125
Country Place
Village II...... - 644 3,658 94 644 3,752 4,396 141
Foxbridge on the
Bay............. 10,400 1,591 9,036 328 1,591 9,364 10,955 652
Summer Chase.... (b) 542 3,094 136 542 3,230 3,772 219
Washington, D.C.:
Camden at
Kendall Ridge... - 1,708 9,698 295 1,708 9,993 11,701 755
Cameron at
Saybrooke....... - 2,802 15,906 258 2,802 16,164 18,966 1,190
Sheffield
Forest.......... - 2,269 12,859 418 2,269 13,277 15,546 374
West Springfield
Terrace......... - 2,417 13,695 98 2,417 13,793 16,210 92
Less amounts
held in
principal
reserve
fund(g)......... (1,098) - - - - - - -
-------- -------- -------- -------- ---------- ---------- ---------- -------
Total Operating
Communities
Acquired........ $155,790 $124,701 $726,004 $ 27,324 $ 124,701 $ 753,328 $ 878,029 $38,948
-------- -------- -------- -------- ---------- ---------- ---------- -------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ - $ 1,254 $ - $ 9,261 $ 1,551 $ 8,964 $ 10,515 $ 365
Charlotte, North
Carolina:
Waterford
Hills........... - 1,508 - 11,109 1,943 10,674 12,617 476
Waterford Square
I............... - 1,890 - 17,763 2,053 17,600 19,653 436
Jacksonville,
Florida:
Cameron Lakes
I............... - 1,759 - 14,358 1,959 14,158 16,117 216
Raleigh, North
Carolina:
Waterford
Point........... - 985 - 14,854 1,493 14,346 15,839 519
-------- -------- -------- -------- ---------- ---------- ---------- -------
Total Operating
Communities
Developed....... $ - $ 7,396 $ - $ 67,345 $ 8,999 $ 65,742 $ 74,741 $ 2,012
-------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL OPERATING
COMMUNITIES..... $155,790 $132,097 $726,004 $ 94,669 $ 133,700 $ 819,070 $ 952,770 $40,960
-------- -------- -------- -------- ---------- ---------- ---------- -------
<CAPTION>
------------ --------
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIES YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... 1989 1994
Potomac Hunt.... 1987 1994
Sarasota,
Florida:
Camden at Palmer
Ranch........... 1988 1994
Tampa, Florida:
Camden Downs.... 1988 1994
Cameron
Bayshore........ 1984 1996
Cameron Lakes... 1986 1995
Country Place
Village I....... 1982 1995
Country Place
Village II...... 1983 1995
Foxbridge on the
Bay............. 1986 1994
Summer Chase.... 1988 1994
Washington, D.C.:
Camden at
Kendall Ridge... 1990 1994
Cameron at
Saybrooke....... 1990 1994
Sheffield
Forest.......... 1987 1995
West Springfield
Terrace......... 1978 1996
Less amounts
held in
principal
reserve
fund(g).........
Total Operating
Communities
Acquired........
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. 1995 1994
Charlotte, North
Carolina:
Waterford
Hills........... 1995 1993
Waterford Square
I............... 1996 1994
Jacksonville,
Florida:
Cameron Lakes
I............... 1996 1995
Raleigh, North
Carolina:
Waterford
Point........... 1996 1994
Total Operating
Communities
Developed.......
TOTAL OPERATING
COMMUNITIES.....
</TABLE>
F-49
<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 COMMUNITIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C) DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. $ - $ 2,730 $ - $ 16,602 $ 2,897 $ 16,435 $ 19,332 $ 39
Birmingham,
Alabama:
Cameron at the
Summit I........ - 2,774 - 5,709 2,778 5,705 8,483 -
Charlotte, North
Carolina:
Waterford Square
II.............. - 2,014 - 4,578 2,065 4,527 6,592 -
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. - 1,328 - 6,742 1,367 6,703 8,070 -
Jacksonville,
Florida:
Cameron
Deerwood........ - 2,331 - 12,173 2,332 12,172 14,504 -
Cameron Lakes
II.............. - 1,340 - 1,529 1,340 1,529 2,869 -
Cameron
Timberlin Parc
I............... - 2,167 - 13,280 2,282 13,165 15,447 16
Nashville,
Tennessee:
Cameron
Overlook........ - 2,659 - 4,679 2,659 4,679 7,338 -
Raleigh, North
Carolina:
Cameron Brooke.. - 1,353 - 8,717 1,382 8,688 10,070 -
Waterford
Forest.......... - 2,371 - 17,978 2,480 17,869 20,349 52
Richmond,
Virginia:
Cameron at
Wyndham......... - 2,038 - 2,366 2,052 2,352 4,404 -
Cameron Crossing
I & II.......... - 2,752 - 8,450 2,768 8,434 11,202 -
Washington, D.C.:
Cameron at
Milestone....... - 5,477 - 24,867 5,607 24,737 30,344 43
Woodway at
Trinity Center.. - 5,342 - 30,241 5,584 29,999 35,583 56
-------- -------- -------- -------- ---------- ---------- ---------- --------
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ - $ 36,676 $ - $157,911 $ 37,593 $ 156,994 $ 194,587 $ 206
-------- -------- -------- -------- ---------- ---------- ---------- --------
<CAPTION>
------------ ---------
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIES YEAR ACQUIRED
- ----------------------- ------------ ---------
<S> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. -(h) 1994
Birmingham,
Alabama:
Cameron at the
Summit I........ - 1996
Charlotte, North
Carolina:
Waterford Square
II.............. - 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. - 1994
Jacksonville,
Florida:
Cameron
Deerwood........ -(h) 1996
Cameron Lakes
II.............. - 1996
Cameron
Timberlin Parc
I............... -(h) 1995
Nashville,
Tennessee:
Cameron
Overlook........ - 1996
Raleigh, North
Carolina:
Cameron Brooke.. - 1995
Waterford
Forest.......... -(h) 1995
Richmond,
Virginia:
Cameron at
Wyndham......... - 1993
Cameron Crossing
I & II.......... - 1995(i)
Washington, D.C.:
Cameron at
Milestone....... -(h) 1995
Woodway at
Trinity Center.. -(h) 1994
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION....
</TABLE>
F-50
<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 --------------------------------------
CAPITALIZED
MULTIFAMILY ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS
COMMUNITIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C)
------------- ------- ------- ------------- ------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ - $ 1,508 $ - $ 512 $ 1,508 $ 512 $ 2,020
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ - 4,025 - 361 4,029 357 4,386
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. - 1,294 - 95 1,294 95 1,389
-------- -------- -------- -------- -------- -------- ----------
TOTAL
COMMUNITIES IN
PLANNING........ $ - $ 6,827 $ - $ 968 $ 6,831 $ 964 $ 7,795
-------- -------- -------- -------- -------- -------- ----------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... - 2,008 - 75 2,083 - 2,083
-------- -------- -------- -------- -------- -------- ----------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ - $ 2,008 $ - $ 75 $ 2,083 $ - $ 2,083
-------- -------- -------- -------- -------- -------- ----------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $155,790 $177,608 $726,004 $253,623 $180,207 $977,028 $1,157,235
-------- -------- -------- -------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
MULTIFAMILY ACCUMULATED CONSTRUCTION YEAR
COMMUNITIES DEPRECIATION YEAR ACQUIRED
------------- ------------ ------------ --------
<S> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ - - 1996
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ - - 1996
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. - - 1995
-------
TOTAL
COMMUNITIES IN
PLANNING........ $ -
-------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... - - 1996
-------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ -
-------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $41,166
-------
</TABLE>
F-51
<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 ACCUMULATED
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C) DEPRECIATION
------------- ------- ------- ------------- ------------- ---------- -------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (l) $ 770 $ - $ 1,489 $ 776 $ 1,483 $ 2,259 (j)
Osuna/North I-
25.............. (l) 832 - 4,598 840 4,590 5,430 157
Atlanta, Georgia:
Cumberland...... (m) 1,321 524 2,419 1,321 2,943 4,264 (j)
Gwinnett Place.. (m) 743 - 241 790 194 984 (j)
North Druid
Hills........... (m) 1,814 144 1,064 1,814 1,208 3,022 (j)
Peachtree....... (m) 1,091 5,085 87 1,095 5,168 6,263 45
Perimeter....... (m) 2,356 982 2,100 2,381 3,057 5,438 (j)
Roswell......... (m) 1,923 110 829 1,923 939 2,862 (j)
Austin, Texas:
Burnet Road..... (l) 525 - 3,616 723 3,418 4,141 243
Midtown......... (l) 600 - 4,085 643 4,042 4,685 109
Pavillion....... (l) 633 - 4,459 633 4,459 5,092 -
Round Rock...... (l) 483 - 351 506 328 834 (j)
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... - 1,500 - 366 1,524 342 1,866 (j)
Dallas, Texas:
Coit Road/North
Central......... (l) 425 - 3,051 496 2,980 3,476 463
Ft.
Worth/Downtown
Freeway......... (l) 350 - 2,653 384 2,619 3,003 82
Las
Colinas/Irving.. (l) 800 - 3,900 805 3,895 4,700 126
North
Arlington/Six
Flags Hills..... (l) 340 - 3,487 407 3,420 3,827 296
North Richland
Hills Road...... (l) 470 - 3,113 544 3,039 3,583 464
South Arlington. (l) 550 - 3,371 642 3,279 3,921 302
Skillman/Northwest. (l) 400 - 2,765 400 2,765 3,165 373
Stemmons/NW
Highway Worth... (l) 356 - 4,275 424 4,207 4,631 441
Tollway/Addison
Colinas......... (l) 275 - 2,529 353 2,451 2,804 468
Denver, Colorado:
Cherry Creek.... (l) 1,070 - 1,677 1,078 1,669 2,747 (j)
Bellview/Denver
Tech Center..... (l) 876 - 5,318 942 5,252 6,194 120
Iliff/Aurora.... (l) 615 - 4,543 624 4,534 5,158 125
Inverness....... (l) 1,041 - 2,110 1,064 2,087 3,151 (j)
Houston, Texas:
Astrodome/Medical
Center.......... (l) 1,530 - 3,902 1,669 3,763 5,432 236
Bammel/Cypress
Station......... (l) 516 - 3,112 595 3,033 3,628 303
Fuqua/Hobby
Airport......... (l) 416 - 3,034 491 2,959 3,450 412
Park Ten........ (l) 791 - 3,212 860 3,143 4,003 320
Stafford/Sugarland. (l) 575 - 3,127 665 3,037 3,702 332
West by
Northwest/Hwy
290............. (l) 519 - 2,997 568 2,948 3,516 434
Westheimer/Beltway. (l) 796 - 3,296 897 3,195 4,092 383
Willowbrook/Northwest. (l) 575 - 3,437 669 3,343 4,012 250
Jacksonville,
Florida:
JTB............. (m) 1,137 379 976 1,206 1,286 2,492 (j)
<CAPTION>
------------ --------
EXTENDED-STAY
LODGING CONSTRUCTION YEAR
PROPERTIES YEAR ACQUIRED
------------- ------------ --------
<S> <C> <C>
Albuquerque, New
Mexico:
I-40............ (j) 1996
Osuna/North I-
25.............. 1996 1995
Atlanta, Georgia:
Cumberland...... (j) 1996
Gwinnett Place.. (j) 1996
North Druid
Hills........... (j) 1996
Peachtree....... 1996 1996
Perimeter....... (j) 1996
Roswell......... (j) 1996
Austin, Texas:
Burnet Road..... 1995 1994
Midtown......... 1996 1995
Pavillion....... 1996 1995
Round Rock...... (j) 1995
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... (j) 1996
Dallas, Texas:
Coit Road/North
Central......... 1994 1993
Ft.
Worth/Downtown
Freeway......... 1996 1994
Las
Colinas/Irving.. 1996 1994
North
Arlington/Six
Flags Hills..... 1995 1993
North Richland
Hills Road...... 1994 1993
South Arlington. 1995 1994
Skillman/Northwest. 1993 1992
Stemmons/NW
Highway Worth... 1995 1992
Tollway/Addison
Colinas......... 1993 1993
Denver, Colorado:
Cherry Creek.... (j) 1996
Bellview/Denver
Tech Center..... 1996 1994
Iliff/Aurora.... 1996 1994
Inverness....... (j) 1996
Houston, Texas:
Astrodome/Medical
Center.......... 1995 1994
Bammel/Cypress
Station......... 1994 1993
Fuqua/Hobby
Airport......... 1994 1993
Park Ten........ 1994 1993
Stafford/Sugarland. 1994 1993
West by
Northwest/Hwy
290............. 1994 1993
Westheimer/Beltway. 1994 1993
Willowbrook/Northwest. 1995 1994
Jacksonville,
Florida:
JTB............. (j) 1996
</TABLE>
F-52
<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
PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL DEPRECIATION YEAR
------------- ------ ------- ------------- ------------- ------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City,
Missouri:
Merriam......... (l) $ 871 $ - $ 3,136 $ 905 $ 3,102 $ 4,007 (j) (j)
Plaza........... - 1,090 - 208 1,158 140 1,298 (j) (j)
Los Angeles,
California:
Brea............ - 1,518 - 173 1,529 162 1,691 (j) (j)
El Segundo...... (l) 2,233 - 425 2,255 403 2,658 (j) (j)
Miami/Ft.
