<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-26263
LOGO
To the Shareholders of Security Capital Atlantic Incorporated ("ATLANTIC"):
You are invited to attend a special meeting of ATLANTIC shareholders to be
held in Atlanta, Georgia on September 8, 1997 at 10:00 a.m. local time.
The purpose of the special meeting is to consider a transaction by which
ATLANTIC will become internally managed. At the meeting you will be asked to
consider and vote upon a proposed Merger and Issuance Agreement which
contemplates (i) the merger of ATLANTIC's REIT manager and property manager
with and into a subsidiary of ATLANTIC in exchange for 2,306,591 ATLANTIC
common shares, (ii) the issuance by ATLANTIC to its common shareholders of
rights to subscribe for and purchase additional ATLANTIC common shares at a
discount to the price of those being acquired by Security Capital Group
Incorporated ("Security Capital") and (iii) the issuance by Security Capital
of warrants to purchase shares of Class B Common Stock of Security Capital
directly to holders of ATLANTIC common shares (other than Security Capital).
You will also be asked to approve a long-term incentive plan for officers and
key employees. If the foregoing proposals are approved, each holder of
ATLANTIC common shares will (1) retain his or her existing ATLANTIC common
shares, (2) receive rights to purchase additional ATLANTIC common shares and
(3) receive warrants to purchase shares of Security Capital Class B Common
Stock. The transaction and certain related matters are described in detail in
the accompanying Proxy Statement and Prospectus. Please review it carefully.
After careful consideration, the Board of Directors has unanimously approved
the transaction and recommends that all shareholders vote for its approval.
The affirmative vote of holders of a majority of the outstanding common shares
of ATLANTIC will be necessary for approval of the Merger and Issuance
Agreement. The affirmative vote of a majority of the votes cast at the meeting
is necessary for the approval of the long-term incentive plan. Security
Capital intends to vote its ATLANTIC common shares, representing approximately
51% of the outstanding shares, in favor of each proposal.
Please complete, sign and date your enclosed proxy card and return it to us
in the accompanying envelope as soon as possible. Failure to return your proxy
card or to vote in person at the special meeting will have the effect of a
vote against the Merger and Issuance Agreement. Returning your completed proxy
card will not limit your right to vote in person if you attend the special
meeting.
If you have any questions regarding the proposed transaction, please call
Georgeson & Company, Inc., our proxy solicitation and information agent, at
(800) 223-2064.
Very truly yours,
LOGO
Constance B. Moore
Co-Chairman
YOUR PROXY IS IMPORTANT--PLEASE RESPOND PROMPTLY
SIX PIEDMONT CENTER . ATLANTA, GEORGIA 30305 . (404) 237-9292
<PAGE>
LOGO
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Security
Capital Atlantic Incorporated, a Maryland corporation ("ATLANTIC"), will be
held on Monday, September 8, 1997, commencing at 10:00 a.m., local time, at
the offices of ATLANTIC at Six Piedmont Center, Atlanta, Georgia 30305, for
the following purposes:
1. To consider and vote upon the approval of a Merger and Issuance
Agreement dated as of March 24, 1997, as amended (the "Merger Agreement"),
between ATLANTIC and Security Capital Group Incorporated, a Maryland
corporation ("Security Capital"), pursuant to which, among other matters,
(i) Security Capital would contribute to ATLANTIC, through a merger
transaction, all of Security Capital's REIT management and property
management businesses and operations relating to ATLANTIC, in exchange for
2,306,591 common shares of ATLANTIC, (ii) ATLANTIC would issue to its
shareholders rights to subscribe for and purchase additional ATLANTIC
common shares at a discount to the price as those being acquired by
Security Capital through the merger transaction and (iii) Security Capital
would issue warrants to acquire shares of its Class B Common Stock directly
to the holders of ATLANTIC common shares (other than Security Capital), all
as more fully described in the accompanying Proxy Statement and Prospectus;
2. To approve the adoption of the Security Capital Atlantic Incorporated
1997 Long-Term Incentive Plan (the "1997 Incentive Plan"); and
3. To transact any other business that may properly come before the
special meeting or any adjournment or postponement thereof.
A copy of the Merger Agreement is set forth as Annex I to the Proxy
Statement and Prospectus attached hereto and is incorporated herein by
reference. A copy of the 1997 Incentive Plan is set forth in Annex II to the
Proxy Statement and Prospectus attached hereto and is incorporated herein by
reference.
The Board of Directors of ATLANTIC has fixed August 6, 1997 as the record
date for the determination of shareholders entitled to notice of and to vote
at the special meeting. The affirmative vote of the holders of a majority of
the outstanding common shares of ATLANTIC entitled to vote at the special
meeting is necessary to approve and adopt proposal 1 above and the affirmative
vote of a majority of the votes cast at the meeting in person or by proxy is
necessary to approve and adopt proposal 2 above. Holders of common shares of
ATLANTIC are not entitled to dissenters' appraisal rights under Maryland law
in connection with any of the proposals.
Registered owners of common shares who plan to attend the special meeting
must detach and retain the admission ticket which is attached to the proxy
card. Beneficial owners of common shares who plan to attend the special
meeting in person may obtain admission tickets in advance by sending written
requests, along with proof of ownership, such as a bank or brokerage firm
account statement, to: Assistant Secretary, Security Capital Atlantic
Incorporated, Six Piedmont Center, Atlanta, Georgia 30305. Record owners and
beneficial owners (including the holders of valid proxies therefrom) who do
not present admission tickets at the meeting will be admitted upon
verification of ownership at the admission counter at the special meeting.
Verification of ownership for record holders (including the holders of valid
proxies therefrom) will consist of a valid form of personal identification
(such as a driver's license or passport) and for beneficial owners will
consist of a bank or brokerage firm account statement together with a valid
form of personal identification.
Whether or not you plan to attend the special meeting, please fill in, date
and sign the proxy card furnished herewith and mail it promptly in the
enclosed pre-addressed envelope, which requires no postage if mailed in the
United States.
By Order of the Board of Directors,
LOGO
Jeffrey A. Klopf
Secretary
Atlanta, Georgia
August 8, 1997
SIX PIEDMONT CENTER . ATLANTA, GEORGIA 30305 . (404) 237-9292
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PROXY STATEMENT
----------------
SECURITY CAPITAL GROUP INCORPORATED
PROSPECTUS
This Proxy Statement and Prospectus relates to (i) a proposed transaction
pursuant to which Security Capital Atlantic Incorporated ("ATLANTIC") will
acquire, through a merger transaction (the "Merger"), the operations and
businesses of its REIT manager and property manager currently being conducted
through wholly owned subsidiaries of Security Capital Group Incorporated
("Security Capital"), in exchange for 2,306,591 shares of ATLANTIC common
stock, $0.01 par value per share ("Common Shares"), and pursuant to which
Security Capital will issue (the "Warrant Issuance") warrants having an
aggregate exercise price of $46,926,322 (the "Warrants"), each to purchase one
share of Class B Common Stock, $0.01 par value per share (the "Class B
Shares"), of Security Capital to holders of ATLANTIC Common Shares other than
Security Capital, all as contemplated by the terms of a Merger and Issuance
Agreement dated as of March 24, 1997, as amended (the "Merger Agreement"); and
(ii) the approval of the Security Capital Atlantic Incorporated 1997 Long-Term
Incentive Plan (the "1997 Incentive Plan").
ATLANTIC is soliciting proxies from its shareholders for use at a Special
Meeting of Shareholders of ATLANTIC scheduled to be held on September 8, 1997
and at any adjournment or postponement thereof (the "Special Meeting") to
consider the matters described above. A copy of the Merger Agreement is
attached to this Proxy Statement and Prospectus as Annex I and is incorporated
herein by reference. A copy of the 1997 Incentive Plan is attached to this
Proxy Statement and Prospectus as Annex II and is incorporated herein by
reference.
This Proxy Statement and Prospectus constitutes both the proxy statement of
ATLANTIC relating to the solicitation of proxies by ATLANTIC's Board of
Directors (the "Board of Directors") for use at the Special Meeting, and the
prospectus of Security Capital with respect to the Warrants. The actual number
of Warrants (which will have an aggregate exercise price of $46,926,322) that
will be issued to holders of Common Shares will depend on both the price at
which the Class B Shares are trading on the Warrant Issuance Date (as
hereafter defined), and on the number of Common Shares outstanding on the
record date determined by the Board of Directors of Security Capital (the
"Warrant Issuance Record Date"). The exercise price for each Warrant will be
equal to the closing price of a Class B Share on the Warrant Issuance Date.
The number of Warrants to be received by each shareholder will not be
determined until after the shareholders approve the Transaction. Information
concerning Security Capital is set forth in the Security Capital Prospectus
attached hereto and is incorporated herein by reference. This Proxy Statement
and Prospectus and the enclosed form of proxy are first being sent to
shareholders of ATLANTIC on or about August 8, 1997. A shareholder who returns
a signed proxy may revoke it at any time prior to its exercise.
Concurrently with the consummation of the transactions contemplated by the
Merger Agreement, including the Warrant Issuance (the "Transaction"), ATLANTIC
expects to close a rights offering of up to approximately $57.1 million of
Common Shares (the "Concurrent Rights Offering"). The Concurrent Rights
Offering is being made pro rata to ATLANTIC shareholders at $22.375 per share,
which is below the price at which Security Capital will receive Common Shares
in the Merger. The price of the Common Shares to be issued in the Concurrent
Rights Offering is equal to 94.51% of the five-day trailing average closing
price of the Common Shares on the day prior to the ATLANTIC Record Date (as
hereafter defined). Security Capital has agreed that it will not exercise any
rights it receives in the Concurrent Rights Offering. Shareholders will be
entitled to subscribe for Common Shares not purchased by other shareholders
pursuant to an oversubscription privilege. Accordingly, the Concurrent Rights
Offering represents an opportunity for holders of Common Shares to maintain
(and, to the extent a shareholder successfully oversubscribes for Common
Shares pursuant to the oversubscription privilege, to increase) their
proportionate interest in Common Shares. The Concurrent Rights Offering is
being made pursuant to a separate prospectus of ATLANTIC. See "The
Transaction--Concurrent Rights Offering."
ATLANTIC has proposed to offer up to $50 million of its shares of preferred
stock and up to $150 million principal amount of its senior debt securities.
Such offerings are not related to the Transaction and are presently expected
to close prior to the Special Meeting. See "Preferred Share and Note
Offerings."
SEE "RISK FACTORS" AT PAGE 15 OF THIS PROXY STATEMENT AND PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE
TRANSACTION.
----------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT AND PROSPECTUS
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 PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
The date of this Proxy Statement and Prospectus is August 6, 1997.
<PAGE>
AVAILABLE INFORMATION
ATLANTIC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and are
also available on the Commission's Worldwide Web site at http://www.sec.gov.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Common Shares are listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol "SCA." All such reports, proxy
statements and other information filed by ATLANTIC with the NYSE may be
inspected at the NYSE's offices at 20 Broad Street, New York, New York 10005.
Security Capital has filed with the Commission a registration statement on
Form S-11 (together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Warrants to be issued pursuant to the Transaction.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
Security Capital will be subject to the informational requirements of the
Exchange Act, and in accordance therewith will file reports and other
information with the Commission. Reports, registration statements, proxy
statements and other information filed by Security Capital with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at the addresses specified above. Copies of such materials can
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Proxy Statement and Prospectus, and if given or made, such information or
representations should not be relied upon as having been authorized. This
Proxy Statement and Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Proxy
Statement and Prospectus, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither
the delivery of this Proxy Statement and Prospectus nor any distribution of
securities pursuant to this Proxy Statement and Prospectus shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated herein by reference or in the affairs of
ATLANTIC or Security Capital since the date of this Proxy Statement and
Prospectus. However, if any material change occurs during the period that this
Proxy Statement and Prospectus is required to be delivered, this Proxy
Statement and Prospectus will be amended and supplemented accordingly. All
information regarding ATLANTIC in this Proxy Statement and Prospectus has been
supplied by ATLANTIC, and all information regarding Security Capital in this
Proxy Statement and Prospectus has been supplied by Security Capital.