Lauderdale,
Florida:
Coral Springs-
Northpoint...... - 1,030 - 139 1,059 110 1,169 (j) (j)
Fort Lauderdale. (m) 1,328 633 926 1,384 1,503 2,887 (j) (j)
Miami Airport... (m) 2,238 679 997 2,326 1,588 3,914 (j) (j)
Plantation...... (m) 1,562 358 118 1,636 402 2,038 (j) (j)
Nashville,
Tennessee:
Cool Springs.... (m) 1,106 - 355 1,182 279 1,461 (j) (j)
Nashville
Airport......... (m) 1,292 338 954 1,324 1,260 2,584 (j) (j)
Orange County,
California:
Spectrum........ (l) 2,115 - 508 2,128 495 2,623 (j) (j)
Phoenix, Arizona:
Dunlap/North
West Valley..... (l) 915 - 4,418 935 4,398 5,333 77 1996
Mesa............ (l) 1,470 - 161 1,529 102 1,631 (j) (j)
Tempe........... (l) 808 - 4,613 830 4,591 5,421 107 1996
Scottsdale...... (l) 883 - 3,454 971 3,366 4,337 218 1995
Union Hills..... (l) 810 - 3,963 821 3,952 4,773 - 1996
Portland, Oregon:
Lake Oswego..... (l) 1,960 - 168 2,010 118 2,128 (j) (j)
Sunset East..... (l) 1,289 - 250 1,308 231 1,539 (j) (j)
Raleigh/Durham,
North Carolina:
Hwy 70.......... (m) 901 - 238 936 203 1,139 (j) (j)
North Raleigh... (m) 1,163 301 935 1,197 1,202 2,399 (j) (j)
RTP............. (m) 984 230 1,598 993 1,819 2,812 (j) (j)
Richmond,
Virginia:
Upper Broad..... (m) 1,358 - 482 1,444 396 1,840 (j) (j)
Salt Lake City,
Utah:
Ft. Union....... (l) 1,285 - 440 1,288 437 1,725 (j) (j)
Redwood......... (l) 844 - 2,002 912 1,934 2,846 (j) (j)
San Antonio,
Texas:
Bitters......... (l) 1,000 - 3,836 1,198 3,638 4,836 254 1995
DeZavala/Six
Flags Fiesta.... (l) 844 - 3,731 983 3,592 4,575 258 1995
Fredricksburg/Medical
Center.......... (l) 800 - 3,356 892 3,264 4,156 319 1994
San Diego,
California:
Mission Valley.. (l) 1,603 - 418 1,618 403 2,021 (j) (j)
San Francisco
(Bay Area),
California:
Milpitas........ (l) 1,136 - 3,413 1,143 3,406 4,549 (j) (j)
Mountain View... (l) 1,805 - 675 1,849 631 2,480 (j) (j)
San Jose........ (l) 1,770 - 434 1,776 428 2,204 (j) (j)
San Mateo....... (l) 1,510 - 4,233 1,517 4,226 5,743 (j) (j)
<CAPTION>
--------
EXTENDED-STAY
LODGING YEAR
PROPERTIES ACQUIRED
------------- --------
<S> <C>
Kansas City,
Missouri:
Merriam......... 1996
Plaza........... 1996
Los Angeles,
California:
Brea............ 1996
El Segundo...... 1996
Miami/Ft.
Lauderdale,
Florida:
Coral Springs-
Northpoint...... 1996
Fort Lauderdale. 1996
Miami Airport... 1996
Plantation...... 1996
Nashville,
Tennessee:
Cool Springs.... 1996
Nashville
Airport......... 1996
Orange County,
California:
Spectrum........ 1996
Phoenix, Arizona:
Dunlap/North
West Valley..... 1995
Mesa............ 1996
Tempe........... 1995
Scottsdale...... 1994
Union Hills..... 1996
Portland, Oregon:
Lake Oswego..... 1996
Sunset East..... 1996
Raleigh/Durham,
North Carolina:
Hwy 70.......... 1996
North Raleigh... 1996
RTP............. 1996
Richmond,
Virginia:
Upper Broad..... 1996
Salt Lake City,
Utah:
Ft. Union....... 1996
Redwood......... 1996
San Antonio,
Texas:
Bitters......... 1994
DeZavala/Six
Flags Fiesta.... 1994
Fredricksburg/Medical
Center.......... 1993
San Diego,
California:
Mission Valley.. 1996
San Francisco
(Bay Area),
California:
Milpitas........ 1996
Mountain View... 1996
San Jose........ 1996
San Mateo....... 1995
</TABLE>
F-53
<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 ----------------------------------
EXTENDED-STAY ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND ACCUMULATED CONSTRUCTION
LODGING PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL DEPRECIATION YEAR
- ------------------ -------- -------- ------------- ------------- -------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
San Ramon....... (l) $ 1,327 $ - $ 402 $ 1,341 $ 388 $ 1,729 (j) (j)
Santa Clara..... - 1,423 - 25 1,428 20 1,448 - (n)
Sunnyvale....... (l) 1,274 - 4,309 1,278 4,305 5,583 (j) (j)
Seattle,
Washington:
Bellevue........ (l) 2,050 - 1,119 2,067 1,102 3,169 (j) (j)
Mountain Lake
Terrace/N.
Seattle......... (l) 1,530 - 494 1,589 435 2,024 (j) (j)
Redmond......... (l) 2,265 - 565 2,527 303 2,830 (j) (j)
Tukwila......... (l) 900 - 465 937 428 1,365 (j) (j)
Tampa Area,
Florida:
Brandon......... (m) 923 762 584 971 1,298 2,269 (j) (j)
North Airport... (m) 615 1,142 1,883 635 3,005 3,640 (j) (j)
St. Petersburg.. (m) 766 155 264 766 419 1,185 (j) (j)
Washington, D.C.:
BWI............. (m) 940 - 486 1,062 364 1,426 (j) (j)
Dulles-South.... (m) 690 - 237 722 205 927 (j) (j)
Fair Oaks....... (m) 1,152 196 372 1,157 563 1,720 (j) (j)
Merrifield...... (m) 1,500 - 276 1,511 265 1,776 (j) (j)
Miscellaneous.... (k) 5,429 - 161 5,589 1 5,590 - -
Less: Fair Value
in excess of
cost--Properties
acquired from
ATLANTIC......... (3,681) (2,623) - (3,681) (2,623) (6,304) -
-------- -------- -------- -------- ---------- ---------- -------
Total Extended-
Stay Lodging
Properties, held
by Homestead.... $ 89,638 $ 9,395 $157,988 $ 93,687 $ 163,334 $ 257,021 $ 7,717
-------- -------- -------- -------- -------- ---------- ---------- -------
Grand Total
Security
Capital......... $155,790 $267,246 $735,399 $411,611 $273,894 $1,140,362 $1,414,256 $48,883
======== ======== ======== ======== ======== ========== ========== =======
<CAPTION>
-----------
EXTENDED-STAY YEAR
LODGING PROPERTIES ACQUIRED
- ------------------ -----------
<S> <C>
San Ramon....... 1996
Santa Clara..... 1996
Sunnyvale....... 1995
Seattle,
Washington:
Bellevue........ 1996
Mountain Lake
Terrace/N.
Seattle......... 1996
Redmond......... 1996
Tukwila......... 1996
Tampa Area,
Florida:
Brandon......... 1996
North Airport... 1996
St. Petersburg.. 1996
Washington, D.C.:
BWI............. 1996
Dulles-South.... 1996
Fair Oaks....... 1996
Merrifield...... 1996
Miscellaneous.... 1995/1996
Less: Fair Value
in excess of
cost--Properties
acquired from
ATLANTIC.........
Total Extended-
Stay Lodging
Properties, held
by Homestead....
Grand Total
Security
Capital.........
</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-54
<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 $631,240
========== ========= =========
<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-55
<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-56
<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-57
<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-58
<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-59
<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.
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.
F-60
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1,816,842
-----------
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
===========
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.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994:
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>
F-61
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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:
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-62
<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 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.
F-63
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-64
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have reviewed the accompanying condensed balance sheet of SECURITY CAPITAL
PACIFIC TRUST as of June 30, 1997, the related condensed statements of earnings
for the three and six-month periods ended June 30, 1997 and 1996, the statement
of shareholders' equity for the six-month period ended June 30, 1997, and the
statements of cash flows for the six-month periods ended June 30, 1997 and
1996. These condensed financial statements are the responsibility of the
Trust's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of SECURITY CAPITAL PACIFIC TRUST as of December
31, 1996, and the related statements of earnings, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 29, 1997, except as to Note 13, which is as of March 10, 1997, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying condensed balance sheet as of
December 31, 1996 is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Chicago, Illinois
August 13, 1997
F-65
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
-------------------------
JUNE 30,
1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996
------ ----------- ------------
<S> <C> <C>
Real estate $2,391,165 $2,153,363
Less accumulated depreciation 104,330 97,574
---------- ----------
2,286,835 2,055,789
Homestead Notes 246,453 176,304
Other mortgage notes receivable 12,861 13,525
---------- ----------
Net investments 2,546,149 2,245,618
Cash and cash equivalents 5,570 5,601
Accounts receivable and accrued interest 5,382 4,157
Restricted cash in tax-deferred exchange escrow 19,707 42
Other assets 29,008 27,014
---------- ----------
Total assets $2,605,816 $2,282,432
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Credit facilities $ 203,015 $ 110,200
Long-Term Debt 630,000 580,000
Mortgages payable 278,619 217,188
Distributions payable -- 24,537
Accounts payable 32,676 22,782
Accrued expenses and other liabilities 64,182 60,217
---------- ----------
Total liabilities 1,208,492 1,014,924
---------- ----------
Shareholders' equity:
Series A Preferred Shares (5,574,014 convertible
shares in 1997 and 6,494,967 in 1996; stated
liquidation preference of $25 per share) 139,350 162,374
Series B Preferred Shares (4,200,000 shares issued;
stated liquidation preference of $25 per share) 105,000 105,000
Common Shares (shares issued--79,375,582 in 1997
and 75,510,986 in 1996) 79,376 75,511
Additional paid-in capital 993,602 918,434
Unrealized holding gain on Homestead Notes 103,142 74,923
Distributions in excess of net earnings (23,146) (68,734)
---------- ----------
Total shareholders' equity 1,397,324 1,267,508
---------- ----------
Total liabilities and shareholders' equity $2,605,816 $2,282,432
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-66
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues $81,412 $79,491 $161,362 $155,300
Interest income on Homestead
Notes 3,800 -- 6,974 --
Other interest income 968 452 1,338 999
--------- --------- --------- ---------
86,180 79,943 169,674 156,299
--------- --------- --------- ---------
Expenses:
Rental expenses 19,870 21,943 40,227 42,029
Real estate taxes 6,656 6,256 13,924 13,359
Property management fees:
Paid to affiliate 2,813 2,973 5,503 5,828
Paid to third parties 197 283 457 536
Depreciation 12,639 10,624 24,688 21,242
Interest 15,798 7,257 29,759 13,777
REIT management fee paid to
affiliate 4,706 5,724 9,323 11,279
General and administrative 316 230 588 506
Other 120 191 1,864 361
--------- --------- --------- ---------
63,115 55,481 126,333 108,917
--------- --------- --------- ---------
Earnings from operations 23,065 24,462 43,341 47,382
Gain on disposition of
investments, net 11,872 5,160 37,207 8,083
--------- --------- --------- ---------
Net earnings before
extraordinary item 34,937 29,622 80,548 55,465
Less extraordinary item--loss on
early extinguishment of debt -- 870 -- 870
--------- --------- --------- ---------
Net earnings 34,937 28,752 80,548 54,595
Less Preferred Share dividends 4,805 6,386 9,840 12,774
--------- --------- --------- ---------
Net earnings attributable to
Common Shares $30,132 $22,366 $ 70,708 $ 41,821
========= ========= ========= =========
Weighted-average Common Shares
outstanding 77,398 72,223 76,639 72,217
========= ========= ========= =========
Per Common Share amounts:
Primary $ 0.39 $ 0.31 $ 0.92 $ 0.58
========= ========= ========= =========
Fully diluted $ 0.38 $ -- $ 0.90 $ --
========= ========= ========= =========
Distributions paid $ 0.325 $ 0.31 $ 0.65 $ 0.62
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-67
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST, $1.00 PAR
VALUE
-----------------------
SERIES A SERIES B
PREFERRED PREFERRED COMMON
SHARES AT SHARES AT SHARES
AGGREGATE AGGREGATE AT ADDITIONAL UNREALIZED DISTRIBUTIONS
LIQUIDATION LIQUIDATION PAR PAID-IN HOLDING IN EXCESS OF
PREFERENCE PREFERENCE VALUE CAPITAL GAINS NET EARNINGS TOTAL
----------- ----------- ------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1997 $162,374 $105,000 $75,511 $918,434 $ 74,923 $(68,734) $1,267,508
Net earnings -- -- -- -- -- 80,548 80,548
Shareholder
distributions -- -- -- -- -- (34,960) (34,960)
Sale of shares, net of
expenses -- -- 2,500 51,755 -- -- 54,255
Conversion of 920,953
Series A
Preferred Shares into
1,240,396 Common
Shares (23,024) -- 1,240 21,784 -- -- --
Change in unrealized
holding gain on
Homestead Notes -- -- -- -- 28,219 -- 28,219
Exercise of warrants
and options -- -- 125 1,629 -- -- 1,754
-------- -------- ------- -------- -------- -------- ----------
Balances at June 30,
1997 $139,350 $105,000 $79,376 $993,602 $103,142 $(23,146) $1,397,324
======== ======== ======= ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-68
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities
Net earnings $ 80,548 $ 54,595
Adjustments to reconcile net earnings to net cash
flow provided by operating activities:
Depreciation and amortization 25,521 22,069
Gain on disposition of investments, net (37,207) (8,083)
Provision for possible loss on investments 1,500 --
Change in accounts payable (176) (6,085)
Change in accrued expenses and other liabilities 3,966 (1,489)
Change in other operating assets (4,034) (885)
--------- ---------
Net cash flow provided by operating activities 70,118 60,122
--------- ---------
Investing activities:
Real estate investments (371,250) (283,961)
Change in tax-deferred exchange escrow (19,665) --
Funding of Homestead Notes (41,250) --
Advances on other mortgage notes receivable (200) --
Principal repayments on other mortgage notes
receivable 864 1,148
Gross proceeds from dispositions 249,816 87,782
Closing costs related to dispositions (5,694) (2,086)
--------- ---------
Net cash flow used in investing activities (187,379) (197,117)
--------- ---------
Financing activities:
Proceeds from Long-Term Debt 50,000 150,000
Debt issuance costs incurred (700) (1,385)
Prepayment of mortgages payable due to community
dispositions (19,850) (25,845)
Regularly scheduled principal payments on mortgages
payable (1,547) (1,029)
Proceeds from credit facilities 464,920 233,885
Principal payments on credit facilities (372,105) (183,635)
Proceeds from sale of Common Shares, net 54,255 --
Cash distributions paid on Common Shares (49,657) (44,785)
Cash dividends paid on Preferred Shares (9,840) (12,774)
Proceeds from exercise of warrants and options 1,754 20
--------- ---------
Net cash flow provided by financing activities 117,230 114,452
--------- ---------
Net decrease in cash and cash equivalents (31) (22,543)
Cash and cash equivalents at beginning of period 5,601 26,919
--------- ---------
Cash and cash equivalents at end of period $ 5,570 $ 4,376
========= =========
Non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of
multifamily communities $ 82,827 $ --
Series A Preferred Shares converted to Common
Shares $ 23,024 $ 3,725
Change in unrealized holding gain on Homestead
Notes $ 28,219 $ --
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-69
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(UNAUDITED)
(1) GENERAL
The condensed financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR")
are unaudited and certain information and footnote disclosures normally
included in financial statements have been omitted. While management of PTR
believes that the disclosures presented are adequate, these interim financial
statements should be read in conjunction with the financial statements and
notes included in PTR's 1996 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary for a fair presentation of PTR's financial
statements for the interim periods presented. The results of operations for the
three and six month periods ended June 30, 1997 and 1996 are not necessarily
indicative of the results to be expected for the entire year.
The accounts of PTR and its majority-owned subsidiaries are consolidated in the
accompanying condensed 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 affect 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.
Reclassifications
Certain of the 1996 amounts have been reclassified to conform to the 1997
presentation.
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
Share(s)"), 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 the weighted average number of
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. 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 the three and six months ended June 30, 1996.
PTR will adopt Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share, which changes the method used to compute earnings per
share, in the fourth quarter of 1997. The impact of SFAS No. 128 on the
calculation of PTR's earnings per share is not expected to be material.
F-70
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(2) REAL ESTATE
Investments
Equity investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
---------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1996
--------------------- ---------------------
UNITS INVESTMENT UNITS INVESTMENT UNITS
- ----- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities $2,028,940 40,786 $1,861,561 42,702
Communities under
construction 254,843 6,672(1) 186,710 5,479(1)
Development communities
in planning:
Development communities
owned 49,965 3,106(1) 48,504 3,351(1)
Development communities
under control (2) 4,278(1) (2) 3,737(1)
---------- --------- ---------- ---------
Total development
communities 49,965 7,384 48,504 7,088
---------- --------- ---------- ---------
Land held for future
development 31,412 -- 30,043 --
---------- --------- ---------- ---------
Total multifamily 2,365,160 54,842 2,126,818 55,269
---------- --------- ---------- ---------
Non-multifamily 26,005 26,545
---------- ----------
Total real estate $2,391,165 $2,153,363
========== ==========
</TABLE>
- --------
(1) Unit information is based on management's estimates and has not been
audited or reviewed by PTR's independent auditors.
(2) PTR's investment as of June 30, 1997 and December 31, 1996 for developments
under control was $3.7 million and $1.6 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>
<S> <C>
Balance at January 1, 1997 $2,153,363
Multifamily:
Acquisition and renovation expenditures 340,682
Development expenditures, excluding land acquisitions 114,480
Acquisition and improvement of land held for current or
future development 4,150
Recurring capital expenditures 4,836
Dispositions (224,263)
Provisions for possible loss on investments (1,500)
----------
Net multifamily activity subtotal 2,391,748
Non-multifamily dispositions (583)
----------
Balance at June 30, 1997 $2,391,165
==========
</TABLE>
At June 30, 1997, PTR had contingent contracts or letters of intent, subject to
PTR's final due diligence and approval of all entitlements, to acquire land for
the development of an estimated 6,602 multifamily units with an aggregate
estimated development cost of approximately $612.7 million. At the same date,
PTR also had contingent contracts or letters of intent, subject to final due
diligence, for the acquisition of 328 additional operating multifamily units
with a total expected investment of $17.5 million, including planned
renovations.
At June 30, 1997, PTR had unfunded development commitments for developments
under construction of $180.4 million.
F-71
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Gains and Provision for Possible Loss on 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 Real Estate Research Group 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
are 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 23 multifamily communities,
one industrial building and two parcels of land during the six months ended
June 30, 1997, representing gross proceeds of $249.8 million, and disposed of
six multifamily communities, one parcel of land and one industrial building
during the six months ended June 30, 1996, representing gross proceeds of $87.8
million. As of June 30, 1997, PTR held a portion of the 1997 disposition
proceeds aggregating $19.7 million in an interest bearing escrow account,
pending acquisition of other multifamily communities to complete the tax-
deferred exchange. For federal income tax purposes, the majority of the 1997
and 1996 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 $37.2 million and $8.1
million were recorded for the six months ended June 30, 1997 and 1996,
respectively.
As part of PTR's asset optimization strategy, six multifamily communities, five
parcels of land and one industrial building were held for disposition as of
June 30, 1997. The aggregate carrying value of properties held for disposition
was approximately $79 million at June 30, 1997. Each community's carrying value
is less than or equal to its estimated fair market value, net of estimated
costs to sell. Such communities 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 communities during 1997
and early 1998 and redeploy the net proceeds from such dispositions, where
appropriate, through tax-deferred exchanges into the acquisition of multifamily
communities. The property level earnings, after interest and depreciation, from
communities held for disposition at June 30, 1997 which are included in PTR's
earnings from operations for the six months ended June 30, 1997 and 1996 were
$3.6 million and $3.5 million, respectively.
(3) HOMESTEAD NOTES
In addition to multifamily investment activity, PTR had developed and operated
extended-stay lodging facilities under the Homestead Village name since 1992.
On October 17, 1996, PTR contributed its Homestead Village properties to
Homestead Village Incorporated ("Homestead"), a new publicly-traded company, in
exchange for certain Homestead securities. As of the contribution date, the
Homestead Village properties constituted approximately 7.1% of PTR's total
assets, at cost. The Homestead Village properties generated approximately 8.1%
of PTR's net operating income (rental revenues less rental expenses, real
estate taxes and property management fees) for the six months ended June 30,
1996.
During the six month period ended June 30, 1997, PTR funded an additional $41.3
million under its $198.8 million commitment to provide development funding to
Homestead in the form of convertible mortgage notes ("Homestead Notes"),
resulting in a total amount funded of $142.4 million as of June 30, 1997.
Following is a reconciliation of the Homestead Notes' components to the amount
reflected in the accompanying Balance Sheet (in thousands):
<TABLE>
<CAPTION>
--------------
JUNE 30, 1997
--------------
<S> <C>
Face amount of Homestead Notes $158,557
Original issue discount (16,119)
---------
Amount funded 142,438
Amortization of original issue discount 531
Conversion feature-initial value 11,168
Unamortized discount on conversion feature (10,826)
Fair value adjustment 103,142
---------
Carrying value and fair value $246,453
=========
</TABLE>
F-72
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The Homestead Notes are convertible into Homestead common stock on the basis of
one share of Homestead common stock for every $11.50 of principal face amount
outstanding. Accordingly, fair value was calculated based upon the conversion
value of the Homestead Notes using the trading price of Homestead common stock
at June 30, 1997 of $17.875. The fair value adjustment is recognized as an
unrealized gain in shareholders' equity.
PTR expects to complete the funding of the remaining $56.4 million under its
funding commitment in 1997 and early 1998.
(4) 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 in August 1999 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 (8.5% at
June 30, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR
(5.6875% at June 30, 1997) plus 1.125% (6.8125% at June 30, 1997), which spread
was reduced from 1.125% to 0.75% effective August 13, 1997. The spread over
LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.50% based upon the rating
of PTR's long-term unsecured senior notes ("Long-Term Debt"). Additionally,
there is a commitment fee on the average unfunded line of credit balance. The
commitment fee was $114,000 and $218,000 for the six months ended June 30, 1997
and 1996, respectively.
A summary of PTR's line of credit borrowings is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
-----------------------
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Total line of credit $350,000 $350,000
Borrowings outstanding at end of period 68,250 99,750
Weighted-average daily borrowings 117,162 112,248
Maximum borrowings outstanding at any month end 205,000 188,750
Weighted-average daily nominal interest rate 6.5% 7.3%
Weighted-average daily effective interest rate 8.3% 8.8%
Weighted-average nominal interest rate at end of
period 6.8% 6.6%
</TABLE>
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing
agreement with TCB. The loan matures March 18, 1998 and bears interest at an
overnight rate which ranged from 5.94% to 7.00% during the six months ended
June 30, 1997. At June 30, 1997, there was $34.8 million outstanding under this
agreement.
On March 10, 1997, PTR borrowed $60 million under a short-term, unsecured,
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% (6.2875% at June 30, 1997). On April 4, 1997, PTR borrowed an
additional $40 million under a short-term, unsecured, borrowing agreement with
the same financial institution, having approximately the same interest rate and
repayment terms. The proceeds from both loans were used to repay borrowings
under PTR's line of credit.
F-73
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT
PTR has issued Long-Term Debt which bears interest at fixed rates, payable
semi-annually. Funds from such issuances were used primarily for acquisition,
development and renovation of multifamily communities and to repay balances on
credit facilities incurred for such purposes. The following table summarizes
the Long-Term Debt as of June 30, 1997:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUANCE AVERAGE EFFECTIVE
AND INTEREST RATE,
OUTSTANDING PRINCIPAL INCLUDING OFFERING ORIGINAL
PRINCIPAL PAYMENT COUPON DISCOUNTS AND MATURITY LIFE
DATE OF ISSUANCE AMOUNT REQUIREMENT RATE ISSUANCE COSTS DATE (YEARS)
- ---------------- ------------ ----------- ------ ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
3/31/97 $ 20 million (1) 7.500% 7.443% 4/1/07 10.00
3/31/97 30 million (1) 8.050 8.038 4/1/17 20.00
------------ ----- ----- -----
Subtotal/Average $ 50 million 7.905% 7.850% 16.00
------------ ----- ----- -----
10/21/96 $ 15 million (1) 6.600% 7.030% 10/15/99 3.00
10/21/96 20 million (1) 6.950 7.400 10/15/02 6.00
10/21/96 20 million (1) 7.150 7.500 10/15/03 7.00
10/21/96 20 million (1) 7.250 7.630 10/15/04 8.00
10/21/96 20 million (1) 7.300 7.640 10/15/05 9.00
10/21/96 20 million (1) 7.375 7.685 10/15/06 10.00
10/21/96 15 million (2) 6.500 6.750 10/15/26 30.00
------------ ----- ----- -----
Subtotal/Average $130 million 7.350% 7.500% 6.85
------------ ----- ----- -----
8/6/96 $ 20 million (1) 7.550% 7.680% 8/1/08 12.00
8/6/96 20 million (1) 7.625 7.730 8/1/09 13.00
8/6/96 20 million (1) 7.650 7.770 8/1/10 14.00
8/6/96 20 million (1) 8.100 8.210 8/1/15 19.00
8/6/96 20 million (1) 8.150 8.250 8/1/16 20.00
------------ ----- ----- -----
Subtotal/Average $100 million 7.840% 7.950% 15.60
------------ ----- ----- -----
2/23/96 $ 50 million (3) 7.150% 7.300% 2/15/10 10.50
2/23/96 100 million (4) 7.900 8.030 2/15/16 18.00
------------ ----- ----- -----
Subtotal/Average $150 million 7.710% 7.840% 15.50
------------ ----- ----- -----
2/8/94 $100 million (5) 6.875% 6.978% 2/15/08 10.50
2/8/94 100 million (6) 7.500 7.653 2/15/14 18.00
------------ ----- ----- -----
Subtotal/Average $200 million 7.240% 7.370% 14.25
------------ ----- ----- -----
Grand Total/Average $630 million 7.530% 7.640% 13.37
============ ===== ===== =====
</TABLE>
- --------
(1) Entire principal amount due at maturity.
(2) 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.
(3) These notes require aggregate annual principal payments of $6.25 million
commencing in 2003.
(4) 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.
(5) These notes require annual principal payments of $12.5 million commencing
in 2001.
(6) 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.