FORWARD LOOKING STATEMENTS
The statements contained in this Proxy Statement that are not historical
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements are based on current expectations, estimates and projections about
the industry and markets in which ATLANTIC 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. ATLANTIC's
operating results depend primarily on income from multifamily communities,
which is substantially influenced by (i) the demand for and supply of
multifamily units in ATLANTIC's primary target market and submarkets, (ii)
operating expense levels, (iii) the effectiveness of property-level operations
and (iv) the pace and price at which ATLANTIC can acquire and develop
additional multifamily communities. Capital and credit market conditions which
affect ATLANTIC's cost of capital also influence operating results.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION .................................................... i
FORWARD LOOKING STATEMENTS................................................ i
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 15
Risks in Valuation...................................................... 15
Conflicts of Interests in the Transaction............................... 15
Significant Influence of Principal Shareholder.......................... 15
Relationship with Financial Advisor..................................... 16
Taxability of Warrant Issuance.......................................... 16
Impact of Transaction on ATLANTIC's Financial Position.................. 16
Absence of Public Market for Warrants and Class B Shares................ 17
THE TRANSACTION (Proposal 1).............................................. 18
General................................................................. 18
Background.............................................................. 18
Security Capital Recommendations and Reasons for the Transaction........ 22
Recommendations of the Board of Directors and Reasons for the
Transaction............................................................ 24
Fairness Opinion........................................................ 28
The Warrant Issuance.................................................... 32
Concurrent Rights Offering.............................................. 33
Federal Income Tax Consequences......................................... 33
Interests of Certain Persons in the Transaction......................... 35
The Merger Agreement.................................................... 37
Investor Agreement...................................................... 42
Administrative Services Agreement....................................... 43
License Agreement....................................................... 43
Protection of Business Agreement........................................ 43
REIT Management Agreement............................................... 44
Property Management..................................................... 44
Regulatory Filings and Approvals........................................ 45
Restrictions on Sales by Affiliates..................................... 45
Accounting Treatment.................................................... 45
Expenses................................................................ 45
Dissenters' Appraisal Rights............................................ 45
Board Recommendation.................................................... 45
LONG-TERM INCENTIVE PLAN (Proposal 2)..................................... 46
THE SPECIAL MEETING....................................................... 49
Purpose of the Meeting.................................................. 49
Date, Time and Place; Record Date....................................... 49
Voting Rights........................................................... 49
Other Matters........................................................... 50
INFORMATION CONCERNING ATLANTIC........................................... 50
General................................................................. 50
Strong Primary Target Market............................................ 51
Employees............................................................... 51
Legal Proceedings....................................................... 51
Competition............................................................. 51
ATLANTIC Common Share Prices and Per Common Share Distributions......... 52
Principal Shareholders.................................................. 54
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REIT MANAGEMENT........................................................... 55
General................................................................. 55
Directors and Officers of ATLANTIC and the REIT Manager................. 57
COMMUNITIES............................................................... 61
Portfolio Composition................................................... 61
Geographic Distribution................................................. 62
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................... 63
REIT Management Agreement............................................... 63
Security Capital Investor Agreement..................................... 64
Administrative Services Agreement....................................... 64
License Agreement....................................................... 64
Protection of Business Agreement........................................ 64
Shareholders' Agreement................................................. 64
Property Management Company............................................. 64
Homestead Transaction................................................... 64
Funding Commitment Agreement............................................ 65
Homestead Protection of Business Agreement.............................. 66
Homestead Investor Agreement............................................ 66
Development Agreement................................................... 67
Other Transactions With Affiliates...................................... 67
SELECTED FINANCIAL INFORMATION............................................ 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 70
Overview................................................................ 70
Results of Operations................................................... 73
Environmental Matters................................................... 79
Liquidity and Capital Resources......................................... 79
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 87
Investment Policies..................................................... 87
Financing Policies...................................................... 88
Policies With Respect to Certain Activities............................. 88
Policies with Respect to Other Activities............................... 89
PREFERRED SHARE AND NOTE OFFERINGS........................................ 90
Preferred Share Offering................................................ 90
Note Offering........................................................... 91
INDEPENDENT AUDITORS AND EXPERTS.......................................... 91
EXPENSES OF SOLICITATION.................................................. 91
SHAREHOLDER PROPOSALS..................................................... 91
INDEX TO ATLANTIC FINANCIAL STATEMENTS.................................... F-1
</TABLE>
Appendix A--Security Capital Prospectus
Annex I--Merger and Issuance Agreement
Annex II--Security Capital Atlantic Incorporated 1997 Long-Term Incentive Plan
Annex III--Opinion of J.P. Morgan Securities Inc.
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement and Prospectus
(including the Security Capital Prospectus attached hereto and the Annexes
hereto). Shareholders are urged to review the entire Proxy Statement and
Prospectus, the Security Capital Prospectus and the Annexes hereto. For a
description of funds from operations, see footnote 6 to ATLANTIC's Historical
and Pro Forma Summary Financial Data and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Unless otherwise indicated, information contained herein regarding
ATLANTIC assumes that no outstanding options to acquire Common Shares are
exercised prior to the Warrant Issuance Record Date. Unless otherwise
indicated, all Common Share and per Common Share amounts have been adjusted to
give effect to ATLANTIC's one-for-two reverse share split, which was effective
on September 10, 1996.
SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC's objective is to be the preeminent real estate operating company
focusing on multifamily communities in its southeastern United States target
market. ATLANTIC focuses on the development, acquisition, operation and long-
term ownership of multifamily communities. At June 30, 1997, ATLANTIC's
portfolio consisted of 26,232 multifamily units, including 6,967 units under
construction or in planning, in 15 metropolitan areas and 50 submarkets in
growth areas of the southeastern United States. The total expected investment
cost of ATLANTIC's 69 operating communities, including budgeted renovations and
total budgeted development expenditures, was approximately $979.1 million at
June 30, 1997 and the total budgeted development cost of ATLANTIC's 24
communities under construction or in planning was approximately $446.1 million.
Additionally, at June 30, 1997, ATLANTIC had land in planning and under control
for the development of 3,406 units with a total budgeted development cost of
$222.8 million.
ATLANTIC has elected to be taxed as a real estate investment trust (a "REIT")
for federal income tax purposes. ATLANTIC's principal executive offices are
located at Six Piedmont Center, Atlanta, Georgia 30305, and its telephone
number is (404) 237-9292.
RISK FACTORS
In considering whether to approve the matters described herein, ATLANTIC
shareholders should consider the following matters in addition to the matters
described in greater detail herein under "Risk Factors." ADDITIONALLY, ATLANTIC
SHAREHOLDERS SHOULD CONSIDER THOSE MATTERS DESCRIBED UNDER THE CAPTION "RISK
FACTORS," BEGINNING ON PAGE 8 IN THE SECURITY CAPITAL PROSPECTUS, WITH RESPECT
TO THE OWNERSHIP OF WARRANTS.
. There may be alternative methods of determining the value of the
management companies contributed by Security Capital to ATLANTIC which
could result in higher or lower valuations for such management companies.
. Although a special committee of independent directors was appointed and
it retained its own legal counsel and financial advisor to evaluate the
Transaction, no independent representatives were retained to negotiate
the terms of the Transaction on behalf of ATLANTIC.
. Conflicts of interest may exist as a result of Security Capital's control
over ATLANTIC.
. Security Capital will continue to exercise significant influence over the
business and policies of ATLANTIC after the Transaction due to its (i)
continued presence as the largest shareholder of ATLANTIC, (ii)
contractual right to nominate up to three members to the Board of
Directors and (iii) contractual right to prior approval and consultation
regarding certain matters.
1
<PAGE>
. A conflict of interest may exist in connection with the retention of J.P.
Morgan Securities Inc. ("J.P. Morgan") to represent both the Special
Committee in connection with the Transaction and Security Capital in
connection with its proposed initial public offering.
. The Warrants (and the Class B Shares issuable upon exercise thereof) are
not currently traded and there may be no public trading market in which
shareholders can dispose of the Warrants (and the Class B Shares issuable
upon exercise thereof) received in connection with the Transaction.
THE SPECIAL MEETING
THE MEETING
The Special Meeting is scheduled to be held at 10:00 a.m., local time, on
September 8, 1997, at the offices of ATLANTIC at Six Piedmont Center, Atlanta,
Georgia, 30305. The Board of Directors has fixed the close of business on
August 6, 1997 as the record date (the "ATLANTIC Record Date") for the
determination of holders of Common Shares entitled to notice of and to vote at
the Special Meeting. See "The Special Meeting."
THE PROPOSALS
At the Special Meeting, shareholders will be asked to consider and vote upon
the following matters:
. The approval of the Merger Agreement and the Transaction; and
. The approval of the 1997 Incentive Plan.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTION AND THE 1997 INCENTIVE PLAN AND RECOMMENDS THAT ATLANTIC
SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTION, AND THE APPROVAL OF THE 1997 INCENTIVE PLAN. SEE "THE
TRANSACTION--RECOMMENDATIONS OF THE BOARD OF DIRECTORS AND REASONS FOR THE
TRANSACTION."
REQUIRED VOTE
Although the approval by shareholders of the Transaction is not required
under ATLANTIC's charter or under Maryland law, the rules of the NYSE require
shareholder approval of the Transaction. The Board of Directors has also
conditioned the Transaction on the approval by the holders of at least a
majority of the outstanding Common Shares. Therefore, the affirmative vote of
the holders of at least a majority of the outstanding Common Shares is required
to approve the Merger Agreement and the Transaction. Assuming the existence of
a quorum at the Special Meeting, the affirmative vote of a majority of the
votes cast at the Special Meeting is required to approve the 1997 Incentive
Plan. The approval by shareholders of the Merger Agreement and the Transaction
is a condition to the approval of the 1997 Incentive Plan. As of July 31, 1997,
Security Capital beneficially owned approximately 51% of the outstanding Common
Shares. See "The Special Meeting--Voting Rights." Security Capital has agreed,
subject to certain conditions, to vote all Common Shares owned by it in favor
of both proposals. Therefore, assuming such conditions are satisfied, approval
of both proposals is assured.
THE TRANSACTION
BACKGROUND
ATLANTIC believes that much of its historical growth has resulted from its
relationship with Security Capital (Atlantic) Incorporated (the "REIT Manager")
which has provided ATLANTIC with certain advantages, including access to
management personnel with extensive real estate expertise, a well-developed,
fully integrated organization, highly focused research and other administrative
support, all at costs below that which ATLANTIC would have incurred for
providing the same level and breadth of services internally. Currently,
ATLANTIC pays
2
<PAGE>
a fee to the REIT Manager based on a fixed percentage of ATLANTIC's cash flow
(as defined) which increases proportionately as ATLANTIC adds assets. The Board
of Directors believes that ATLANTIC has reached a sufficient size to realize
economies of scale by internalizing the management function since ATLANTIC will
have sufficient depth of management and personnel such that additional assets
can be acquired, developed and managed without a significant increase in
personnel or other costs. These economies of scale should result in an increase
in the level of growth in funds from operations. The Transaction will allow
ATLANTIC to terminate the existing management agreements with the REIT Manager
and SCG Realty Services Atlantic Incorporated (the "Property Manager") and
become an internally managed REIT. It is expected that ATLANTIC will continue
to purchase certain administrative services from Security Capital following
completion of the Transaction. For a description of the terms of the agreement
regarding such administrative services, see "The Transaction--Administrative
Services Agreement."