F-74
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Mortgages Payable
Mortgages payable at June 30, 1997 consisted of the following (dollar amounts
in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
BALLOON BALANCE PRINCIPAL
EFFECTIVE SCHEDULED PERIODIC PAYMENT AT BALANCE AT
INTEREST MATURITY PAYMENT DUE AT JUNE 30, DECEMBER 31,
COMMUNITY RATE(1) DATE TERMS MATURITY 1997 1996
- --------- --------- --------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONVENTIONAL FIXED RATE:
Tigua Village N/A 05/01/97 (2) $ N/A $ - $ 683
Silvercliff 7.65% 11/10/97 (2) 7,304 7,335 7,382
Braeswood Park 7.50 01/01/98 (2) 6,635 6,693 6,761
Seahawk(8) N/A 01/10/98 (8) N/A - 5,427
La Tierra at the Lakes 7.88 12/01/98 (2) 25,105 25,794 26,019
Windsail(8) N/A 02/01/99 (8) N/A - 4,798
Fairwood Landing 8.75 12/21/99 (2) 5,501 5,782 5,831
Greenpointe 8.50 03/01/00 (2) 3,416 3,607 3,638
Mountain Shadow 8.50 03/01/00 (2) 3,136 3,311 3,340
Sunterra 8.25 03/01/00 (2) 7,627 8,066 8,138
Brompton Court 8.38 09/01/00 (2) 13,340 14,199 14,318
Marina Lakes 7.85 07/19/01 (2) 12,393 13,453 -
Treat Commons 7.50 09/14/01 (2) 6,537 7,131 7,192
El Dorado 7.53 10/01/02 (2) 15,548 16,635 16,718
Ashton Place 8.24 10/01/23 (3) N/A 47,074 47,342
Double Tree II(8) N/A 05/01/33 (8) N/A - 4,750
-------- --------
159,080 162,337
-------- --------
TAX-EXEMPT FIXED RATE(4):
Fox Creek N/A 06/01/97 (9) N/A - 4,236
Pelican Point 9.67 10/02/97 (2) 14,774 16,000 -
Cherry Creek 8.41 11/01/01 (2) 2,780 3,875 4,000
Redwood Shores 5.68 10/01/08 (2) 16,820 25,000 25,220
Crossroads 6.76 12/15/18 (5) 4,435 4,435 4,435
-------- --------
49,310 37,891
-------- --------
TAX-EXEMPT FLOATING
RATE(4):
River Meadows 5.08 10/01/05 (6) 10,000 10,000 -
Apple Creek 5.33 09/01/07 (6) 11,100 11,100 11,100
La Jolla Point 5.10 08/01/14 (6) 13,232 21,600 -
Le Club 5.05 11/01/15 (6) 21,700 21,700 -
-------- --------
64,400 11,100
-------- --------
COMBINED(7):
Las Flores 8.80 06/01/24 (3) N/A 5,829 5,860
---- -------- --- ------- -------- --------
Total/Average Mortgage
Debt 7.24% $278,619 $217,188
==== ======== ========
</TABLE>
- --------
(1) Represents the effective interest rate, including loan cost amortization
and other ongoing fees and expenses.
(2) Regular amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Tax-exempt effective interest rates include credit enhancement and other
bond-related costs, where applicable.
(5) Semi-annual payments are interest only until December 2003 at 5.4%, at
which time the interest rate is adjusted to the current market rate
(6) Payments are interest only until maturity and the interest rate is adjusted
weekly or monthly.
(7) 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.
(8) Mortgage was prepaid upon community disposition.
(9) The Fox Creek bonds were refunded. New bonds with a scheduled maturity date
of August 15, 2027 were issued on August 8, 1997, which require monthly
payments of interest only until August 2007 at which time monthly principal and
interest payments commence in an amount sufficient to amortize the balance over
the remaining term.
F-75
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The changes in mortgages payable during the six months ended June 30, 1997
consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997 $217,188
Mortgage notes assumed 82,827
Principal payments, including prepayments upon community
dispositions (21,396)
---------
Balance at June 30, 1997 $278,619
=========
</TABLE>
Scheduled Debt Maturities
Approximate principal payments due during each of the calendar years in the 20-
year period ending December 31, 2016 and thereafter, as of June 30, 1997, are
as follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------
CREDIT LONG-TERM
FACILITIES DEBT MORTGAGES TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
1997 $134,765 $ - $ 25,164 $ 159,929
1998 68,250 - 35,072 103,322
1999 - 30,000 8,609 38,609
2000 - - 30,323 30,323
2001 - 12,500 24,117 36,617
2002 - 32,500 17,647 50,147
2003 - 38,750 2,076 40,826
2004 - 38,750 2,254 41,004
2005 - 38,750 12,446 51,196
2006 - 38,750 2,652 41,402
2007 - 38,750 13,973 52,723
2008 - 38,750 19,345 58,095
2009 - 36,250 2,125 38,375
2010 - 38,750 2,297 41,047
2011 - 25,000 2,542 27,542
2012 - 30,000 2,689 32,689
2013 - 35,000 2,907 37,907
2014 - 42,500 16,004 58,504
2015 - 40,000 24,155 64,155
2016 - 45,000 2,653 47,653
Thereafter - 30,000 29,569 59,569
--------- --------- --------- ----------
Total $203,015 $630,000 $278,619 $1,111,634
========= ========= ========= ==========
</TABLE>
General
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 leverage ratios. PTR was in compliance
with all covenants pertaining to its debt instruments at June 30, 1997.
Interest paid on all borrowings for the six months ended June 30, 1997 was
$26.0 million, net of $8.8 million of interest capitalized during construction.
Interest paid on all borrowings for the six months ended June 30, 1996 was $9.4
million, net of $7.5 million of interest capitalized during construction.
Amortization of loan costs included in interest expense for the six months
ended June 30, 1997 and 1996 was $1,513,000 and $827,000 respectively.
F-76
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(5) CASH DISTRIBUTIONS
PTR paid first and second quarter 1997 distributions of $0.325 per Common Share
on February 20 and May 29, 1997. On July 21, 1997 the Board of Trustees (the
"Board") declared a cash distribution of $0.325 per Common Share, payable on
August 27, 1997, to shareholders of record on August 13, 1997. On March 31 and
June 30, 1997, PTR paid quarterly dividends of $0.4377425 per cumulative
convertible Series A Preferred Share and $0.5625 per cumulative redeemable
Series B Preferred Share.
(6) SHAREHOLDERS' EQUITY
On March 27, 1997, PTR filed a $300 million shelf registration with the
Securities and Exchange Commission. These securities can be issued on an as-
needed basis, subject to PTR's ability to effect offerings on satisfactory
terms.
On June 4, 1997, PTR sold 2,500,000 Common Shares to Goldman, Sachs & Co. for
an aggregate purchase price of $54.5 million. The net proceeds of $54.3 million
(net of $150,000 of offering costs) were used to repay borrowings under PTR's
$350 million unsecured revolving line of credit and its short-term borrowing
agreement with TCB.
On August 6, 1997, PTR commenced a rights offering to subscribe for and
purchase 7,433,433 Common Shares at a price of $21 13/16 per share (the
"Subscription Price"). PTR's common shareholders of record on August 6, 1997
will receive a dividend of one right for each Common Share held. Seven rights
entitle the holder to purchase one Common Share at the Subscription Price. The
rights are transferable and will expire on September 9, 1997. The offering is
designed to allow PTR common shareholders (other than Security Capital) the
opportunity to maintain their relative ownership in PTR by purchasing
additional Common Shares at a price which is below the price at which Security
Capital is receiving Common Shares in the proposed merger described in note 7.
The funds from the rights offering will be used to repay borrowings under
certain credit facilities of PTR.
After giving effect to the rights offering described above, assuming such
offering is fully subscribed, PTR will have approximately $203.3 million in
shelf-registered securities available for issuance.
(7) PROPOSED MERGER TRANSACTION
Effective March 1, 1991, PTR entered into a REIT Management agreement with
Security Capital Pacific Incorporated (the "REIT Manager"), to provide REIT
Management services to PTR. The REIT Manager is a subsidiary of Security
Capital Group Incorporated ("Security Capital").
SCG Realty Services Incorporated ("SCG Realty Services"), a wholly-owned
subsidiary of Security Capital, managed 94.1% and 83.9% (based on total
expected investment) of PTR's operating multifamily communities as of June 30,
1997 and 1996, respectively. Rates for services performed by SCG Realty
Services are subject to annual approval by PTR's independent Trustees (who
receive an annual review from an independent third party). Management believes
that such rates are consistent with those prevailing in the markets in which
PTR operates.
On August 5, 1997, the Securities and Exchange Commission declared effective a
registration statement filed by Security Capital relating to warrants to
purchase Class B common stock of Security Capital, and containing PTR's proxy
statement relating to a proposed merger transaction whereby PTR would acquire
the operations and businesses of the REIT Manager and SCG Realty Services
valued at approximately $75.8 million in exchange for Common Shares. The $75.8
million value was based on a three-year discounted analysis of net operating
income prepared by Security Capital and revised after negotiation with a
special committee comprised of independent Trustees (the "Special Committee").
The number of Common Shares issuable to Security Capital was determined using a
per Common Share price of $23.0125 (the average market price of Common Shares
over the five-day period prior to the August 6, 1997 record date for
determining PTR's shareholders entitled to vote on the proposed merger). As a
result of the transaction, PTR would become an internally managed REIT and
Security Capital would remain PTR's largest shareholder (34% ownership at
August 6, 1997). The Board approved the proposed merger transaction based on
the recommendation of the Special Committee. The proposed merger transaction
requires the approval of a two-thirds majority of PTR's outstanding Common
Shares. PTR's proxy statement was mailed to
F-77
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONCLUDED)
PTR's common shareholders and a meeting of PTR's common shareholders to vote on
the proposed merger is scheduled to be held on September 8, 1997. Assuming that
the market value of the Common Shares issued to Security Capital on the
transaction date is $75.8 million, approximately $3.1 million will be allocated
to the net tangible assets acquired and the $72.7 million difference will be
accounted for as costs incurred in acquiring the management companies from a
related party since the management companies do not qualify as "businesses" for
purposes of applying APB Opinion No. 16, "Business Combinations". Upon
consummation of the merger, this expense will be recorded as an operating
expense on PTR's statement of earnings.
On June 10, 1997, the Board extended the term of the REIT Management Agreement
through the earlier of (i) the date of the consummation of the proposed merger
described above, or (ii) the regularly scheduled Board meeting in the fourth
quarter of 1997.
In addition, subject to and after the closing of the proposed merger and after
the closing of the rights offering described in note 6, Security Capital will
issue warrants pro rata to holders of PTR's Common Shares and Series A
Preferred Shares (other than Security Capital), to acquire shares of Class B
common stock of Security Capital having an aggregate subscription price at the
time of issuance of approximately $102 million. The number of shares of Class B
common stock subject to the warrants will be based on the closing price of such
shares on the date the warrants are issued to a warrant distribution agent for
subsequent distribution to the holders of Common Shares and Series A Preferred
Shares. The warrants will have a term of one year. Security Capital is issuing
the warrants to induce PTR common shareholders to vote in favor of the proposed
merger and to raise additional equity capital at a relatively low cost in
addition to other benefits.
F-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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.
(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.
F-85
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
(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.
F-86
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
(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.
F-87
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-88
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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%
F-89
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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).
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.
F-90
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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>
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.
F-91
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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
F-92
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
- --------
(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.
F-93
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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>
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.
F-94
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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-95
<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
F-96
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Preferred Share dividends are payable quarterly in arrears on the last day of
March, June, September and December 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-97
<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.