The Board of Directors believes that ATLANTIC will benefit from the
Transaction even though in previous periods the fees earned by the REIT Manager
and the Property Manager have been less than the direct costs and indirect
costs that they have incurred in providing these services. The fees paid by
ATLANTIC for the REIT Manager and Property Manager services in 1996 were
approximately $655,000 less than the direct and indirect costs incurred by
Security Capital in providing these services. See "The Pro Forma Condensed
Financial Statements." These losses have arisen for the following reasons.
Security Capital has invested in staffing and systems of the REIT Manager and
Property Manager in anticipation of future growth and with the expectation that
these entities would become profitable. Security Capital believed that it was
essential to provide a full level of services to ATLANTIC, as described above,
even though ATLANTIC's revenue stream was not yet of sufficient size to support
these activities. Security Capital believes that ATLANTIC has now reached a
sufficient size so that the revenue stream from operating properties will
support the costs associated with ATLANTIC managing its operations internally.
Further, given the opportunities for economies of scale, as described above,
Security Capital estimates that by internalizing the management function
ATLANTIC will incur expenses in the future that are less than it otherwise
would have paid in fees to the REIT Manager and the Property Manager under the
current management contract. In addition, the REIT Manager has incurred costs
associated with performing services related to ATLANTIC's acquisition and
development of communities that do not generate stabilized cash flow until
future periods. As an example, at June 30, 1997 ATLANTIC had $267.5 million of
prestabilized assets and $446.1 million of multifamily communities under
development (based on total expected investment). This backlog has resulted in
a timing difference between the costs incurred by the REIT Manager and the
revenues it would receive in future periods as these communities become
stabilized. By internalizing the management function, ATLANTIC, unlike the REIT
Manager, will be able to capitalize qualifying acquisition and development
costs in accordance with GAAP. In so doing, ATLANTIC will be able to match the
incurrence of costs associated with the acquisition or development of
communities with the revenue generated by these communities which is consistent
with the accounting treatment used by other multifamily REITs. The Special
Committee analyzed the information provided by Security Capital, together with
its financial advisor, over a two-month period, held numerous meetings and
requested and received additional information from Security Capital, considered
possible alternative transactions to the proposal by Security Capital and
considered the potential benefits and detriments to the Transaction, with a
particular emphasis on whether, based on internal management projections, the
Transaction would result in increased funds from operations. See "The
Transaction--Background." The Board of Directors was aware, during its
deliberations, that the REIT Manager and Property Manager were not profitable.
However, the Board of Directors did analyze the information provided by
Security Capital and concluded that the Transaction would be accretive to
ATLANTIC's funds from operations. See "The Transaction--Recommendations of the
Board of Directors and Reasons for the Transaction."
The REIT Manager and Property Manager are each owned by Security Capital,
which owned approximately 51% of ATLANTIC's Common Shares as of July 31, 1997.
Substantially all officers of ATLANTIC are employees of the REIT Manager and
ATLANTIC has no employees. The REIT Manager and Property Manager currently
employ approximately 100 professionals and 450 property level and support
personnel. Pursuant to the terms of the REIT Management Agreement (as defined
below) between ATLANTIC and the REIT Manager, the
3
<PAGE>
REIT Manager provides both strategic and day-to-day management for ATLANTIC in
exchange for a REIT management fee equal to approximately 16% of ATLANTIC's
cash flow (as defined in the REIT Management Agreement). The REIT Management
Agreement is renewable by ATLANTIC annually, subject to a determination by
ATLANTIC's independent directors that the REIT Manager's performance has been
satisfactory and that the compensation payable to the REIT Manager is fair.
ATLANTIC may terminate the REIT Management Agreement on 60 days' notice. For
the three months ended March 31, 1997 and the years 1996, 1995 and 1994,
ATLANTIC paid the REIT Manager fees totalling approximately $3.0 million, $10.4
million, $6.9 million and $3.7 million, respectively.
As of June 30, 1997, the Property Manager managed approximately 92.6% of
ATLANTIC's operating multifamily units. Rates for services performed by the
Property Manager are at rates prevailing in the markets in which ATLANTIC
operates and range between 3.5% and 3.75% of community revenues and are subject
to annual approval by ATLANTIC's independent directors. For the three months
ended March 31, 1997 and the years 1996, 1995, and 1994, ATLANTIC paid the
Property Manager fees of approximately $1.3 million, $4.2 million, $3.5 million
and $1.5 million, respectively, for property management services. For a further
description of these agreements, see "The Transaction--REIT Management
Agreement" and "--Property Management Agreement."
The purchase price of $54,608,549 that will be paid for the REIT Manager and
the Property Manager under the terms of the Transaction was based on a three-
year discounted net operating income analysis prepared by Security Capital and
revised after negotiation with the Special Committee of the Board of Directors.
See "The Transaction--Background" and "--Security Capital Recommendations and
Reasons for the Transaction." Based on the results of the above valuation
analysis and negotiation, Security Capital estimates that the purchase price
represents a multiple of 7.0 times the net change in ATLANTIC's 1997 pro forma
funds from operations assuming that the Transaction occurred as of January 1,
1997 and assuming the stabilization of pre-stabilized operating assets that are
in the process of being repositioned and the stabilization of assets that are
under development or in lease up. The term "stabilization" means that capital
improvements, repositioning, new management and marketing programs (or
development and marketing, in the case of newly developed communities) have
been completed and in effect for a sufficient period of time (but in no case
longer than 12 months, except in cases of major renovations) to achieve 93%
occupancy at market rents. Prior to being "stabilized," a community is
considered "pre-stabilized." By making these adjustments, the stabilized
multiple calculation takes into account not only the overhead costs that
ATLANTIC would incur in developing or transitioning these assets but also the
fee that would otherwise have been paid to the REIT Manager as those properties
generated additional cash flow. At June 30, 1997, ATLANTIC had $267.5 million
of prestabilized assets and $446.1 million of multifamily communities under
development (based on total expected investment).
TERMS OF THE TRANSACTION
In January 1997, Security Capital made a proposal to the Board of Directors
that Security Capital exchange the REIT Manager and the Property Manager for
Common Shares, with the result that ATLANTIC would become an internally managed
REIT. On March 18, 1997, a special committee of independent directors of the
Board of Directors (the "Special Committee") recommended that the Board of
Directors approve the Transaction subject to definitive documentation.
Following the meeting of the Special Committee, the full Board of Directors
approved the Merger Agreement and the Transaction. On March 24, 1997, ATLANTIC
and Security Capital entered into the Merger Agreement. Pursuant to the Merger
Agreement, Security Capital will cause the REIT Manager and the Property
Manager to be merged into a newly formed subsidiary of ATLANTIC. The employees
of the REIT Manager and the Property Manager will become employees of ATLANTIC
as a result of the Merger, which will be consummated as follows:
. Security Capital will transfer all of its shares of the REIT Manager and
the Property Manager to a newly formed subsidiary of ATLANTIC in exchange
for 2,306,591 Common Shares valued at approximately $54.6 million.
. The number of Common Shares to be issued to Security Capital was based on
the average market price of the Common Shares over the five-day period
prior to the ATLANTIC Record Date.
4
<PAGE>
. In order to allow ATLANTIC's shareholders to maintain (and, to the extent
a shareholder successfully oversubscribes for Common Shares pursuant to
the oversubscription privilege described below, to increase) their
relative ownership in ATLANTIC, ATLANTIC is conducting the Concurrent
Rights Offering entitling its shareholders (other than Security Capital)
to purchase up to approximately $57.1 million of additional Common
Shares. Security Capital has agreed not to exercise any rights it
receives in the Concurrent Rights Offering. Shareholders will also be
entitled to subscribe for Common Shares not purchased by other
shareholders pursuant to an oversubscription privilege. The exercise
price for Common Shares in the Concurrent Rights Offering is $22.375,
which is below the price at which Common Shares will be issued to
Security Capital in the Merger. The lower price in the Concurrent Rights
Offering is because ATLANTIC desires to increase the liquidity of the
rights and to raise additional capital through the exercise of rights.
The exercise price in the Concurrent Rights Offering, the price of Common
Shares to Security Capital in the Merger, the closing price of the Common
Shares on August 5, 1997 (the day prior to the ATLANTIC Record Date) and
the five-day trailing average closing price on August 5, 1997 are as
follows:
<TABLE>
<S> <C>
Exercise Price in Concurrent Rights Offering..................... $22.375
Price to Security Capital in Merger.............................. $23.675
NYSE Closing Price on August 5, 1997............................. $24.00
Five-Day Trailing Average Closing Price on August 5, 1997........ $23.675
</TABLE>
Any Common Shares not subscribed for by shareholders in the Concurrent
Rights Offering will be made available for purchase by third parties. Any
Common Shares issued pursuant to the Concurrent Rights Offering will be
offered only by means of a separate prospectus which is being mailed
concurrently with this Proxy Statement and Prospectus. The closing of the
Concurrent Rights Offering is not contingent upon the consummation of the
Transaction nor is the consummation of the Transaction contingent upon the
closing of the Concurrent Rights Offering.
. As part of the Transaction, Security Capital will issue Warrants pro rata
to ATLANTIC's shareholders, other than Security Capital, to acquire Class
B Shares having an aggregate exercise price at the time of the Warrant
Issuance of approximately $46.9 million. The Warrant Issuance is being
made in order to induce holders of Common Shares to vote in favor of the
Transaction, to broaden Security Capital's shareholder base, to enable
Security Capital to raise additional equity capital at a relatively low
cost through exercises 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. The Warrant
Issuance will occur subject to and after the closing of the Merger and
after the closing of the Concurrent Rights Offering. The number of
Warrants to be received by each shareholder in the Warrant Issuance will
be determined after ATLANTIC's shareholders have approved the
Transaction. The number of Class B Shares subject to the Warrants will be
based on the closing price of the Class B Shares on the date the Warrants
are issued to the Warrant Issuance Agent (as defined below) for
subsequent distribution to holders of Common Shares. The Warrants will
expire one year after issuance and will contain customary provisions to
protect holders from dilution in certain events, including certain
distributions and certain sales of shares at less than market price.
. As part of the Transaction, ATLANTIC and Security Capital will enter into
the Amended and Restated Investor Agreement (as defined below). The
Amended and Restated Investor Agreement will require ATLANTIC's
management to consult with the nominee of Security Capital prior to
presenting certain significant matters to the Board of Directors for
approval, including ATLANTIC's annual budget and substantial deviations
therefrom. Additionally, the Amended and Restated Investor Agreement will
entitle Security Capital to approve certain significant matters proposed
by ATLANTIC, including the issuance of Common Shares and the incurrence
of indebtedness in excess of certain ratios. See "The Transaction--
Investor Agreement."
Concurrently with signing the Merger Agreement with ATLANTIC, Security
Capital also signed substantially similar agreements with each of Security
Capital Industrial Trust ("SCI") and Security Capital
5
<PAGE>
Pacific Trust ("PTR"), each which are affiliates of Security Capital and
ATLANTIC. Consummation of the Transaction is not dependent upon the closing of
the SCI and PTR transactions.