(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
F-98
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Security Capital Industrial Trust
We have reviewed the accompanying consolidated balance sheet of Security
Capital Industrial Trust and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations for the three and six months ended June
30, 1997 and 1996, and the consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996. These financial statements are the
responsibility of the Trust's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Industrial Trust
and subsidiaries as of December 31, 1996, and in our report dated February 10,
1997, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1996, is fairly stated in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Chicago, Illinois
August 11, 1997
F-108
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
-------------------------
JUNE 30, DECEMBER 31,
1997 1996
ASSETS (UNAUDITED) (AUDITED)
------ ----------- ------------
<S> <C> <C>
Real Estate $2,702,070 $2,508,747
Less accumulated depreciation 139,236 109,147
---------- ----------
2,562,834 2,399,600
Investment in and Advances to Unconsolidated
Subsidiaries 75,166 --
Cash and Cash Equivalents 9,532 4,770
Accounts Receivable 9,236 5,397
Other Assets 57,495 52,539
---------- ----------
Total assets $2,714,263 $2,462,306
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit $ 130,100 $ 38,600
Long-term debt 624,234 524,191
Mortgage notes payable 84,274 91,757
Securitized debt 34,983 36,025
Assessment bonds payable 11,901 12,170
Accounts payable and accrued expenses 37,232 35,357
Construction payable 23,127 24,645
Distributions payable -- 25,058
Other liabilities 17,855 18,130
---------- ----------
Total liabilities 963,706 805,933
---------- ----------
Commitments and Contingencies
Minority Interest 55,973 56,984
Shareholders' Equity:
Series A Preferred Shares; $0.01 par value;
5,400,000 shares issued and outstanding at June
30, 1997 and December 31, 1996; 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
June 30, 1997 and December 31, 1996; stated
liquidation preference of $25 per share 201,250 201,250
Series C Preferred Shares; $0.01 par value;
2,000,000 shares issued and outstanding at June
30, 1997 and December 31, 1996; stated liquidation
preference of $50 per share 100,000 100,000
Common shares of beneficial interest, $0.01 par
value; 97,760,595 shares issued and outstanding at
June 30, 1997 and 93,676,546 shares at December
31, 1996 978 937
Additional paid-in capital 1,338,965 1,257,347
Distributions in excess of net earnings (81,609) (95,145)
---------- ----------
Total shareholders' equity 1,694,584 1,599,389
---------- ----------
Total liabilities and shareholders' equity $2,714,263 $2,462,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-109
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
-------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Rental income $69,157 $54,361 $136,543 $104,423
Other real estate income 4,569 1,037 5,690 1,180
Income from unconsolidated
subsidiaries 1,546 -- 1,546 --
Interest income 393 350 1,117 507
--------- --------- --------- ---------
Total income 75,665 55,748 144,896 106,110
--------- --------- --------- ---------
Expenses:
Rental expenses, net of
recoveries of $10,663 and
$7,171 for the three month
periods in 1997 and 1996,
respectively, and $21,263 and
$13,378 for the six month
periods in 1997 and 1996,
respectively 5,235 6,065 9,513 11,211
Property management fees paid to
affiliate, net of recoveries of
$1,073 and $793 for the three
month periods in 1997 and 1996,
respectively, and $2,115 and
$1,347 for the six month
periods in 1997 and 1996,
respectively 1,762 1,182 3,312 2,181
Depreciation and amortization 18,976 14,126 37,024 27,215
Interest expense 13,183 8,851 24,558 17,359
REIT management fee paid to
affiliate 6,228 5,033 12,834 9,674
General and administrative 380 303 687 552
Other 850 732 1,461 1,200
--------- --------- --------- ---------
Total expenses 46,614 36,292 89,389 69,392
--------- --------- --------- ---------
Net Earnings Before Minority
Interest and Gain/(Loss) on
Disposition of Real Estate 29,051 19,456 55,507 36,718
Minority interest share in net
earnings 940 884 1,835 1,640
--------- --------- --------- ---------
Net Earnings Before Gain/(Loss) on
Disposition of Real Estate 28,111 18,572 53,672 35,078
Gain/(loss) on disposition of real
estate 3,773 -- 3,773 (29)
--------- --------- --------- ---------
Net Earnings 31,884 18,572 57,445 35,049
Less preferred share dividends 8,830 6,695 17,659 11,368
--------- --------- --------- ---------
Net Earnings Attributable to
Common Shares $23,054 $11,877 $ 39,786 $ 23,681
========= ========= ========= =========
Weighted Average Common Shares
Outstanding 97,758 81,445 96,888 81,436
========= ========= ========= =========
Per Share Net Earnings
Attributable to Common Shares $ 0.24 $ 0.15 $ 0.41 $ 0.29
========= ========= ========= =========
Distributions Per Common Share $0.2675 $0.2525 $ 0.5350 $ 0.5050
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-110
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net earnings $ 57,445 $ 35,049
Minority interest 1,835 1,640
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 37,024 27,215
(Gain)/loss on disposition of real estate (3,773) 29
Rent leveling (2,278) (2,518)
Amortization of deferred financing costs 1,034 1,303
Increase in accounts receivable and other assets (8,622) (4,522)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 1,600 (936)
--------- ---------
Net cash provided by operating activities 84,265 57,260
--------- ---------
Investing Activities:
Real estate investments (325,609) (317,244)
Tenant improvements and lease commissions (5,794) (7,208)
Recurring capital expenditures (2,046) (556)
Proceeds from disposition of real estate 66,029 1,092
--------- ---------
Net cash used in investing activities (267,420) (323,916)
--------- ---------
Financing Activities:
Net proceeds from sale of shares, exercised
warrants and dividend reinvestment and share
purchase plan 80,659 192,379
Proceeds from long-term debt offering 100,000 199,632
Debt issuance costs (1,393) (3,440)
Termination of interest rate contracts 1,658 (1,923)
Distributions paid to common shareholders (51,308) (41,122)
Distributions paid to minority interest holders (2,846) (2,631)
Preferred share dividends (17,659) (11,368)
Proceeds from line of credit 208,600 211,000
Payments on line of credit (117,100) (278,700)
Regularly scheduled principal payments on mortgage
notes payable (1,854) (1,960)
Balloon principal payments made upon maturity (10,840) (8,404)
--------- ---------
Net cash provided by financing activities 187,917 253,463
--------- ---------
Net Increase/(Decrease) in Cash and Cash Equivalents 4,762 (13,193)
Cash and Cash Equivalents, beginning of period 4,770 22,235
--------- ---------
Cash and Cash Equivalents, end of period $ 9,532 $ 9,042
========= =========
Supplemental Schedule of Noncash Investing and
Financing Activities:
In conjunction with real estate acquired:
Assumption of existing mortgage notes payable $ 3,900 $ 2,770
Issuance of common shares $ 1,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-111
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. GENERAL:
The consolidated financial statements of Security Capital Industrial Trust
("SCI") as of June 30, 1997 are unaudited, and pursuant to the rules of the
Securities and Exchange Commission, certain information and footnote
disclosures normally included in financial statements have been omitted. The
consolidated financial statements for 1996 have been restated to conform to the
1997 presentation. While management of SCI believes that the disclosures
presented are adequate, these interim consolidated financial statements should
be read in conjunction with SCI's December 31, 1996 consolidated financial
statements.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of SCI's consolidated financial position and
results of operations for the interim periods. The results of operations for
the three and six month periods ended June 30, 1997 and 1996 are not
necessarily indicative of the results to be expected for the entire year.
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.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In March 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). The new statement is effective December 15, 1997 and will
require restatement of prior years' earnings per share; early adoption is not
permitted. The adoption of SFAS No. 128 will have no material effect on SCI's
reported earnings per share.
The FASB has also released Statement of Financial Accounting Standard No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129"). SCI
already complies with the requirements of the standard which is effective for
periods ending after December 15, 1997.
3. REAL ESTATE:
The following summarizes real estate investments as of June 30, 1997 and
December 31, 1996 (in thousands):
<TABLE>
-------------
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
---------- ------------
<S> <C> <C>
Land held for development $ 118,523 $ 109,316
Land under development 47,283 40,465
Improved land 384,467 356,428
Buildings and improvements 2,084,247 1,918,256
Construction in progress 48,064 77,506
Capitalized preacquisition costs 19,486 6,776
---------- ----------
Total real estate 2,702,070 2,508,747
Less accumulated depreciation 139,236 109,147
---------- ----------
Net real estate $2,562,834 $2,399,600
========== ==========
</TABLE>
F-112
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalized preacquisition costs include $14,642,000 and $1,634,000 of funds on
deposit with title companies as of June 30, 1997 and December 31, 1996,
respectively, for property acquisitions.
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES:
On April 24, 1997, SCI Logistics Services Incorporated ("SCI Logistics"), a
newly formed corporation, acquired a 60% interest in a refrigerated warehouse
company, renamed CS Integrated LLC ("CSI"), for $73.4 million. CSI owns 16
refrigerated warehouses totaling 43.4 million cubic feet and two dry storage
facilities. SCI Logistics will account for its investment in CSI on the equity
method because the minority shareholder of CSI has significant rights involving
day-to-day operations as well as the right to approve certain significant
transactions. SCI owns 100% of the nonvoting preferred stock of SCI Logistics.
An unrelated third party owns 100% of the common stock of SCI Logistics. SCI
will recognize 95% of the economic benefits from SCI Logistics' cash flow (as
defined) through its cumulative preferred stock dividends. SCI will account for
its investment in SCI Logistics on the cost method due to the approval rights
of the common shareholder.
As of June 30, 1997 Investment in and Advances to Unconsolidated Subsidiaries
consists of the following items (in thousands):
<TABLE>
<S> <C>
Investment in preferred stock of SCI Logistics $ 2,138
Note receivable from SCI Logistics 12,863
Short-term note receivable from CSI 58,419
Accrued interest and other receivables 1,746
---------
Total $75,166
=========
</TABLE>
The note receivable from SCI Logistics is an unsecured loan which bears
interest at 13% per annum payable annually on the 24th of April of each year,
and matures on April 24, 2002. The short term note receivable from CSI is a
bridge loan expected to be replaced by third party financing in the third
quarter of 1997. The loan bears interest payable quarterly at a rate equal to
the lesser of (a) the higher of the prime rate plus 1% or the federal funds
rate and (b) the highest lawful rate.
5. BORROWINGS:
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 an annual rate equal to the lesser of (a)
the greater of the federal funds rate plus 0.5%, and the prime rate, or (b)
LIBOR plus .95%, based upon SCI's current senior debt ratings. Additionally,
there is a commitment fee ranging from .125% to .20% per annum of the unused
line of credit balance. The line is scheduled to mature in May 1999 and may be
extended annually for an additional year with the approval of NationsBank and
the other participating lenders (the "Bank Group"); 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 $1.25 billion, to
maintain interest payment coverage of not less than 2 to 1, and to maintain a
fixed charge coverage ratio (as defined) of not less than 1.75 to 1. As of June
30, 1997, SCI was in compliance with all covenants contained in the line of
credit, and as of August 11, 1997, $64.1 million of borrowings were outstanding
on the line of credit.
On March 19, 1997, SCI executed a promissory note (the "Note") with NationsBank
for a short term unsecured borrowing agreement of $15.0 million which matures
October 1, 1997. The rate of interest on each
F-113
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
advance (a "Loan") and the maturity date of each Loan will be determined by
agreement between SCI and NationsBank at the time of such Loan. The purpose of
this Note is to provide a lower cost option for same day borrowings since there
is a three day notice period required on the revolving line of credit.
Long-Term Debt
<TABLE>
<CAPTION>
-----------------------
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
(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 mature 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 mature 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 14,995 14,993
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 17,455 17,448
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 17,441 17,435
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 commencing May
15, 2002 and mature on May 15, 2009 74,682 74,668
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 commencing May 15,
1999 and mature on May 15, 2002 49,957 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 commencing May 15,
2005 and mature on May 15, 2008 99,846 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 commencing May 15, 2010 and mature on May
15, 2016 49,858 49,856
7.81% Medium-Term Notes, issued on February 4, 1997 in
an original principal amount of $100,000,000. Interest
is payable February 1 and August 1 of each year. The
Notes are payable in six annual installments ranging
from $10,000,000 to $20,000,000 commencing February 1,
2010 and mature on February 1, 2015 100,000 --
--------- ---------
Total long-term debt, net of original issue discount $624,234 $524,191
========= =========
</TABLE>
F-114
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Such notes are governed by
the terms and provisions of an indenture (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 June 30,
1997, SCI was in compliance with all debt covenants contained in the Indenture.
Mortgage Notes Payable, Assessment Bonds Payable and Securitized Debt
Mortgage notes payable of $84.3 million were secured by real estate with an
aggregate undepreciated cost of $147.1 million at June 30, 1997. Assessment
bonds payable of $11.9 million were secured by real estate with an aggregate
undepreciated cost of $222.6 million at June 30, 1997. Securitized debt of
$35.0 million was collateralized by real estate with an aggregate undepreciated
cost of $68.0 million at June 30, 1997.
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, 2002, and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
Remainder of 1997 $ 10,032
1998 19,763
1999 25,668
2000 38,407
2001 40,662
2002 44,592
2003 and thereafter 577,034
---------
Total principal due 756,158
Less: original issue discount (766)
---------
Total carrying value $755,392
=========
</TABLE>
For the six month periods ended June 30, 1997 and 1996, interest expense on all
borrowings was $24,558,000 and $17,359,000, respectively, which was net of
capitalized interest of $8,505,000 and $6,898,000, respectively. The total
interest paid in cash was $28,470,000 and $22,999,000 for the six month periods
ended June 30, 1997 and 1996, respectively.
6. MINORITY INTEREST:
Minority interest represents limited partners' interests in five real estate
partnerships controlled by SCI (Red Mountain Joint Venture, SCI Limited
Partnership-I, SCI Limited Partnership-II, SCI Limited Partnership-III, and SCI
Limited Partnership-IV). As of June 30, 1997, a total of 5,194,258 limited
partnership units were held by minority interest limited partners in the
various real estate partnerships. Limited partners are entitled to exchange
each partnership unit for one common share of SCI.
F-115
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 partnership
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 totaling 3.64% in Partnership-IV. SCI
has contributed additional funds to the partnership in 1996 and 1997 in
conjunction with tax deferred exchanges of real estate which increased SCI's
interest from 96.36% to 96.62%. 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 primarily
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 SCI IV, Inc. at June 30, 1997. Partnership-IV
had $1.1 million of borrowings from SCI IV, Inc. at June 30, 1997. SCI IV, Inc.
had $1.1 million of borrowings from SCI and its affiliates at June 30, 1997.
For financial 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 of beneficial interest in SCI and are entitled to receive preferential
cumulative quarterly distributions per unit equal to the quarterly distribution
in respect of common shares. At June 30, 1997, there were 68,612 limited
partnership units outstanding in Partnership-IV.
7. SHAREHOLDERS' EQUITY:
On March 24, 1997, SCI issued 48,809 common shares in conjunction with an
acquisition of property. 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.
On June 30, 1997, SCI paid a quarterly dividend of $0.5875 per cumulative
redeemable Series A preferred share, $0.4375 per cumulative convertible Series
B preferred share ("Series B Preferred Share") and $1.0675 per cumulative
redeemable Series C preferred share to preferred shareholders of record on June
16, 1997. On July 16, 1997, SCI declared a distribution of $0.2675 per common
share, payable on August 19, 1997, to common shareholders of record as of
August 5, 1997.
8. EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of common
shares outstanding during the period. Exercise of outstanding warrants and
options to acquire 37,764 SCI common shares would not have a material dilutive
effect on earnings per share. The conversion of the limited partnership units
(as discussed in Note 6) and the Series B Cumulative Convertible Redeemable
Preferred Shares into common shares is not assumed since the effect would not
be dilutive.
9. SUBSEQUENT EVENTS:
Proposed Merger Transaction
On August 5, 1997, the Securities and Exchange Commission declared effective a
registration statement filed by Security Capital Group Incorporated ("Security
Capital") relating to warrants to purchase Class B common stock of Security
Capital and containing SCI's proxy statement relating to a proposed merger
transaction whereby SCI would acquire the operations and businesses of its REIT
manager and property manager valued at approximately $81.9 million in exchange
for SCI common shares. The $81.9 million value was based on a three-year
discounted
F-116
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
analysis of net operating income prepared by Security Capital and revised after
negotiation with a special committee comprised of independent Trustees (the
"Special Committee"). The number of SCI common shares issuable to Security
Capital (3,692,023) is based on the average market price of the common shares
($22.175) over the five-day period prior to the August 6, 1997 record date for
determining SCI's shareholders entitled to vote on the merger. As a result of
the transaction, SCI would become an internally managed REIT and Security
Capital would remain SCI's largest shareholder (44.1% as of June 30, 1997).