POTENTIAL BENEFITS AND DETRIMENTS OF THE TRANSACTION
Potential Benefits
The Board of Directors believes that the Transaction will result in an
enhancement to shareholder value. Currently, ATLANTIC pays a fee to the REIT
Manager based on a fixed percentage of ATLANTIC's cash flow (as defined) which
increases proportionately as ATLANTIC adds assets. The Board of Directors
believes that ATLANTIC has reached a sufficient size to realize economies of
scale by internalizing the management function since ATLANTIC will have
sufficient depth of management and personnel such that additional assets can be
acquired, developed and managed without a significant increase in personnel or
other costs. These economies of scale should result in an increase in the level
of growth in funds from operations and over time, the multiple at which Common
Shares trade. The Board of Directors believes that the Transaction will further
benefit ATLANTIC's long-term performance as follows:
. The Transaction will position ATLANTIC to pursue possible acquisitions of
other REITs in a more effective way.
. Investors and analysts will view an internally managed structure more
favorably since ATLANTIC's costs, after capitalization of qualifying
acquisition and development costs in accordance with generally accepted
accounting principles ("GAAP"), will be more comparable to other
multifamily REITs. These acquisition and development activities are
currently provided by the REIT Manager and paid for as part of the REIT
management fee, which fee is expensed by ATLANTIC. Management believes
that the increased comparability, in addition to the opportunity for
increased funds from operations growth due to the economies of scale, as
discussed above, will result in a higher multiple on ATLANTIC's funds
from operations and an enhancement to shareholder value.
. As a consequence of the REIT Manager's and Property Manager's personnel
becoming full-time employees of ATLANTIC, they will be able to more
closely relate the results of their efforts to ATLANTIC's performance.
. The Transaction is expected to be viewed positively by the rating
agencies, which could have a positive impact on ATLANTIC's future debt
cost.
Potential Detriments
The following are certain potential detriments of the Transaction:
. Since the number of Common Shares issuable to Security Capital in the
Merger is fixed, the value of those shares at the time the Merger is
completed may be greater than the value placed on the operations of the
REIT Manager and Property Manager by the Board of Directors.
.The Warrant Issuance will be taxable to holders of Common Shares.
. The REIT Manager and Property Manager have not been profitable. The fees
paid by ATLANTIC for the REIT Manager and the Property Manager services
in 1996 were approximately $655,000 less than the direct costs and
indirect costs incurred by Security Capital in providing these services.
. The Transaction would result in ATLANTIC recording higher administrative
expenses related to the internalization of the management function in
lieu of paying a fee to the REIT Manager and Property Manager. Security
Capital has anticipated that ATLANTIC would incur approximately $15.5
million of additional administrative expenses in 1998 by internalizing
the management function. Of these expenses, an amount which is subject to
a maximum limit of $3.7 million for 1998, is expected to be purchased
from Security Capital under an administrative services agreement. See
"The Transaction-- Administrative Services Agreement." ATLANTIC would,
however, no longer pay estimated REIT management and property management
fees of $22.2 million in 1998. The increased administrative costs of
internalizing the management function may be greater than anticipated and
no assurance can be given that the cost to ATLANTIC of providing such
services internally will not exceed the fees payable to the REIT Manager
and the Property Manager under the current agreements.
6
<PAGE>
. Although the Transaction is expected to be immediately accretive to
ATLANTIC's funds from operations, the Transaction may not result in a
corresponding increase in the price at which Common Shares trade on the
NYSE.
CONFLICTS OF INTEREST
The Transaction was initiated and structured by individuals who are executive
officers of Security Capital. Although no independent representatives were
retained to negotiate the terms of the Transaction on behalf of ATLANTIC, the
Board of Directors created the Special Committee, which retained financial
advisors and legal counsel. Two of the members of the Special Committee,
Messrs. Holmes and Richman, own securities of Security Capital. Additionally,
certain officers and employees of the REIT Manager and the Property Manager
(including Constance B. Moore and James C. Potts, Co-Chairmen of ATLANTIC) will
receive certain benefits if the Transaction is consummated. See "Risk Factors--
Conflicts of Interests in the Transactions" and "The Transactions--Interests of
Certain Persons in the Transaction."
RECOMMENDATIONS OF THE BOARD OF DIRECTORS AND REASONS FOR THE TRANSACTION
The Special Committee unanimously approved the Merger Agreement and the
Transaction as being fair and reasonable to ATLANTIC. The Special Committee
recommended that the Board of Directors approve the Merger Agreement and the
Transaction. The Board of Directors unanimously approved the Merger Agreement
and the Transaction as being fair and reasonable. In reaching its conclusion,
the Board of Directors placed particular emphasis on the recommendation of the
Special Committee. The Board of Directors considered a number of other factors,
including the reasons emphasized by the Special Committee. Finally, the Board
of Directors considered the condition to the closing of the Merger that the
Special Committee receive a written opinion from an investment banking firm
satisfactory to the Special Committee that, as of the date of this Proxy
Statement and Prospectus, the consideration to be received in the transactions
contemplated by the Merger Agreement and by the Related Agreements (as defined
in the Merger Agreement) is fair, from a financial point of view, to ATLANTIC
and its shareholders (other than Security Capital) and that such opinion must
not have been withdrawn, revoked or modified. The Board of Directors did not
quantify or otherwise attempt to assign relative weights to the specific
factors considered in making its determination although, as noted above, it did
place special emphasis on the recommendation of the Special Committee. For a
more detailed discussion of ATLANTIC's reasons for the Transaction and the
factors considered by the Board of Directors in making its recommendation, see
"The Transaction--Recommendations of the Board of Directors and Reasons for the
Transaction."
BENEFITS TO INSIDERS
If the Transaction is consummated, the current officers and employees of the
REIT Manager and the Property Manager will become officers and employees of
ATLANTIC (except Jeffrey A. Klopf). These persons will be compensated for their
services directly by ATLANTIC and will be eligible for a target bonus. The
following table sets forth the expected salary and target bonus for the Co-
Chairmen and each of the three other most highly compensated executive officers
of ATLANTIC (the "Named Executive Officers") for 1997:
<TABLE>
<CAPTION>
TARGET
NAME AND TITLE SALARY BONUS
-------------- -------- --------
<S> <C> <C>
James C. Potts, Co-Chairman............................ $230,000 $115,000
Constance B. Moore, Co-Chairman........................ 230,000 115,000
J. Lindsay Freeman, Senior Vice President.............. 195,000 65,000
Bradley C. Miller, Senior Vice President............... 185,000 60,000
William Kell, Vice President and Controller............ 137,500 25,625
</TABLE>
Subject to shareholder approval of the 1997 Incentive Plan, the officers of
ATLANTIC will be granted options to purchase Common Shares having an aggregate
dollar value (based on the price of the Common Shares on the date the 1997
Incentive Plan is approved by shareholders) of $2,105,400 and officers and
certain
7
<PAGE>
employees of ATLANTIC will be granted the right to purchase Common Shares
having an aggregate dollar value (based on the price of the Common Shares on
the date the 1997 Incentive Plan is approved by shareholders and including
matching options for two Common Shares for each Common Share purchased) of
$43,305,000. ATLANTIC will loan such officers and employees up to 95% of the
purchase price for any Common Shares so purchased. Additionally, 25 of such
officers will be granted options to acquire an aggregate of $4,002,000 (based
on the exercise price at the date of grant) of Class A Shares of Security
Capital in December 1997. The options and stock purchase awards will be subject
to vesting. The officers and employees of ATLANTIC will also be entitled to
make contributions to a 401(k) plan, for which ATLANTIC will match 50% of
eligible contributions. See "The Transaction--Interests of Certain Persons in
the Transaction" and "Long-Term Incentive Plan."
FAIRNESS OPINION
The Special Committee retained J.P. Morgan to deliver a fairness opinion in
connection with the proposed transaction.
On March 11, 1997, J.P. Morgan delivered its oral opinion to the Special
Committee to the effect that, as of the date of such opinion, the consideration
to be received in the transactions contemplated by the Merger Agreement and by
the Related Agreements (as defined in the Merger Agreement) was fair, from a
financial point of view, to ATLANTIC and its shareholders (other than Security
Capital). J.P. Morgan has confirmed its March 11, 1997 oral opinion by
delivering its written opinion to the Special Committee, dated as of the date
of this Proxy Statement and Prospectus, that, as of such date, the
consideration to be received in the transactions contemplated by the Merger
Agreement and by the Related Agreements (as defined in the Merger Agreement)
was fair, from a financial point of view, to ATLANTIC and its shareholders
(other than Security Capital). The full text of the written opinion of J.P.
Morgan, which sets forth the assumptions made, matters considered and
limitations of the review undertaken in connection with the opinion, is
attached hereto as Annex III and is incorporated herein by reference.
SHAREHOLDERS OF ATLANTIC ARE URGED TO, AND SHOULD, READ THE OPINION OF J.P.
MORGAN IN ITS ENTIRETY. For additional information concerning the assumptions
made, matters considered and limits of review by J.P. Morgan in reaching its
opinion and the fees received and to be received by it, see "The Transaction--
Fairness Opinion." Additionally, see "Risk Factors--Relationship with Financial
Advisor" for certain relationships between Security Capital and J.P. Morgan.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Mayer, Brown & Platt, based on certain representations of
Security Capital and ATLANTIC, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, ATLANTIC
will not recognize income, gain or loss on the Merger for federal tax purposes.
In addition, in the opinion of Mayer, Brown & Platt, based on certain
representations of Security Capital and ATLANTIC, the Merger will not
jeopardize ATLANTIC's qualification as a REIT under the Code. The Merger will
not result in a taxable event to the ATLANTIC shareholders. See "The
Transaction--Federal Income Tax Consequences--The Merger."
Pursuant to the Warrant Issuance, a shareholder receiving Warrants pursuant
to the Warrant Issuance will have ordinary taxable income equal to the value of
the Warrants on the Warrant Issuance Date (as defined below). In the opinion of
Mayer, Brown & Platt, the receipt of the Warrants by tax-exempt shareholders
will be treated as "unrelated business taxable income." See "The Transaction--
Federal Income Tax Consequences--The Warrant Issuance."
CONDITIONS TO THE TRANSACTION
The obligations of ATLANTIC to consummate the Transaction are subject to the
satisfaction or waiver of certain conditions, including, among others, (i)
obtaining the requisite approval of ATLANTIC and Security Capital shareholders,
(ii) the absence of any injunction prohibiting the consummation of the
Transaction, (iii) the receipt of all governmental consents, orders and
approvals legally required for consummation of the Transaction, (iv) the
receipt of certain legal opinions or Internal Revenue Service ("IRS") rulings
with respect to the tax
8
<PAGE>
consequences of the Transaction, REIT qualification and certain other legal
matters, (v) the continuing accuracy of the representations and warranties of
each party and (vi) the performance of certain other specified obligations by
each party. See "The Transaction--The Merger Agreement--Conditions to the
Transaction."
TERMINATION
The Merger Agreement may be terminated at any time prior to the date on which
the Merger is closed (the "Closing Date") (i) by mutual consent of ATLANTIC and
Security Capital; (ii) by either of ATLANTIC or Security Capital after December
31, 1997 if the Transaction has not been consummated on or before that date (so
long as the terminating party has not breached its obligations under the Merger
Agreement except for immaterial breaches); (iii) unilaterally by ATLANTIC or
Security Capital if (a) the other party fails to perform any covenant or
agreement in the Merger Agreement in any material respect and does not cure
such failure in all material respects within 15 business days after receipt of
a written notice of the alleged failure from the other party, (b) the other
party fails to fulfill or complete a condition to the obligations of that party
(which condition is not waived) by reason of a breach by that party of its
obligations in the Merger Agreement or (c) any condition to the obligations of
the other party is not satisfied (other than by reason of a breach by that
party of its obligations under the Merger Agreement), and it reasonably appears
that the condition cannot be satisfied prior to December 31, 1997; (iv)
unilaterally by Security Capital if ATLANTIC, through the Board of Directors or
the Special Committee, withdraws, modifies or amends its recommendation that
ATLANTIC shareholders approve the Merger Agreement and the Transaction; and (v)
unilaterally by ATLANTIC if Security Capital, through its Board of Directors
(the "Security Capital Board"), withdraws, modifies or amends its
recommendation that Security Capital shareholders approve the Merger Agreement
and the Transaction. On April 17, 1997, the shareholders of Security Capital
approved the Merger Agreement after the Security Capital Board had recommended
such approval.
AMENDMENT AND WAIVER
Subject to compliance with applicable law, the Merger Agreement may be
amended by the written agreement of ATLANTIC and Security Capital. However, the
Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of ATLANTIC or Security Capital. See
"The Transaction--The Merger Agreement--Amendment and Waiver." To the extent
that the Merger Agreement is amended in any material respect after the date of
this Proxy Statement and Prospectus, and to the extent that any material
provisions of the Merger Agreement are waived, ATLANTIC will notify
shareholders and resolicit their votes to the extent required by law.
DISSENTERS' APPRAISAL RIGHTS
Under Maryland law, holders of Common Shares are not entitled to dissenters'
appraisal rights in connection with the Transaction. See "The Transaction--
Dissenters' Appraisal Rights."
ATLANTIC COMMON SHARE PRICE
The Common Shares are listed and traded on the NYSE under the symbol "SCA."
On January 21, 1997 (the last trading day prior to the public announcement that
ATLANTIC was evaluating the Transaction), the last sales price of the Common
Shares was $25 3/8 per share. On March 24, 1997 (the last trading day preceding
the time the signing of the Merger Agreement was announced), the last sales
price of the Common Shares was $22 1/4 per share. On August 5, 1997, the last
sales price of the Common Shares was $24.00 per share. Share prices above are
as reported on the NYSE Composite Tape by America Online. See "Information
Concerning ATLANTIC--ATLANTIC Common Share Prices and Per Common Share
Distributions."
Security Capital has filed a registration statement with the Commission
relating to an initial public offering of the Class B Shares. Although the
Warrants and the Class B Shares have been approved for listing on the NYSE,
subject to official notice of issuance, no assurances can be given that such
initial public offering will be consummated or that an active market for the
Warrants or the Class B Shares will develop.
9
<PAGE>
ATLANTIC HISTORICAL AND PRO FORMA SUMMARY FINANCIAL DATA
The following table sets forth the Pro Forma Financial Results as of and for
the three months ended March 31, 1997 and for the year ended December 31, 1996,
and the Historical Financial Results as of and for the three months ended March
31, 1997 and for the years ended December 31, 1996, 1995 and 1994 and the
period from inception (October 26, 1993) through December 31, 1993. Such
selected financial information is qualified in its entirety by, and should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included in this Proxy Statement and Prospectus. The Pro Forma
Financial Results are not necessarily indicative of what the actual financial
position and results of operations of ATLANTIC would have been as of and for
the periods indicated, nor do they purport to represent the financial position
and results of operations for future periods. Unless
otherwise indicated, all Common Share and per Common Share amounts have been
adjusted to give effect to ATLANTIC's one-for-two reverse Common Share split,
which was effective on September 10, 1996.
<TABLE>
<CAPTION>
PRO
FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
--------- ------------ ------------ ---------------------------------
THREE
MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED PERIOD ENDED DECEMBER 31,
MARCH 31, MARCH 31, DECEMBER 31, ---------------------------------
1997 1997 1996 1996 1995 1994 1993(2)
--------- ------------ ------------ -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $39,715 $39,715 $148,361 $137,729 $103,634 $55,071 $156
Homestead Convertible
Mortgages interest
income................ 185 185 -- -- -- -- --
Property management
fees paid to
affiliate............. -- 1,280 -- 4,208 3,475 1,536 --
Property management
fees paid to third
parties............... 232 232 971 971 591 661 --
Interest expense....... 2,893 4,761 12,219 16,181 19,042 9,240 --
REIT management fee
paid to affiliate..... -- 3,029 -- 10,445 6,923 3,671 12
General and
administrative
expenses.............. 1,751 265 5,923 673 646 266 1
Net earnings before
extraordinary item.... 13,258 10,178 45,306 42,569 19,639 9,926 38
Extraordinary item--
loss on early
extinguishment of
debt.................. -- -- -- 3,940 -- -- --
Series A Preferred
Share dividend........ 1,125 -- 4,500 -- -- -- --
Net earnings
attributable to Common
Shares................ 12,133 10,178 40,806 38,629 19,639 9,926 38
Net earnings per Common
Share before
extraordinary item.... 0.27 0.27 1.01 1.33 0.89 0.81 0.13
Net earnings
attributable to Common
Shares per Common
Share................. 0.27 0.27 1.01 1.21 0.89 0.81 0.13
Cash distributions
declared and paid..... 14,778 14,778 53,064 53,064 35,119 14,648 --
Cash distributions
declared and paid per
Common Share.......... $ 0.39 $ 0.39 $ 1.65 $ 1.65 $ 1.60 $ 1.20 $--
Weighted average Common
Shares outstanding.... 44,241 37,892 40,246 32,028 21,944 12,227 286
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA(3) HISTORICAL
---------- ------------------------------------
DECEMBER 31,
MARCH 31, MARCH 31, ------------------------------------
1997 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at
cost.................. $1,208,229 $1,208,229 $1,157,235 $888,928 $631,260 $31,005
Total assets........... 1,210,645 1,204,231 1,135,065 885,824 637,846 31,850
Line of credit(4)...... 21,020 295,250 228,000 190,000 153,000 --
Long-term debt......... 150,000 -- -- -- -- --
Mortgages payable...... 155,418 155,418 155,790 118,524 107,347 --
Total liabilities...... 367,043 489,511 436,423 328,886 271,216 178
Total shareholders'
equity................ $ 843,602 $ 714,720 $ 698,642 $556,938 $366,630 $31,672
Number of Common Shares
outstanding........... 44,241 37,892 37,892 27,763 18,567 1,582
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ------------ ------------ -----------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED PERIOD ENDED DECEMBER 31,
MARCH 31, MARCH 31, DECEMBER 31, -----------------------------------------
1997 1997 1996 1996 1995 1994 1993(2)
------------ ------------ ------------ --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings
attributable to Common
Shares................ $12,133 $10,178 $ 40,806 $ 38,629 $ 19,639 $ 9,926 $ 38
Add (deduct):
Real estate
depreciation.......... 6,132 6,132 22,534 20,824 15,925 8,770 28
Amortization related to
Homestead convertible
mortgages............. (20) (20) -- -- -- -- --
Gain on disposition of
real estate........... -- -- -- (6,732) -- -- --
Gain on sale of
Homestead assets(5)... -- -- -- (2,839) -- -- --
Provision for possible
loss on investments... 200 200 2,500 2,500 -- -- --
Extraordinary item--
loss on early
extinguishment of
debt.................. -- -- -- 3,940 -- -- --
------- ------- --------- --------- --------- --------- --------
Funds from
operations(6)......... $18,445 $16,490 $ 65,840 $ 56,322 $ 35,564 $ 18,696 $ 66
======= ======= ========= ========= ========= ========= ========
Net cash provided
(used) by operating
activities............ $19,804 $16,913 $ 69,685 $ 54,356 $ 39,732 $ 23,564 $ (492)
Net cash used by
investing activities.. (70,486) (69,354) (291,476) (287,418) (235,149) (390,077) (31,005)
Net cash provided by
financing activities.. $50,733 $52,055 $ 226,026 $ 230,907 $ 195,649 $ 372,638 $ 31,634
</TABLE>
- -------
(1) The pro forma condensed statements of earnings reflect: (i) the Merger,
(ii) the sale of the Homestead Village properties and subsequent
distribution of Homestead securities on November 12, 1996, (iii) the
acquisition and disposition of communities acquired or disposed of
subsequent to January 1, 1996 and related assumptions of mortgage debt and
(iv) the sale of Common Shares subsequent to January 1, 1996 (including the
sale of Common Shares on April 10, 1997) and the proposed Note Offering, as
defined, and Preferred Offering, as defined, and the related repayments of
ATLANTIC's $350 million unsecured line of credit as if all of these
transactions had occurred on January 1, 1996.
(2) For the period from inception (October 26, 1993) to December 31, 1993.
(3) The pro forma condensed balance sheet reflects: (i) the Merger, (ii) the
sale of Common Shares on April 10, 1997 and (iii) the proposed Note
Offering, as defined, and Preferred Offering, as defined, and the related
repayments of ATLANTIC's $350 million unsecured line of credit as if all of
these transactions had occurred on March 31, 1997.
(4) At July 31, 1997, ATLANTIC had $254.8 million of outstanding borrowings
under its $350 million unsecured line of credit and such outstanding
borrowings are expected to be approximately $85.0 million at the closing of
the Transaction and after giving effect to the Concurrent Rights Offering
and the proposed Preferred Offering and Note Offering (as defined below).
(5) For a description of the transaction relating to these assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Homestead Transaction."
(6) Funds from operations represents net earnings computed in accordance with
GAAP, excluding gains (or losses) from real estate transactions, provisions
for possible losses, extraordinary items and real estate depreciation.
Funds from operations should not be considered as an alternative to net
earnings or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity.
ATLANTIC believes that funds from operations is helpful to a reader as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities,
it provides a reader with an indication of the ability of ATLANTIC to incur
and service debt, to make capital expenditures and to fund other cash
needs. Furthermore, management believes that an understanding of funds from
operations will enhance the reader's comprehension of the impact of the
Merger on ATLANTIC which was a specific consideration of the Special
Committee in recommending approval of the Transaction to the Board of
Directors. On January 1, 1996, ATLANTIC adopted the National Association of
Real Estate Investment Trusts' ("NAREIT") revised definition of funds from
operations. Under this more conservative definition, loan cost amortization
is not added back to net earnings in determining funds from operations. For
comparability, funds from operations for the periods prior to January 1,
1996 give effect to the revised definition. The funds from operations
measure presented by ATLANTIC, while consistent with the NAREIT definition,
will not be comparable to similarly titled measures of other REITs which do
not compute funds from operations in a manner consistent with ATLANTIC.
Funds from operations is not intended to represent cash made available to
shareholders. Cash distributions paid to shareholders is presented above
under "Operations Summary."
11
<PAGE>
RECENT OPERATING RESULTS
The following table sets forth ATLANTIC's preliminary unaudited operating
results for the six months ended June 30, 1997 and 1996. These operating
results are not necessarily indicative of the results to be expected for the
entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
(IN THOUSANDS EXCEPT PER
COMMON SHARE DATA)
<S> <C> <C>
Rental income..................................... $ 80,822 $ 63,685
Net earnings attributable to Common Shares........ 22,008 16,397
Net earnings attributable to Common Shares per
Common Share..................................... 0.56 0.56
Cash distributions declared and paid per Common
Share............................................ $ 0.78 $ 0.84
Weighted-average Common Shares outstanding........ 39,569 29,085
Reconciliation of net earnings attributable to
Common Shares to funds from operations:
Net earnings attributable to Common Shares...... $ 22,008 $ 16,397
Add (deduct):
Real estate depreciation...................... 12,583 9,597
Amortization related to Homestead convertible
mortgages..................................... (101) --
Gain on disposition of real estate............ (259) (662)
Provision for possible loss on investments.... 200 --
------------ ------------
Funds from operations(6)........................ $ 34,431 $ 25,332
Net cash provided by operating activities......... 35,624 26,839
Net cash used by investing activities............. (138,347) (130,587)
Net cash provided by financing activities......... $ 101,245 $ 101,779
</TABLE>
- --------
See footnotes above.