SCI's Board of Trustees approved the proposed merger transaction based on the
recommendation of the Special Committee. The proposed merger transaction
requires the approval of a majority of the outstanding common shares. SCI's
proxy statement was mailed to SCI's common shareholders and a meeting of SCI's
shareholders to vote on the proposed merger is scheduled to be held on
September 8, 1997. Assuming that the market value of the common shares issued
to Security Capital on the transaction date is $81.9 million, approximately
$5.7 million will be allocated to the net tangible assets acquired and the
$76.2 million difference will be accounted for as costs incurred in acquiring
the management companies from a related party since the management companies do
not qualify as "businesses" for purposes of applying APB Opinion No. 16,
"Business Combinations".
In addition, subject to and after the closing of the proposed merger and after
the closing of the rights offering described below, Security Capital will issue
warrants pro rata to holders of SCI's common shares, Series B Preferred Shares
and limited partnership units (other than Security Capital), to acquire shares
of Class B common stock of Security Capital having an aggregate subscription
price at the time of issuance of approximately $101 million. The number of
shares of Class B common stock subject to the warrants will be based on the
closing price of such shares on the date the warrants are issued to a warrant
distribution agent for subsequent distribution to holders of common shares,
Series B Preferred Shares and limited partnership units. The warrants will have
a term of one year. Security Capital is issuing the warrants to induce SCI
common shareholders to vote in favor of the proposed merger and to raise
additional equity capital at a relatively low cost, in addition to other
benefits.
The Rights Offering
On August 6, 1997, SCI commenced a rights offering to subscribe for and
purchase 4,970,352 common shares of beneficial interest at a price of $21 per
share (the "Subscription Price"). SCI's common shareholders of record on August
6, 1997 will receive a dividend of one right for each common share held. Eleven
rights entitle the holder to purchase one common share at the Subscription
Price. The rights are transferable and will expire on September 9, 1997. The
offering is designed to allow SCI's shareholders (other than Security Capital)
the opportunity to maintain their relative ownership in SCI by purchasing
additional common shares at a price which is below the price at which Security
Capital is receiving common shares in the proposed merger. The funds from the
rights offering will be used to repay borrowings under SCI's unsecured line of
credit, for the acquisition and development of additional distribution
properties and for general corporate business purposes.
Debt Issuance
On July 11, 1997, SCI issued $100 million of Senior Notes due 2017 (the "July
1997 Notes"). The July 1997 Notes bear interest at 7.625% per annum payable
semi-annually on January 1 and July 1 of each year. The principal will mature
on July 1, 2017. The average effective interest cost is 7.73%, including all
costs associated with the offering plus $235,759 combined proceeds from a
forward treasury lock agreement and a swap agreement entered into in November
1996 in anticipation of the July debt offering. The forward treasury lock
agreement was on a notional amount of $26 million of U.S. Treasury bonds
maturing August 15, 2016 with a base price of 103.453% and effectively fixed
the 30-year Treasury bond used to price the July 1997 Notes at a rate of 6.56%.
The termination of the forward treasury lock resulted in a gain of $174,319.
The swap was on a notional amount of $33.0 million and required SCI to pay a
fixed rate of 6.61% on the notional amount in exchange for a floating rate
equal to the three-month LIBOR rate. The termination of the swap on July 8,
1997 resulted in a gain of $61,440.
F-117
<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-118
<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-119
<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
$30,469 in 1996, $17,788 in 1995 and
$10,093 in 1994 21,734 17,028 5,908
Property management fees paid to affiliate,
net of recoveries of $3,208 in 1996,
$2,351 in 1995 and $397 in 1994 4,940 1,432 1,336
Depreciation and amortization 59,850 39,767 18,169
Interest expense 38,819 32,005 7,568
REIT management fee paid to affiliate 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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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. Further, SCI
advances mortgage loans to SCI Development Services to fund acquisition,
development and construction ("AD&C") activity. In accordance with accounting
guidance for AD&C lending, therefore, SCI accounts for these loans as real
estate investments, effectively consolidating the activities of SCI Development
Services. 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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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- 147
<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-148
<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>
Commerce Park
Distribution
Center 4 $ 811 $ 4,597 $ 205 $ 811 $ 4,802 $ 5,613 $ (342)
Eastwood
Distribution
Center 1 (f) 122 690 36 122 726 848 (51)
Joe's Creek
Distribution
Center 3 (f) 242 1,369 174 242 1,543 1,785 (102)
Lakeland
Distribution
Center 1 938 5,313 541 938 5,854 6,792 (498)
Orchid Lake
Industrial
Center 1 41 235 10 41 245 286 (17)
Plant City
Distribution
Center 1 (f) 206 1,169 50 206 1,219 1,425 (86)
Sabal Park
Distribution
Center 1 352 - 3,042 352 3,042 3,394 (26)
Silo Bend
Distribution
Center 4 (f) 2,887 16,358 655 2,887 17,013 19,900 (1,131)
Silo Bend
Industrial
Center 1 (f) 525 2,975 222 525 3,197 3,722 (226)
St. Petersburg
Service Center 1 35 197 21 35 218 253 (15)
Tampa East
Distribution
Center 12 (f) 2,780 15,757 1,337 2,780 17,094 19,874 (1,165)
Tampa East
Industrial
Center 2 (f) 332 1,880 104 332 1,984 2,316 (139)
Tampa West
Distribution
Center 16 (d)(f) 3,341 19,046 1,663 3,400 20,650 24,050 (1,421)
Tampa West
Industrial
Center 4 (f) 700 1,161 3,569 700 4,730 5,430 (119)
Tampa West
Service Center 4 (f) 970 5,501 273 971 5,773 6,744 (405)
Tulsa, Oklahoma
52nd Street
Distribution
Center 1 340 1,924 64 340 1,988 2,328 (141)
70th East
Distribution
Center 1 129 733 131 129 864 993 (54)
East 55th Street
Distribution
Center 1 (f) 210 1,191 28 210 1,219 1,429 (88)
Expressway
Distribution
Center 4 573 3,280 322 573 3,602 4,175 (405)
Henshaw
Distribution
Center 3 500 2,829 70 499 2,900 3,399 (213)
Washington,
D.C./Baltimore
Ardmore
Distribution
Center 3 1,431 8,110 231 1,431 8,341 9,772 (549)
Ardmore
Industrial
Center 2 984 5,581 128 985 5,708 6,693 (381)
Chantilly
Distribution
Center 1 1,650 - 9,352 2,103 8,899 11,002 -
Concorde
Industrial
Center 4 1,538 8,717 319 1,538 9,036 10,574 (470)
De Soto Business
Park 5 (d) 1,774 10,055 978 1,774 11,033 12,807 (170)
Eisenhower
Industrial
Center 3 1,240 7,025 894 1,240 7,919 9,159 (515)
Fleet
Distribution
Center 8 3,198 18,121 430 3,198 18,551 21,749 (558)
Hampton Central
Distribution
Center 1 986 - 3,635 986 3,635 4,621 (59)
Patapsco
Distribution
Center 1 270 1,528 499 270 2,027 2,297 (57)
Sunnyside
Industrial
Center 3 1,541 8,733 947 1,541 9,680 11,221 (618)
Other markets 9 (f) 2,703 16,583 (105) 2,825 16,356 19,181 (748)
--- -------- ---------- -------- -------- ---------- ---------- ---------
Total Operat-
ing Properties 942 $352,574 $1,406,914 $515,196 $356,428 $1,918,256 $2,274,684 $(109,147)
--- -------- ---------- -------- -------- ---------- ---------- ---------
<CAPTION>
-------------
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
----------- -------------
<S> <C>
Commerce Park
Distribution
Center 1994
Eastwood
Distribution
Center 1994
Joe's Creek
Distribution
Center 1994
Lakeland
Distribution
Center 1994
Orchid Lake
Industrial
Center 1994
Plant City
Distribution
Center 1994
Sabal Park
Distribution
Center 1996
Silo Bend
Distribution
Center 1994
Silo Bend
Industrial
Center 1994
St. Petersburg
Service Center 1994
Tampa East
Distribution
Center 1994
Tampa East
Industrial
Center 1994
Tampa West
Distribution
Center 1994, 1995
Tampa West
Industrial
Center 1994, 1996
Tampa West
Service Center 1994
Tulsa, Oklahoma
52nd Street
Distribution
Center 1994
70th East
Distribution
Center 1994
East 55th Street
Distribution
Center 1994
Expressway
Distribution
Center 1993
Henshaw
Distribution
Center 1994
Washington,
D.C./Baltimore
Ardmore
Distribution
Center 1994
Ardmore
Industrial
Center 1994
Chantilly
Distribution
Center 1996
Concorde
Industrial
Center 1995
De Soto Business
Park 1996
Eisenhower
Industrial
Center 1994
Fleet
Distribution
Center 1996
Hampton Central
Distribution
Center 1996
Patapsco
Distribution
Center 1995
Sunnyside
Industrial
Center 1994
1991, 1994,
Other markets 1996
Total Operat-
ing Properties
</TABLE>
F-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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
(which are substantially consistent with US generally accepted auditing
standards). 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.
Supplementary information included in this annual financial report has been
reviewed in the context of our mandate but has not been subject to specific
audit procedures carried out in accordance with the standards described above.
Consequently, we express no opinion on such information. We have no observation
to make concerning such information in the context of the consolidated
financial statements taken as a whole.
Price Waterhouse Jean-Robert Lentz
Reviseur d'enterprises
Luxembourg, February 28, 1997
F-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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"), an investment company with variable capital. 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, an investment company
with fixed capital, 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-162
<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-163
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACCOUNTS RECEIVABLE AND PREPAYMENTS
A. Deferred Costs
The Company expensed formation costs of $1,654,000 in 1996, which should have
been amortized over the useful life of 5 years under US GAAP. Additionally, the
Company expensed line of credit fees of $3.7 million in 1996 related to costs
incurred in connection with arranging USREALTY's $300 million line of credit
while US GAAP would require such costs to be amortized over the term of the
line of credit of 3 years. These departures from US GAAP in these financial
statements are not considered material given that the total effect is
approximately 1% of "Increase in net assets resulting from operations".
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-164
<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-165
<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-166
<PAGE>
SECURITY CAPITAL U.S. REALTY
AUDITOR'S REPORT
To the Shareholders of
SECURITY CAPITAL U.S. REALTY
Luxembourg
We have audited the financial statements, which consist of the statement of net
assets, the statement of operations, the statement of changes in net assets and
the schedule of investments and the notes to the financial statements of
Security Capital U.S. Realty ("USREALTY") for the period ended December 31,
1995. These financial statements are the responsibility of the Board of
Directors of USREALTY. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing
(which are substantially consistent with US 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 the Board of Directors of USREALTY in preparing the financial
statements, 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 attached 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
USREALTY at December 31, 1995 and the results of its operations and changes in
its net assets for the period then ended.
Supplementary information included in the annual report has been reviewed in
the context of our mandate but has not been subject to specific audit
procedures carried out in accordance with the standards described above.
Consequently, we express no opinion on such information. We have no observation
to make concerning such information in the context of the financial statements
taken as a whole.
Jean-Robert Lentz Price Waterhouse S.A.
Reviseur d'enterprises Reviseur d'entreprises
Luxembourg, March 4, 1996
F-167
<PAGE>
SECURITY CAPITAL U.S. REALTY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1995
(EXPRESSED IN USD)
<TABLE>
<S> <C>
----------
<CAPTION>
ASSETS USD
------ ----------
<S> <C>
Investment in Pacific Retail Trust, at fair value (cost 53,059,324) 53,000,000
Investment in Special Opportunity Investment, at market value (cost
1,594,652) 1,779,688
Cash and cash equivalents 6,960,120
Formation expenses 1,654,407
Other assets, net 5,627
----------
TOTAL ASSETS 63,399,842
----------
<CAPTION>
LIABILITIES
-----------
<S> <C>
Accounts payable and accrued expenses 224,203
Management fee payable 20,925
Income taxes payable 6,680
----------
TOTAL LIABILITIES 251,808
----------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY) 63,148,034
==========
Net assets are comprised of:
Paid in capital 62,945,730
Undistributed net investment income 76,592
Unrealized appreciation on investments 125,712
----------
63,148,034
----------
Represented by 6,294,573 shares outstanding
Net asset value per share USD 10.03
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-168
<PAGE>
SECURITY CAPITAL U.S. REALTY
STATEMENT OF OPERATIONS FOR THE PERIOD FROM INCORPORATION (JULY 7, 1995) TO
DECEMBER 31, 1995
(EXPRESSED IN USD)
<TABLE>
---
<CAPTION>
USD
---------
<S> <C>
INCOME
Dividends from strategic investments:
Pacific Retail Trust (net of withholding tax of USD 89,040) 504,560
Interest:
Interest income, other 83,682
---------
TOTAL INCOME 588,242
---------
EXPENSES
Management fees 99,374
Custodian fees 7,494
Administrative expenses 7,494
Printing and professional expenses 27,516
Directors fees 16,159
Amortization of formation expenses 147,125
Interest expense on line of credit from Security Capital Group 162,628
Subscription tax 9,471
Other fees 34,389
---------
TOTAL EXPENSES 511,650
=========
Net investment income 76,592
---------
Increase in appreciation on investments 125,712
---------
Increase in net assets resulting from operations 202,304
=========
Per share data
Earnings per share 0.03
Weighted average shares outstanding 6,294,573
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-169
<PAGE>
SECURITY CAPITAL U.S. REALTY
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM
INCORPORATION (JULY 7, 1995) TO DECEMBER 31, 1995
(EXPRESSED IN USD)
<TABLE>
<S> <C>
----------
<CAPTION>
USD
----------
<S> <C>
Net investment income 76,592
Increase in appreciation on investments 125,712
----------
Increase in net assets resulting from operations 202,304
----------
Paid-in subscriptions 62,945,730
----------
Total increase in net assets 63,148,034
----------
Net assets at the beginning of the period 0
Net assets at the end of the period 63,148,034
==========
Net asset value at the end of the period 10.03
==========
STATEMENT OF CHANGES IN SHARES OUTSTANDING FOR THE PERIOD FROM
INCORPORATION (JULY 7, 1995) TO DECEMBER 31, 1995
Number of shares at the beginning of the period 0
Number of shares purchased 6,294,573
----------
Number of shares at the end of the period 6,294,573
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-170
<PAGE>
SECURITY CAPITAL U.S. REALTY
FINANCIAL HIGHLIGHTS FOR THE PERIOD FROM INCORPORATION (JULY 7, 1995)
TO DECEMBER 31, 1995
(EXPRESSED IN USD)
<TABLE>
<S> <C>
Selected per share data
Net asset value at the beginning of the period 0.00
Initial subscription 10.00
Net investment income 0.01
Net gain on securities 0.02
-----
Total from investment operations 0.03
-----
Net asset value at the end of the period 10.03
=====
</TABLE>
SECURITY CAPITAL U.S. REALTY
SCHEDULE OF STRATEGIC INVESTMENTS IN REAL ESTATE COMPANIES AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SECURITY SHARES/UNITS COST FAIR VALUE NET ASSETS
- -------- ------------ ---- ---------- -------------
(SEE NOTE 2)
<S> <C> <C> <C> <C>
PACIFIC 5,300,000 53,059,324 53,000,000 83.93%
RETAIL TRUST
</TABLE>
Total strategic investments in real estate companies: USD 53,000,000
SCHEDULE OF SPECIAL OPPORTUNITY INVESTMENTS AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
PROPERTY TYPE SHARES/UNITS COST MARKET VALUE NET ASSETS
- ------------- ------------ ---- ------------ -------------
Companies in which USREALTY owns a 5% or Greater Interest:
<S> <C> <C> <C> <C> <C>
NONE
Companies in which USREALTY owns less than 5% (Grouped by Property Type):
Office 167,500 1,594,652 1,779,688 2.82%
Total special opportunity
investments:USD 1,779,688
</TABLE>
USREALTY will provide the December 31, 1995 list of its investments to
Shareholders, free of charge upon request.