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following sets forth for Common Shares certain historical and pro forma
summary per share financial information for the three months ended March 31,
1997 and the year ended December 31, 1996. The following information should be
read in conjunction with and is qualified in its entirety by the financial
statements and accompanying notes of ATLANTIC included elsewhere in this Proxy
Statement and Prospectus and the pro forma condensed consolidated financial
statements presented at page F-1.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
ATLANTIC PER COMMON SHARE DATA:
Net Earnings attributable to Common
Shares excluding gains on dispositions
and extraordinary item:
Historical........................... $ 0.27 $ 1.03
Pro forma before the Merger(1)....... 0.27 1.00
Pro forma after the Merger........... 0.29 1.07
Pro forma after the Note Offering and
Preferred Share Offering............ $ 0.27 $ 1.01
Cash Distributions(2):
Historical........................... $ 0.39 $ 1.65
Pro forma before the Merger.......... 0.39 1.65
Pro forma after the Merger........... 0.39 1.65
Pro forma after the Note Offering and
Preferred Share Offering............ $ 0.39 $ 1.65
Book Value:
Historical........................... $18.86 $18.44
Pro forma before the Merger.......... 18.98 N/A
Pro forma after the Merger........... 17.98 N/A
Pro forma after the Note Offering and
Preferred Share Offering............ $19.07 N/A
</TABLE>
- --------
(1) Reflects the pro forma effect of the sale of ATLANTIC's Homestead Village
assets, the Common Share issuance in April 1997 and the acquisition and
disposition of communities in 1996 as described in ATLANTIC's pro forma
condensed financial statements included in this Proxy Statement and
Prospectus.
(2) In addition, ATLANTIC made a special distribution of Homestead common stock
and warrants on November 12, 1996 as more fully described in ATLANTIC's
financial statements included in this Proxy Statement and Prospectus.
13
<PAGE>
PREFERRED SHARE AND NOTE OFFERINGS
In addition to the Offering, ATLANTIC has proposed to offer its preferred
stock and unsecured senior debt securities to the public, because the proceeds
from the Concurrent Rights Offering are not expected to be sufficient to
satisfy ATLANTIC's capital needs. The Concurrent Rights Offering is in no way
conditioned on or related to such other offerings nor is the Concurrent Rights
Offering conditioned upon consummation of the Merger. The proceeds from such
other offerings will be used for the same purposes as the proceeds from the
Concurrent Rights Offering. See "The Transaction--Concurrent Rights Offering."
ATLANTIC has proposed to offer shares of Series A Cumulative Redeemable
Preferred Stock, par value $.01 per share (the "Series A Preferred Shares"),
with an aggregate liquidation preference and a total issue price of
approximately $50 million (which may be increased or decreased subject to
market conditions) (the "Preferred Share Offering"). Holders of the Series A
Preferred Shares will be entitled to receive cumulative preferential cash
distributions at the rate specified in the Articles Supplementary relating
thereto. The Series A Preferred Shares will be redeemable after a specified
date by ATLANTIC for cash at the redemption price specified in the Articles
Supplementary relating thereto, plus all accrued and unpaid distributions. In
addition, the Series A Preferred Shares will be redeemable by ATLANTIC in order
to preserve ATLANTIC's status as a REIT. Subject to certain exceptions, the
Holders of Series A Preferred Shares will have no voting rights. The Series A
Preferred Shares will not be convertible into or exchangeable for any other
property or securities of ATLANTIC. See "Preferred Share and Note Offerings--
Preferred Share Offering."
ATLANTIC has proposed to offer approximately $150 million principal amount
(which may be increased or decreased subject to market conditions) (the "Note
Offering") of its unsecured senior debt securities (the "Notes"). The Notes
will be direct, senior unsecured obligations of ATLANTIC and will rank equally
with all other unsecured and unsubordinated indebtedness of ATLANTIC from time
to time outstanding. The Notes will bear interest at stated rates, payable
semiannually in arrears. Installments of equal principal amounts will be paid
in each year on the Notes beginning in a specified year, so that the Notes will
amortize beginning in such year. The Notes will be redeemable at any time at
the option of ATLANTIC, in whole or in part, at a redemption price equal to the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date plus the make-whole amount, if any. See "Preferred Share
and Note Offerings--Note Offering."
14
<PAGE>
RISK FACTORS
Holders of Common Shares should consider carefully the specific factors set
forth below as well as the other information contained in this Proxy Statement
and Prospectus in evaluating the Transaction. Additionally, holders of Common
Shares should consider the factors set forth in the Security Capital
Prospectus attached hereto under the caption "Risk Factors" with respect to an
investment in Security Capital securities.
RISKS IN VALUATION
Security Capital is merging its ATLANTIC REIT management and property
management operations with and into a newly created subsidiary of ATLANTIC in
exchange for 2,306,591 Common Shares valued at $54,608,549. In determining the
value of the ATLANTIC REIT management and property management operations,
Security Capital projected net operating income after capitalization of
qualifying acquisition and development costs in accordance with GAAP from
existing agreements with ATLANTIC through 1999 and discounted this net
operating income back to July 1, 1997. The value of the REIT management and
property management operations did not include any value that may be
attributed to the Warrants. See "The Transaction--Security Capital
Recommendations and Reasons for the Transaction." The present value of the
projected net operating income from REIT management and property management
operations does not, and is not intended to, reflect what Security Capital
could obtain in an actual sale of its REIT management and property management
operations. Different valuation methodologies may have resulted in higher or
lower values for the REIT management and property management operations.
Security Capital did not obtain a third party valuation of the projected net
operating income anticipated to be received by it under the existing REIT
management and property management agreements. Therefore, no assurance can be
given that the value of the Common Shares being issued to Security Capital is
not greater than the value of the operations being merged.
CONFLICTS OF INTERESTS IN THE TRANSACTION
The Transaction was initiated and structured by individuals who are
executive officers of Security Capital, the largest shareholder of ATLANTIC.
Although no independent representatives have been retained to negotiate the
terms of the Transaction on behalf of ATLANTIC, the Board of Directors created
the Special Committee consisting of Messrs. Manuel A. Garcia, III, Ned S.
Holmes and John M. Richman. The Special Committee engaged Hogan & Hartson
L.L.P. as its legal counsel and engaged J.P. Morgan as its financial advisor
to provide a written opinion with respect to the fairness, from a financial
point of view, of the consideration to be received in the transactions
contemplated by the Merger Agreement and by the Related Agreements (as defined
in the Merger Agreement) to ATLANTIC and its shareholders (other than Security
Capital). No member of the Special Committee is an officer of ATLANTIC or a
director or officer of the REIT Manager or the Property Manager, or an officer
or director of Security Capital. However, Messrs. Garcia, Holmes and Richman
beneficially own 12,000, 59,500 and 12,000 Common Shares, respectively, and
Messrs. Holmes and Richman beneficially own 67 and 1,633 shares, respectively,
of Security Capital's Class A Common Stock, $0.01 par value per share ("Class
A Shares"). Additionally, Messrs. Holmes and Richman beneficially own $50,835
and $856,318 aggregate principal amount of Security Capital's Convertible
Subordinated Debentures due 2014 (the "2014 Convertible Debentures"),
respectively (convertible into an aggregate of 48 and 819 Class A Shares,
respectively). Directors of ATLANTIC, other than members of the Special
Committee, beneficially own in the aggregate 24,649 Common Shares, 514 Class A
Shares and $151,248 aggregate principal amount of 2014 Convertible Debentures
(convertible into an aggregate of 144 Class A Shares). Beginning on January 1,
1998, each Class A Share will be convertible into 50 Class B Shares.
Accordingly, the interests of such persons may differ from the interests of
shareholders as a result of their ownership of securities of Security Capital
and, as a result, such persons may have an incentive to place the interests of
Security Capital over those of ATLANTIC's shareholders.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
As of June 30, 1997, Security Capital beneficially owned approximately 51%
of the issued and outstanding Common Shares. As a result, Security Capital
currently controls approximately 51% of the vote on matters submitted for
ATLANTIC shareholder action, including the Transaction. Under ATLANTIC's
charter (the
15
<PAGE>
"ATLANTIC Charter"), no other shareholder may hold more than 9.8% of the
shares of ATLANTIC. Security Capital has the contractual right (and after the
Transaction will continue to have the contractual right) to nominate directors
to the five-member Board of Directors, depending upon its level of ownership
of Common Shares. Ms. Moore and Mr. Potts are deemed to be Security Capital's
nominees. The directors so elected are in a position to exercise control or
significant influence over the affairs of ATLANTIC if they act together. Upon
consummation of the Transaction, Security Capital's ownership could increase
from approximately 51% to approximately 54%, if no other shareholders or third
parties subscribe for Common Shares issuable in the Concurrent Rights
Offering, and would remain at approximately 51% if the full amount of Common
Shares are sold in the Concurrent Rights Offering. Additionally, after the
Transaction Security Capital will continue to have contractual rights of prior
approval and consultation regarding certain important matters. See "The
Transaction--Investor Agreement."
RELATIONSHIP WITH FINANCIAL ADVISOR
J.P. Morgan was retained by the Special Committee to render a fairness
opinion with respect to the Transaction and will receive a fee of $250,000 in
connection therewith. The retention of J.P. Morgan by the Special Committee
occurred prior to the time that J.P. Morgan was named by Security Capital as
lead underwriter in connection with Security Capital's proposed initial public
offering, for which J.P. Morgan will receive customary fees and commissions.
Additionally, J.P. Morgan and its affiliates maintain investment banking and
other relationships with ATLANTIC, Security Capital, PTR and SCI, as well as
other affiliates of Security Capital. The naming of J.P. Morgan as lead
underwriter in connection with Security Capital's proposed initial public
offering was not tied to or contingent upon the rendering by J.P. Morgan of a
fairness opinion in connection with the Transaction. Nevertheless, as a result
of the foregoing, J.P. Morgan has a material relationship with the Special
Committee as well as Security Capital and may therefore have a conflict of
interest in rendering its opinion as to the fairness of the Transaction while
also participating as a lead underwriter in the determination of the initial
public offering price of Security Capital's Class B Shares. See "The
Transaction--Background."
TAXABILITY OF WARRANT ISSUANCE
Pursuant to the Warrant Issuance, a shareholder receiving Warrants will have
ordinary taxable income equal to the value of the Warrants on the Warrant
Issuance Date. In the opinion of Mayer, Brown & Platt, the receipt of Warrants
by tax-exempt shareholders will be treated as "unrelated business taxable
income." See "The Transaction--Federal Income Tax Consequences--The Warrant
Issuance."
IMPACT OF TRANSACTION ON ATLANTIC'S FINANCIAL POSITION
To date ATLANTIC has incurred a REIT management fee and property management
fee for services provided by Security Capital. After completion of the Merger,
ATLANTIC will no longer pay a REIT management or property management fee;
instead, it will directly incur the operating and related costs for the
professionals (currently 100 professionals) and property level and support
personnel (currently 450 persons) employed by the REIT Manager and the
Property Manager who will become employees of ATLANTIC. ATLANTIC will directly
incur all future increases in management costs that currently are borne by the
REIT Manager and the Property Manager. The REIT Manager and the Property
Manager have not been profitable. The fees paid by ATLANTIC for the REIT
Manager and Property Manager services in 1996 were approximately $655,000 less
than the direct and indirect costs incurred by Security Capital in providing
these services. The Board of Directors believes that ATLANTIC has reached a
sufficient size to realize economies of scale by internalizing the management
function since ATLANTIC will have sufficient depth of management and personnel
such that additional assets can be acquired, developed and managed without a
significant increase in personnel or other costs. In addition, as a result of
the Transaction, ATLANTIC will capitalize qualifying acquisition and
development costs. In doing so, ATLANTIC will be able to match the incurrence
of costs associated with ATLANTIC's acquisition or development of communities
with the revenue generated by these communities. However, no assurance can be
given that the cost to ATLANTIC of providing such services internally will not
exceed the fees payable to the REIT Manager and the Property Manager under the
current agreements.
16
<PAGE>
ABSENCE OF PUBLIC MARKET FOR WARRANTS AND CLASS B SHARES
The Class B Shares and the Warrants (including the Class B Shares issuable
upon exercise thereof) have been approved for listing, subject to official
notice of issuance, on the NYSE, although no assurance can be given that an
active trading market will develop. In the event that the Security Capital
initial public offering of Class B Shares is not consummated, the Warrants
(and the Class B Shares issuable upon exercise thereof) will not be listed or
traded on any established market. As a result, shareholders may have
difficulty disposing of their Warrants or shares issuable upon exercise of
such Warrants.
17
<PAGE>
THE TRANSACTION
(PROPOSAL 1)
GENERAL
The following is a summary of the material aspects of the Transaction. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached to this Proxy Statement
and Prospectus as Annex I and is incorporated herein by reference.
BACKGROUND
In March 1996, Security Capital's management began considering the
feasibility of a transaction whereby Security Capital would transfer to each
of ATLANTIC, PTR and SCI all of its REIT management and property management
operations in exchange for equity in each of ATLANTIC, PTR and SCI with the
result that each of ATLANTIC, PTR and SCI would become an internally managed
REIT.
On September 17, 1996, at a regular meeting of the Security Capital Board,
Security Capital management made a presentation to the Security Capital Board
regarding Security Capital's REIT and property management operations. The
Security Capital Board instructed management to recommend options which would
maximize shareholder values for shareholders of ATLANTIC, PTR and SCI and
shareholders of Security Capital. Security Capital's management then began to
actively explore the means of achieving this goal. At the December 4, 1996
meeting of the Security Capital Board, Security Capital's management
recommended that Security Capital contribute its respective REIT and property
management operations to ATLANTIC, PTR and SCI in exchange for common shares
in each entity. At this meeting, the Security Capital Board authorized
management to proceed with each of the proposed transactions.
On January 13, 1997, at a special meeting of the Board of Directors,
Security Capital's management discussed with the Board of Directors a proposal
with respect to the REIT Manager and the Property Manager. At the meeting,
because of Security Capital's significant ownership of Common Shares and its
direct interest in the proposed transaction, the Board of Directors created
the Special Committee, consisting of Manuel A. Garcia, Ned S. Holmes and John
M. Richman, to consider the proposal and recommend action with respect to the
proposal to the Board of Directors. The Special Committee appointed J.P.
Morgan as its financial advisor and retained Hogan & Hartson L.L.P. as its
legal counsel.
On January 22, 1997, at a special meeting of the Board of Directors,
Security Capital's management made a formal presentation to the Board of
Directors describing the material terms and expected benefits to ATLANTIC of
the proposed transaction, the valuation methodology and underlying assumptions
used to determine the proposed purchase price, the terms of the Warrants, the
legal procedures necessary to consummate the proposed transaction, the
anticipated tax impact of the proposed transaction and the impact of the
proposed transaction on ATLANTIC's personnel and accounting policies.
Representatives of Hogan & Hartson L.L.P. and J.P. Morgan attended this
meeting. After the presentation, the Special Committee met with J.P. Morgan
and Hogan & Hartson L.L.P. At this meeting, the Special Committee discussed
generally the proposal which had been outlined in detail at the Board of
Directors meeting. J.P. Morgan provided a brief overview of the process that
it would undertake for the purpose of analyzing the proposed transaction and
making a determination as to the fairness, from a financial point of view, of
the consideration to be received in the transactions contemplated by the
Merger Agreement and by the Related Agreements (as defined in the Merger
Agreement) to ATLANTIC and its shareholders (other than Security Capital).
Hogan & Hartson L.L.P. reviewed with the Special Committee its duties under
Maryland law in connection with consideration of the proposed transaction.
Although Hogan & Hartson L.L.P. did not render any opinion to the Special
Committee regarding whether the members thereof were disinterested for
purposes of Maryland law, Hogan & Hartson L.L.P. requested from each member of
the Special Committee information concerning his relationship with Security
Capital (including ownership of securities) in order to permit each member to
determine whether or not he would be considered a disinterested director for
purposes of Maryland law.
18
<PAGE>
The Special Committee considered possible alternative transactions to the
proposal by Security Capital. The alternatives which the Special Committee
identified in which ATLANTIC would retain external management were: rejecting
Security Capital's proposal and maintaining the status quo; or continuing
external management but contracting with one or more new, unaffiliated
management companies. The Special Committee concluded that contracting with a
new, unaffiliated manager or managers would not be beneficial to ATLANTIC.
While that alternative would eliminate conflicts of interest between ATLANTIC
and Security Capital, in the Special Committee's judgment, the REIT Manager
and Property Manager are uniquely valuable to ATLANTIC, owing to their
expertise, innovation, breadth of skill and experience in managing ATLANTIC's
business and properties.
The Special Committee also discussed the perceived negative aspects of
external management and the potential benefits of internalized management.
Potential benefits discussed included improving ATLANTIC's long-term funds
from operations, removing impediments to ATLANTIC's participation in
acquisition in the REIT industry, improving the funds from operations multiple
reflected in ATLANTIC's stock market price by improving ATLANTIC's
attractiveness to institutional and other investors who disfavor externally
managed REITs and improving ATLANTIC's potential rating agencies' outlook.
After considering whether there were significant potential detriments to
internalizing management, the Special Committee concluded that internalizing
management was preferable to maintaining an externally managed structure.
At the January 22 meeting, the Special Committee concluded that, prior to
approving the proposed transaction, the Special Committee would have to be
satisfied that the transaction would, based on the internal management
projections described elsewhere herein, result in increased funds from
operations per Common Share following the proposed transaction. In addition to
financial considerations, the Special Committee also identified several
components of the transaction which they determined would require specific
analysis and input from legal and financial advisors, including (i) the
advisability (and if advisable, the terms of) business protection agreements
for certain members of management, (ii) the potential benefits and detriments
to ATLANTIC of continuing to obtain on a contract basis certain administrative
services from Security Capital, (iii) whether there should be any amendment to
the Investor Agreement (as defined below) between ATLANTIC and Security
Capital and (iv) whether any special vote of shareholders of ATLANTIC other
than Security Capital should be a requirement for approval of the transaction.
After the January 22, 1997 meeting, Security Capital provided the Special
Committee with detailed financial forecasts, a funds from operations accretion
analysis and a summary description of proposed compensation arrangements for
senior officers.
On January 21 and 22, 1997, Security Capital made similar proposals to the
board of trustees of PTR and the board of trustees of SCI, respectively. On
the afternoon of January 22, 1997, ATLANTIC issued the following statement:
"[ATLANTIC] . . . today announced that it has received a proposal from
Security Capital Group to exchange Security Capital Group's REIT management
and property management companies for ATLANTIC common shares. As a result
of the transaction, ATLANTIC would become an internally managed REIT, and
Security Capital Group would remain ATLANTIC's largest shareholder.
ATLANTIC's Board of Directors has formed a special committee comprised of
independent directors to review the proposed transaction. The transaction
is subject to approval by the special committee and the full Board of
Directors. If the board approves the transaction, a proxy statement,
subject to review by the Securities and Exchange Commission, will be mailed
to ATLANTIC shareholders prior to a shareholder vote on the proposed
transaction.
After the Board of Directors has voted on this matter, ATLANTIC's
management will be available to discuss the transaction."
The Special Committee met again with J.P. Morgan and Hogan & Hartson L.L.P.
by telephone conference call on February 10, 1997. The Special Committee
reviewed Security Capital's proposed schedule for preparation of documents and
approval of the proposed transaction and discussed in detail with J.P. Morgan
the scope of its
19
<PAGE>
review and the expected content of its fairness opinion. The Special Committee
also reviewed certain publicly available information supplied by J.P. Morgan
and Hogan & Hartson L.L.P. with respect to selected REIT Asset Management
Comparable Transactions (as described below under "--Fairness Opinion--REIT
Asset Management Comparative Transactions") concerning administrative services
contracts with affiliates, restrictions on disposition of securities by
affiliates receiving securities in the transactions, business protection
agreements, limitations on indemnification from the contributors of management
businesses and escrows of securities related thereto, and shareholder vote
requirements for approval of such transactions.
On March 5, 1997, Mr. Holmes, the Chairman of the Special Committee, the
chairs of the special committees of PTR and SCI and members of Security
Capital's management participated in a telephonic meeting at which Security
Capital agreed with the chairs of each of the special committees that all
negotiations among the parties would be conducted openly and full access to
all information supplied by Security Capital to the members of any of the
special committees would be supplied to each of the other special committees.
Additionally, Security Capital agreed that each of ATLANTIC, PTR and SCI would
receive the benefit of any favorable terms negotiated by any of the special
committees.
Between March 5, 1997 and March 17, 1997, Mr. Holmes and the chairs of the
PTR and SCI special committees engaged in further discussions and negotiations
with one of Security Capital's Managing Directors and other representatives of
Security Capital. Also during this period, Hogan & Hartson L.L.P. negotiated
various terms and provisions of the Merger Agreement and related agreements
with Mayer, Brown & Platt, regular counsel for ATLANTIC and counsel for
Security Capital in the Transaction. In the course of such negotiations, Hogan
& Hartson L.L.P. consulted on various occasions with legal counsel for the
special committees of PTR and SCI.
The Special Committee again met on March 11, 1997 with J.P. Morgan and Hogan
& Hartson L.L.P. The Chairman of the Special Committee reported that Security
Capital had informed him of its intention to engage J.P. Morgan as lead
manager for Security Capital's initial public offering and reported on
discussions he had with J.P. Morgan concerning whether such engagement could
compromise J.P. Morgan's objectivity in representing the Special Committee.
J.P. Morgan informed the Special Committee, and subsequently confirmed its
view in a letter to the Chairman of the Special Committee dated March 17,
1997, that it had reviewed the potential conflicts and viewed each transaction
to be separate and stand-alone and, therefore its relationship with Security
Capital (including its engagement as lead manager for Security Capital's
initial public offering) did not compromise its objectivity in representing
the Special Committee. However, to minimize any potential conflict of
interest, J.P. Morgan arranged for separate teams to work on each transaction.
J.P. Morgan noted that it had discussed the arrangement with Hogan & Hartson
L.L.P., counsel to the Special Committee, and that Hogan & Hartson L.L.P.
while it did not render any opinion to the Special Committee in this regard,
indicated that, based on its review of the provisions of applicable Maryland
law, there was no legal impediment that would preclude J.P. Morgan from
continuing to work for the Special Committee if it were acceptable to the
Special Committee. The Special Committee reviewed the information presented by
J.P. Morgan and concluded that J.P. Morgan should continue to advise the
Special Committee notwithstanding its other engagement by Security Capital.
J.P. Morgan presented its initial report on its analysis of the financial
aspects of the proposed transaction and rendered its oral opinion as to the
fairness, from a financial point of view, of the consideration to be received
in the transactions contemplated by the Merger Agreement and by the Related
Agreements (as defined in the Merger Agreement) to ATLANTIC and its
shareholders (other than Security Capital). Members of the Special Committee
asked J.P. Morgan about various aspects of its presentation and discussed
fully the proposed financial terms of the proposed transaction. In addition,
the Special Committee requested that J.P. Morgan reevaluate the Warrants to
take into account the fact that there could be no assurance that Security
Capital's proposed initial public offering would be successful. At this
meeting, the Special Committee also reviewed with Hogan & Hartson L.L.P. the
draft documents related to the proposed transaction prepared by Security
Capital.