The accompanying notes are an integral part of these financial statements.
F-171
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 1995
NOTE 1--ORGANIZATION
Security Capital U.S. Realty ("USREALTY") is a Luxembourg real estate
corporation organized as a "Societed'investissement a Capital Variable"
(SICAV). USREALTY was formed on July 7, 1995 for the purpose of owning United
States of America real estate primarily through companies in which it has a
strategic ownership position. USREALTY owns its assets through its wholly-owned
Luxembourg subsidiary, Security Capital Holdings S.A. ("HOLDINGS"). All
accounts of HOLDINGS have been consolidated with US REALTY and all significant
intercompany transactions have been eliminated upon consolidation. References
herein to USREALTY are to the consolidated entity unless noted otherwise.
As of December 31, 1995, $509.50 million of equity capital subscriptions were
received, of which $62.95 million have been called and funded, with the balance
of $446.55 million available for future investments. The Board of Directors may
call these subscriptions at its discretion.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
A. Fair Value Basis of Presentation:
USREALTY accounts for its investments at fair value as management believes 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 as 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.
Under fair value accounting, unrealized gains (or losses) are determined by
comparing fair value of the securities held to the cost of such securities.
Unrealized gains or losses relating to changes in 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 realized. Under current tax laws, USREALTY
investment gains generally are not subject to income taxes.
USREALTY's investments are generally long-term and it does not intend to sell
securities simply to realize gain thereon (other than in the case of special
opportunity investments).
At December 31, 1995, 96.75% of USREALTY's investments were private 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 realizable 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. Interest income
is recorded on the accrual basis. Realized gains and losses on sales of shares
are determined on the identified cost method.
C. Organization Costs:
Costs totalling $1,801,533 associated with the formation of USREALTY and its
initial private placement have been deferred and are being amortized over five
years. These costs exceeded the $1.2 million estimated in USREALTY's private
offering due to an extended offering period and greater than anticipated
documentation costs for consummating the private offering.
F-172
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1995 (CONTINUED)
NOTE 3--TAXATION
USREALTY, as separate from HOLDINGS, is not liable for any Luxembourg tax on
income. USREALTY is liable in Luxembourg for a tax of 0.06% per annum of its
net asset value. Cash dividends and interest received by USREALTY or HOLDINGS
on their investments may be subject to non-recoverable withholding or other
taxes in the countries of origin which are reflected as withholding taxes in
the statement of operations.
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 REIT investments which meet certain holding period (generally one
calendar year) and size requirements. Substantially all of HOLDINGS's
investments should qualify for the exclusion. Interest accrued on advances from
USREALTY to HOLDINGS are deducted in determining HOLDINGS's taxable income.
Income paid from HOLDINGS to USREALTY is subject to various levels of tax. Cash
(but not accrued) interest payments from HOLDINGS to USREALTY, which were
$178,131, are subject to withholding tax at a rate of 3.75% and totalled $6,680
for 1995. No dividends were paid.
NOTE 4--INVESTMENTS
USREALTY plans to deploy 60-85% of its assets into long-term strategic
ownership positions and 10-25% into intermediate-term special opportunity
ownership positions and 0-10% into Security Capital Group securities.
The 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, 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 characterized
by the potential for a superior market niche and the ultimate potential for
market preeminence with a focused strategy and product.
Special opportunity (less than 10% of the fully diluted stock) positions in US
public REITs and real estate companies have and will take the form of either
direct investments in, or public market purchases of, companies that possess
the requisite fundamentals to generate strong cash flow growth and/or value
appreciation.
Pacific Retail Trust ("PRT"), a privately-held REIT considered a strategic
investment, focuses in its target market on the development, acquisition,
operation and long-term ownership of income-producing retail properties. PRT
focuses, in the western United States, specifically on neighborhood shopping
centers with protected infill locations which are anchored by grocery and drug
stores. PRT will remarket and remerchandise its centers to energize the shop
space and grow cash flow. On October 19, 1995, USREALTY invested $53,000,000 at
$10.00 per share in PRT. At December 31, 1995, USREALTY owned 81.2% of PRT's
outstanding voting shares. USREALTY has committed to invest an additional $147
million in PRT at a price of $10 per share. A majority of PRT's directors are
USREALTY nominees.
On November 5, 1995, USREALTY and HOLDINGS signed an agreement to invest $250
million into common stock of Carr Realty Corporation ("Carr") at $21.50 per
share. (Carr stock closed at $24.25 per share on the New York Stock Exchange on
January 31, 1996.) This Company is the largest owner and operator of office
space in the Washington, D.C. market. It changed its name to CarrAmerica Realty
Corporation ("CarrAmerica") and is implementing a national strategy focused on
value-driven suburban office properties which will permit CarrAmerica to
provide the highest level of service to national, regional and local users of
corporate office space in the growth markets of the U.S. USREALTY and HOLDINGS
will make an initial investment of $140 million in April 1996. Coincident with
its initial investment, USREALTY will appoint two nominees to CarrAmerica's
board, with the right to appoint an additional two when the full $250 million
is invested.
F-173
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1995 (CONTINUED)
USREALTY intends to invest up to a maximum of 10% of its total assets in
securities of Security Capital Group Incorporated ("Security Capital") which,
through wholly-owned subsidiaries, has subscribed for 39% of USREALTY's total
subscribed shares and is the sole shareholder of USREALTY's Advisor. 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 arms-length basis. When and if Security Capital
becomes traded on a recognized securities market. USREALTY may purchase
Security Capital securities from third parties in open-market transactions.
USREALTY's valuation of its investment in Security Capital will take into
account the cross ownership holdings between the companies.
NOTE 5--ADVISORY AGREEMENT
USREALTY has an advisory agreement with Security Capital (EU) Management S.A.
("Advisor"), a wholly-owned subsidiary of Security Capital. The agreement
requires the Advisor to provide USREALTY with advice with respect to the
investment of assets of USREALTY. The Advisor will identify tangible investment
opportunities in US 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 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 Advisor
subcontracts for certain services through its wholly-owned affiliate, Security
Capital (UK) Management Limited, and another Security Capital subsidiary,
Security Capital Investment Research Incorporated. The Advisor is entitled to a
management fee, payable monthly, 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.
NOTE 6--OPERATING EXPENSES
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.
Operating expenses, as defined in the prospectus, will be payable by USREALTY
to the extent that they fall below 0.25% per annum of the average daily value
of long-term investments of USREALTY. Any amounts exceeding 0.25% will be borne
by the Advisor.
F-174
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1995 (CONTINUED)
NOTE 7--LINE OF CREDIT
USREALTY's wholly-owned subsidiary, HOLDINGS, received preliminary commitment
for a $150 million line of credit from Commerzbank International S.A.
Commerzbank proposes to syndicate the loan to an international bank group with
a view towards increasing the line of credit to $200 million.
The line of credit will bear interest at the annual rate of Libor plus 1.75%
or, at USREALTY's option, at the prime lending rate for major U.S. banks. The
line of credit will be secured by all assets owned by HOLDINGS, which
represents substantially all of USREALTY's assets. USREALTY will guarantee the
loan and secure its guarantee by pledging its stock in HOLDINGS.
In order to fund its initial investment in Pacific Retail Trust prior to
receiving subscription funds, and thereby comply with certain technical
requirements for an exemption from certain U.S. pension fund rules, USREALTY
borrowed $53 million from a subsidiary of Security Capital, which was repaid
upon receipt by USREALTY of its initial subscription amounts. USREALTY paid
interest on this loan (aggregating $162,628) at the prime rate for major U.S.
banks, which was the rate at which Security Capital borrowed the funds which it
loaned to USREALTY.
NOTE 8--CHANGES IN INVESTMENT PORTFOLIO
A detailed schedule of portfolio changes is available free of charge upon
request at the registered office of USREALTY.
F-175
<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-176
<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-177
<PAGE>
LOGO
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the offering of the shares being registered. All the amounts
shown are estimates (other than the SEC registration fee).
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee............................................ $ 30,615
New York Stock Exchange listing fee............................. 26,389
Printing and engraving fees..................................... 110,000
Legal fees and expenses (other than Blue Sky)................... 200,000
Accounting fees and expenses.................................... 130,000
Blue Sky fees and expenses (including fees of counsel).......... 5,000
Miscellaneous expenses.......................................... 197,996
--------
Total....................................................... $700,000
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33 below.
ITEM 33. 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 $425,137,000. 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 $266,336,000 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
43,493 Class A Shares and $32,947,000 of its 2014 Convertible Debentures
(convertible into an aggregate of approximately 31,498 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 307,958 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
April 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 for
accredited investors 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 June 30, 1997, 9,753 Class A Shares have
been issued pursuant to
II-1
<PAGE>
such plan. On September 4, 1996, the Registrant instituted an interest
reinvestment plan for accredited investors 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 June 30,
1997, 2,885 Class A Shares have been issued pursuant to such plan.
Since January 1, 1994, the Registrant has granted options to purchase an
aggregate of 91,396 Class A Shares to directors and officers of the Registrant
and its subsidiaries. Since January 1, 1996, options to purchase 8,644 Class A
Shares at an aggregate exercise price of approximately $2,170,000 and
approximately $4,240,000 of 2014 Convertible Debentures (convertible into
approximately 4,054 Class A Shares) were exercised. Since January 1, 1994, the
Registrant has issued an aggregate of 85 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) and Regulation D promulgated thereunder.
ITEM 34. 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,
II-2
<PAGE>
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."
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 limits such liability to the maximum extent permitted
by Maryland law.
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 or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. In addition, Maryland law
permits a corporation to advance reasonable expenses to a director or officer
upon the corporation's receipt of (a) a written affirmation by the director or
officer of his or her good faith belief that he or she has met the standard of
conduct necessary for indemnification by the corporation and (b) a written
statement by or on his or her behalf to repay the amount paid or reimbursed by
the corporation if it shall ultimately be determined that the standard of
conduct was not met.
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 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 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
The consideration to be received by the Registrant for the capital stock
registered will be credited to the appropriate capital stock account.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) See Index to Exhibits.
(b) See Index to Financial Statements included as part of the Prospectus.
(c) See Annex II and Annex III to the Prospectus.
II-3
<PAGE>
ITEM 37. UNDERTAKINGS.
The undersigned Registrant hereby undertakes: (1) to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereto) which, individually or
in the aggregate, represent a fundamental change in the information set forth
in the registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; (2) that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and (3) to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The Registrant undertakes that every prospectus: (1) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be a part of this registration statement as
of the time it was declared effective; and (2) for the purposes of determining
any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SANTA FE, STATE OF NEW MEXICO ON THE 30TH DAY OF
SEPTEMBER, 1997.
Security Capital Group Incorporated
By: _________________________________
/s/ Jeffrey A. Klopf
Jeffrey A. Klopf
Senior Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William D. Sanders* Chairman of the Board of
____________________________________ Directors, President and
William D. Sanders Chief Executive Officer
(principal executive
officer) and Director
/s/ Paul E. Szurek* Chief Financial Officer
____________________________________ (principal financial
Paul E. Szurek officer)
/s/ Jayson C. Cyr* Vice President (principal
__________________________________ accounting officer)
Jayson C. Cyr
/s/ Samuel W. Bodman* Director
____________________________________
Samuel W. Bodman
/s/ Hermann Buerger* Director
____________________________________
Hermann Buerger
/s/ John P. Frazee, Jr.* Director
____________________________________
John P. Frazee, Jr.
/s/ Cyrus R. Freidheim, Jr.* Director
____________________________________
Cyrus F. Freidheim, Jr.
/s/ H. Laurance Fuller* Director
____________________________________
H. Laurence Fuller
/s/ Ray L. Hunt* Director
____________________________________
Ray L. Hunt
/s/ John T. Kelley, III* Director
____________________________________
John T. Kelley, III
/s/ Peter S. Willmott* Director
____________________________________
Peter S. Willmott
</TABLE>
/s/ Jeffrey A.
Klopf September 30,
*By: __________________________ 1997
Jeffrey A. Klopf
Attorney-in-fact
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
2.1 Merger and Issuance Agreement, dated as of March 24, 1997, between
Security Capital Atlantic Incorporated ("ATLANTIC") and Security
Capital (the "ATLANTIC Merger") (incorporated by reference to Exhibit
2.1 to the ATLANTIC Form 8-K filed March 26, 1997 (File No. 1-12303,
the "ATLANTIC Form 8-K"))
2.2 Merger and Issuance Agreement, dated as of March 24, 1997, between
Security Capital Pacific Trust ("PTR") and Security Capital (the "PTR
Merger") (incorporated by reference to Exhibit 2.1 to the PTR Form 8-
K filed March 26, 1997 (File No. 1-10272, the "PTR Form 8-K")
2.3 Merger and Issuance Agreement, dated as of March 24, 1997, between
Security Capital Industrial Trust ("SCI") and Security Capital (the
"SCI Merger") (incorporated by reference to Exhibit 2.1 to the SCI
Form 8-K filed March 26, 1997 (File No. 1-12846, the "SCI Form 8-K"))
2.4 ATLANTIC Merger Form of Agreement and Plan of Merger (incorporated by
reference to Exhibit 2.4 to Security Capital's registration statement
on Form S-4 as amended on Form S-11 (File No. 333-26263, the "SC
ATLANTIC Form S-11"))
2.5 PTR Merger Form of Agreement and Plan of Merger (incorporated by
reference to Exhibit 2.5 to Security Capital's registration statement
on Form S-4 as amended on Form S-11 (File No. 333-25267, the "SC PTR
Form S-11"))
2.6* SCI Merger Form of Agreement and Plan of Merger
2.7 First Amendment, dated April 21, 1997, to Merger and Issuance
Agreement, between ATLANTIC and Security Capital (incorporated by
reference to Exhibit 2.7 to the SC ATLANTIC Form S-11)
2.8 Second Amendment, dated June 26, 1997, to Merger and Issuance
Agreement, between ATLANTIC and Security Capital (incorporated by
reference to Exhibit 2.8 to the SC ATLANTIC Form S-11)
2.9 First Amendment, dated April 21, 1997, to Merger and Issuance
Agreement, between PTR and Security Capital (incorporated by
reference to Exhibit 2.9 to the SC PTR Form S-11)
2.10 Second Amendment, dated June 26, 1997, to Merger and Issuance
Agreement, between PTR and Security Capital (incorporated by
reference to Exhibit 2.10 to the SC PTR Form S-11)
2.11* First Amendment, dated April 21, 1997, to Merger and Issuance
Agreement, between SCI and Security Capital
2.12* Second Amendment, dated June 26, 1997, to Merger and Issuance
Agreement, between SCI and Security Capital
2.13 Third Amendment, dated July 22, 1997, to Merger and Issuance
Agreement, between ATLANTIC and Security Capital (incorporated by
reference to Exhibit 2.13 to the SC ATLANTIC Form S-11)
2.14 Third Amendment, dated July 22, 1997, to Merger and Issuance
Agreement, between PTR and Security Capital (incorporated by
reference to Exhibit 2.13 to the SC PTR Form S-11)
2.15* Third Amendment, dated July 22, 1997, to Merger and Issuance
Agreement, between SCI and Security Capital
4.1 Security Capital Articles of Amendment and Restatement (incorporated
by reference to Exhibit 4.1 to Security Capital's registration
statement on Form S-1 as amended on Form S-11 (File No. 333-26037,
the "SC Form S-11"))
4.2 Security Capital Amended and Restated Bylaws (incorporated by
reference to Exhibit 4.2 to the SC Form S-11)
4.3 Form of Rights Agreement between Security Capital and The First
National Bank of Boston, as Rights Agent, including form of Rights
Certificate (incorporated by reference to Exhibit 4.3 to the SC Form
S-11)
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
4.4 Form of stock certificate for shares of Class A common stock of
Security Capital (incorporated by reference to Exhibit 4.4 to the SC
Form S-11)
4.5 Form of stock certificate for shares of Class B common stock of
Security Capital (incorporated by reference to Exhibit 4.5 to the SC
Form S-11)
4.6 Form of 12% Convertible Subordinated Debentures due June 30, 2014
(incorporated by reference to Exhibit 4.6 to the SC Form S-11)
4.7 Form of 6.50% Convertible Subordinated Debentures due March 29, 2016
(incorporated by reference to Exhibit 4.7 to the SC Form S-11)
4.8 Form of Warrant Agreement by and between Security Capital and The
First National Bank of Boston, as warrant agent, including form of
warrant certificate (incorporated by reference to Exhibit 4.8 to the
SC Form S-11)
4.9 Stock Purchase Warrant issued June 30, 1994 by Security Capital to
Citibank, N.A. (incorporated by reference to Exhibit 4.9 to the SC
Form S-11)
5* Opinion of Mayer, Brown & Platt (including form of opinion of Ballard
Spahr Andrews & Ingersoll in support thereof)
8.1* Opinion of Mayer, Brown & Platt as to cetain tax matters
8.2 Internal Revenue Service Private Letter Ruling dated July 11, 1997
(incorporated by reference to Exhibit 8.2 to the SC ATLANTIC Form S-
11)
10.1 Investor Agreement, dated as of October 28, 1993, between ATLANTIC and
Security Capital (incorporated by reference to Exhibit 10.4 to
ATLANTIC's Form S-11 (File No. 333-7071, the "ATLANTIC Form S-11"))
10.2 Form of Amended Restated Investor Agreement between ATLANTIC and
Security Capital (incorporated by reference to Exhibit 10.1 to 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 Homestead's 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, a predecessor to PTR
("PTA"), and Security Capital Realty Incorporated, a predecessor to
Security Capital ("SCRI") (incorporated by reference to Exhibit 10.1
to PTR's Form 8-K dated July 19, 1994)
10.5 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 Form S-2
(File No. 33-43201))
10.6 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)
10.7 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)
10.8 Form of Third Amended and Restated Investor Agreement between PTR and
Security Capital (incorporated by reference to Exhibit 10.1 to the
PTR Form 8-K)
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 Form S-3 (File No. 33-73382))
10.10 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)
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.11 Form of Third Amended and Restated Investor Agreement between SCI and
Security Capital (incorporated by reference to Exhibit 10.1 to the
SCI Form 8-K)
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 1, 1997 between Security Capital U.S.
Realty, Security Capital Holdings, S.A. and Security Capital (EU)
Management S.A. (incorporated by reference to Exhibit 10.21 to the SC
Form S-11)
10.22 Acquisition Agreement and Plan of Reorganization dated as of April 24,
1997 among Security Capital, Security Capital BVI Holdings
Incorporated and William D. Sanders (incorporated by reference to
Exhibit 10.22 to the SC Form S-11)
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
(incorporated by reference to Exhibit 10.23 to the SC Form S-11)
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 (incorporated by reference to Exhibit 10.24 to the SC
Form S-11)
10.25 Amended and Restated Guaranty, dated as of August 19, 1996, by
Security Capital in favor of Wells Fargo Realty Advisors,
Incorporated (incorporated by reference to Exhibit 10.25 to the SC
Form
S-11)
10.26 Form of Indemnification Agreement entered into between Security
Capital and each of its directors and employees (incorporated by
reference to Exhibit 10.26 to the SC Form S-11)
10.27 1996 Security Capital Outside Directors Plan (incorporated by
reference to Exhibit 10.27 to the SC Form S-11)
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.28 Security Capital 1995 Option Plan (as amended and restated effective
as of December 3, 1996) (incorporated by reference to Exhibit 10.28
to the SC Form S-11)
10.29 Security Capital Deferred Fee Plan for Directors (incorporated by
reference to Exhibit 10.29 to the SC Form S-11)
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
to the SC Form S-11)
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
to the SC Form S-11)
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
to the SC Form S-11)
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
to the SC Form S-11)
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 to the SC Form S-11)
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 to the SC Form S-11)
10.36 Form of Secured Promissory Note from certain executive officers to
Security Capital (incorporated by reference to Exhibit 10.36 to the
SC Form S-11)
10.37 First Amendment to Amended and Restated Credit Agreement and Guaranty,
dated as of July 21, 1997, by and among SC Realty Incorporated,
Security Capital and Wells Fargo Bank National Association
(incorporated by reference to Exhibit 10.37 to the SC PTR Form S-11)
11 Fully Diluted Earnings per Common Share and Common Equivalent Share
(incorporated by reference to Exhibit 11 to the SC Form S-11)
12.1* Security Capital Industrial Trust Computation of Ratios
15.1 Letter of Arthur Andersen LLP regarding Security Capital unaudited
interim financial information
15.2 Letter of KPMG Peat Marwick LLP regarding unaudited interim financial
information
15.3 Letter of Arthur Andersen LLP regarding SCI audited interim financial
information
21 Subsidiaries of Security Capital (incorporated by reference to Exhibit
21 to the SC Form
S-11)
23.1* Consents of Mayer, Brown & Platt (included in the opinions filed as
Exhibit 5 and
Exhibit 8)
23.2* Consent of Ballard Spahr Andrews & Ingersoll (included in the opinion
filed as a part of Exhibit 5)
23.3 Consent of Arthur Andersen LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Price Waterhouse LLP
23.6 Consent of Ernst & Young LLP
23.7 Consent of Ernst & Young LLP
24.1* Power of Attorney pursuant to which amendments to this Registration
Statement may be filed
24.2* Power of Attorney of Paul E. Szurek
</TABLE>
- --------
*Previously filed
E-4
<PAGE>
EXHIBIT 15.1
September 29, 1997
Board of Directors and Shareholders
Security Capital Group Incorporated:
We are aware that Security Capital Group Incorporated has included in its
Registration Statement Nos. 333-26259, 333-26267 and 333-26263 its consolidated
financial statements for the quarter ended June 30, 1997, which includes our
report dated August 11, 1997 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act of
1933 (the "Act"), that report is not considered a part of such registration
statements prepared or certified by our firm or a report prepared or certified
by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
<PAGE>
EXHIBIT 15.2
The Board of Directors
Security Capital Group Incorporated
With respect to Post-Effective Amendment No. 1 to the registration statement on
Form S-11 (File No. 333-26259) of Security Capital Group Incorporated, which
includes a prospectus related to Security Capital Group Incorporated, we
acknowledge our awareness of the use therein of our report dated August 13, 1997
related to our review of interim financial information of Security Capital
Pacific Trust as of June 30, 1997 and for the three and six month periods ended
June 30, 1997 and 1996. Pursuant to Rule 436(c) under the Securities Act of
1933, such report is not considered a part of a registration statement prepared
or certified by an accountant, or a report prepared or certified by an
accountant within the meaning of sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
September 30, 1997
<PAGE>
EXHIBIT 15.3
September 29, 1997
Board of Directors and Shareholders of
Security Capital Group Incorporated:
We are aware that Security Capital Group Incorporated has included
in its Registration Statement Nos. 333-26259, 333-26267 and 333-26263 Security
Capital Industrial Trust's consolidated financial statements for the quarter
ended June 30, 1997, which includes our report dated August 11, 1997 covering
the unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the "Act"), that report is not
considered a part of such registration statements prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the consolidated financial statements and schedules of Security
Capital Group Incorporated and Security Capital Industrial Trust and to all
references to our Firm included in or made a part of this registration
statement.
Arthur Andersen LLP
Chicago, Illinois
September 29, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of
Security Capital Group Incorporated:
We consent to the use of our report included herein dated January 29, 1997,
except as to Note 13, which is as of March 10, 1997, relating to the balance
sheets of Security Capital Pacific Trust as of December 31, 1996 and 1995, the
related statements of earnings, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, and the related
schedule as of December 31, 1996, and to the reference to our firm under the
heading "Experts" in this Post-Effective Amendment No. 1 to registration
statement on Form S-11 of Security Capital Group Incorporated which includes a
prospectus related to Security Capital Group Incorporated.
KPMG Peat Marwick LLP
Chicago, Illinois
September 30, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Post-Effective Amendment No. 1 to the
Form S-11 Registration Statement filed by Security Capital Group Incorporated,
in connection with the registration of its Warrants to purchase Class B common
stock that may be subscribed by security holders of Security Capital
Industrial Trust (the "Registration Statement") of our reports dated March 4,
1996 and February 28, 1997, relating to the consolidated financial statements
of Security Capital US Realty SICAV, which appear in such Registration
Statement.
Price Waterhouse SA
24-26 Avenue de Liberte
Luxembourg, L-1014
September 29, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 3, 1997 with respect to
the financial statements at December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 of Security Capital Atlantic
Incorporated, which is included in Post-Effective Amendment No. 1 to the
Registration Statement on Form S-11 (No. 333-26259) and the related Prospectus
of Security Capital Group Incorporated.
Ernst & Young LLP
Dallas, Texas
September 29, 1997
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 24, 1997 with respect to
the financial statements at December 31, 1996 and for the year ended December
31, 1996 of Homestead Village Incorporated, which is included in Post-
Effective Amendment No. 1 to the Registration Statement on Form S-11 (No. 333-
26259) and the related Prospectus of Security Capital Group Incorporated.
Ernst & Young LLP
Dallas, Texas
September 29, 1997