At the conclusion of this meeting the Special Committee met with
representatives of Security Capital's management, including one of Security
Capital's Managing Directors, and requested that Security Capital consider
modifying the proposed transaction in certain respects, including (i) to
reduce the purchase price to
20
<PAGE>
reflect the potential illiquidity of the Warrants and any revisions in
management's projections as more analysis is undertaken, (ii) to provide a cap
on the number of shares that could be issued to Security Capital pursuant to
the Merger Agreement, (iii) to restrict Security Capital's ability to dispose
of its Common Shares for a period of at least six months following the
transaction, (iv) to lower the proposed threshold on the amount of a claim
that could be asserted against Security Capital pursuant to the
indemnification of ATLANTIC under the Merger Agreement, (v) to include in the
Merger Agreement certain representations and warranties by Security Capital
which the Special Committee, with the advice of Hogan & Hartson L.L.P.,
believed to be customary for transactions of this type, (vi) to clarify in the
Administrative Services Agreement (as defined below) that ATLANTIC has
ultimate authority to manage its business and that Security Capital will
provide services pursuant to the agreement at the request of ATLANTIC, and
(vii) to provide a cap on the payments to be made to Security Capital pursuant
to the Administrative Services Agreement. The Special Committee also requested
that they be provided with a report by Ernst & Young LLP on the procedures
applied in connection with verifying the mathematical accuracy of ATLANTIC's
financial analysis of the impact of the proposed transaction. Finally, the
Special Committee requested that Security Capital give further consideration
to conditioning approval of the transaction on the favorable vote of a
majority of those shareholders of ATLANTIC other than Security Capital voting
at the Special Meeting. Security Capital declined this request because it is
under no legal obligation to not vote its Common Shares. The Special Committee
elected to proceed with the proposed transaction because it believed that the
proposed transaction was beneficial to ATLANTIC and its shareholders despite
the fact that Security Capital would control the outcome of the vote on the
proposed transaction.
On March 14, 1997, following discussions among the Chairman of the Special
Committee, the chairmen of the special committees of PTR and SCI and members
of Security Capital's management, Security Capital agreed to reduce the
proposed purchase price for the REIT Manager and the Property Manager from
$56,858,549 to $54,608,549. Security Capital also agreed to restrictions on
its ability to engage in the REIT and property management businesses and to
limitations on its ability to make employment opportunities available to
employees of ATLANTIC, PTR and SCI.
On March 18, 1997, the Special Committee met by conference telephone with J.
P. Morgan and Hogan & Hartson L.L.P. to discuss the outcome of negotiations
with Security Capital regarding various terms of the proposed transaction. The
Special Committee was advised by its Chairman that Security Capital had (i)
agreed to reduce ATLANTIC's overall purchase price by approximately $2.3
million to $54,608,549 to reflect the impact of ATLANTIC's assumption of
retirement and stock option plan expenses and the potential adverse impact on
the value of the Warrants if Security Capital's proposed initial public
offering does not occur and (ii) agreed to a minimum and maximum number of
Common Shares to be issued in the Merger, based upon a range of 11.24% above
and below the March 14, 1997 stock market closing price of $23.25 per Common
Share and to certain other revisions to the proposed transactions. In
addition, Security Capital had agreed to cap the cost of administrative
services to be purchased by ATLANTIC from Security Capital, to accept a three-
year business protection agreement and a six-month prohibition on transfer of
all of its Common Shares, to reduce to $250,000 the threshold for indemnity
claims, and to include in the Merger Agreement in all material respects the
additional representations and warranties of Security Capital that had been
requested. J.P. Morgan reported the impact on its analysis of assuming nominal
value of the Warrants.
At the March 18 meeting, Hogan & Hartson L.L.P. also reported to the Special
Committee that Security Capital had rejected conditioning approval of the
transaction on the favorable vote of a majority of non-Security Capital
shareholders voting at the Special Meeting and again reviewed with the Special
Committee members their duties and responsibilities under Maryland law in
connection with their consideration and recommendation of the proposed
transaction. Based upon all of its review and negotiations, J.P. Morgan's
financial analysis and oral fairness opinion, and advice from Hogan & Hartson
L.L.P., the Special Committee concluded that, subject to final documentation
satisfactory to the Chairman of the Special Committee in consultation with
counsel, the proposed transaction was fair and reasonable to ATLANTIC and the
shareholders of ATLANTIC other than Security Capital and on terms and
conditions not less favorable to ATLANTIC than those available from
unaffiliated third parties. The Special Committee therefore recommended that
the Board of Directors approve the proposed transaction and recommend to the
shareholders of ATLANTIC that they approve it.
21
<PAGE>
On March 24, 1997, the Chairman of the Special Committee met by conference
telephone with Hogan & Hartson L.L.P. and J.P. Morgan to review various
revisions to the final transaction documents prior to their execution. J.P.
Morgan orally re-confirmed its fairness opinion as described above.
On June 25, 1997, the Special Committee met to consider a proposed amendment
to the Merger Agreement, which would permit ATLANTIC to issue Common Shares in
the Concurrent Rights Offering at a price determined by the Board of
Directors, but not less than 94% of the five-day trailing average closing
price of the Common Shares on the day prior to the ATLANTIC Record Date. The
proposed amendment would also allow ATLANTIC to sell the Common Shares not
purchased by shareholders in the Concurrent Rights Offering to third parties.
The Special Committee believed that the proposed amendment to the Merger
Agreement would allow ATLANTIC to raise additional equity capital at a
relatively low cost, while allowing shareholders to make additional
investments in ATLANTIC at a discount to the price at which Security Capital
is acquiring Common Shares in the Merger. The Special Committee recommended
that the Board of Directors approve the amendment to the Merger Agreement.
Following the meeting of the Special Committee, the Board of Directors
unanimously approved the amendment to the Merger Agreement.
On July 22, 1997, the Special Committee considered a proposed amendment to
the Merger Agreement which would allow the Concurrent Rights Offerings to
close even if the Merger is not consummated. The proposed amendment was
necessary in order to allow the rights to be issued in connection with the
Concurrent Rights Offering to be traded on the NYSE, which in turn would allow
shareholders receiving rights to sell their rights on the NYSE if they did not
exercise such rights and would allow third parties to purchase rights on the
NYSE and exercise such rights to participate in the Concurrent Rights
Offering. The Special Committee believed that the proposed amendment was in
the best interests of ATLANTIC's shareholders and recommended that the Board
of Directors approve the amendment. Following the meeting of the Special
Committee, the Board of Directors unanimously approved the amendment to the
Merger Agreement.
SECURITY CAPITAL RECOMMENDATIONS AND REASONS FOR THE TRANSACTION
Based on the reasons described below, Security Capital believes that it
would be in the best interests of ATLANTIC and its shareholders to internalize
its REIT and property management operations within ATLANTIC. Because of the
interests of ATLANTIC and Security Capital in the Transaction, Security
Capital's management's goal was to structure the Transaction in a manner that
would maximize shareholder values for each party. Security Capital, which owns
approximately 51% of the outstanding Common Shares, has agreed that it will
vote all Common Shares it owns in favor of the Transaction. Security Capital
expects that it will benefit from the Transaction.
The following were all of the material factors presented by Security Capital
to the Board of Directors with regard to the Transaction:
. IMPACT ON FUNDS FROM OPERATIONS. Security Capital believes that the
Transaction will be accretive to ATLANTIC's funds from operations.
Currently, ATLANTIC pays a fee to the REIT Manager based on a fixed
percentage of ATLANTIC's cash flow (as defined) and to the Property
Manager based on a percentage of property revenue, each of which
increases proportionately as ATLANTIC adds assets.
. ACQUISITION POSSIBILITIES. Security Capital believes that the REIT
industry is undergoing a period of significant consolidation. Security
Capital believes that an internally managed REIT will have much greater
flexibility to participate in this industry consolidation than does an
externally managed REIT because of the perceived conflicts of interest
with external management.
. PUBLIC MARKET VALUATION. Security Capital examined the public market
valuation and funds from operations multiples of comparable public
multifamily REITs that were internally managed. Security Capital believes
that investors and analysts will view an internally managed structure
more favorably since ATLANTIC's costs, after capitalization of qualifying
acquisition and development costs in accordance with GAAP, will be more
comparable to other multifamily REITs. These acquisition and development
activities are currently provided by the REIT Manager and paid for as
part of the REIT management fee, which fee is expensed by ATLANTIC.
Further, the REIT Manager has historically experienced a timing
difference between the costs it expenses associated with ATLANTIC's
acquisition and development of properties and the revenues it will
receive from management fees in future periods
22
<PAGE>
as these properties generate operating cash flow. Management believes that
the increased comparability resulting from ATLANTIC's capitalization of
qualifying acquisition and development costs in accordance with GAAP, in
addition to the opportunity for the increased growth in funds from
operations due to the economies of scale, as discussed above, will result
in a higher multiple on ATLANTIC's funds from operations and an
enhancement to shareholder value.
. RATING AGENCY ISSUES. It is Security Capital's belief that the external
management structure of ATLANTIC may cause concern for the rating
agencies because of perceived conflicts of interest. ATLANTIC intends to
seek a rating for long-term debt it may issue. Because ATLANTIC expects
that long-term debt will be an important component of ATLANTIC's capital
structure, Security Capital believes it would be prudent to eliminate
rating agencies' issues regarding any perceived conflicts of interest.
The Board of Directors considered the impact of the Transaction on
ATLANTIC's acceptance by the rating agencies to be favorable. See "--
Recommendations of the Board of Directors and Reasons for the
Transaction."
The following are certain potential detriments of the Transaction:
. Since the number of Common Shares issuable to Security Capital in the
Merger is fixed, the value of those shares at the time the Merger is
completed may be greater than the value placed on the operations of the
REIT Manager and Property Manager by the Board of Directors.
. The Warrant Issuance will be taxable to holders of Common Shares.
. The REIT Manager and Property Manager have not been profitable. The fees
paid by ATLANTIC for the REIT Manager and the Property Manager services
in 1996 were approximately $655,000 less than the direct costs and
indirect costs incurred by Security Capital in providing these services.
. The Transaction would result in ATLANTIC recording higher administrative
expenses related to the internalization of the management function in
lieu of paying a fee to the REIT Manager and Property Manager. Security
Capital has anticipated that ATLANTIC would incur approximately $15.5
million of additional administrative expenses in 1998 by internalizing
the management function. Of these expenses, an amount which is subject to
a maximum limit of $3.7 million for 1998, is expected to be purchased
from Security Capital under an administrative services agreement. See
"The Transaction--Administrative Services Agreement." ATLANTIC would,
however, no longer pay estimated REIT management and property management
fees of $22.2 million in 1998. The increased administrative costs of
internalizing the management function may be greater than anticipated and
no assurance can be given that the cost to ATLANTIC of providing such
services internally will not exceed the fees payable to the REIT Manager
and the Property Manager under the current agreements.
. Although the Transaction is expected to be immediately accretive to
ATLANTIC's funds from operations, the Transaction may not result in a
corresponding increase in the price at which Common Shares trade on the
NYSE.
Based primarily on these reasons, and after consideration of the potential
detriments, Security Capital recommended the Transaction to the Board of
Directors.
For purposes of determining the value of the REIT management and property
management operations being acquired by ATLANTIC, Security Capital calculated,
for the six months ending December 31, 1997, and each of the years ending
December 31, 1998 and December 31, 1999, the projected REIT management fees
and property management fees, net of operating costs, which Security Capital
would have received under existing agreements with ATLANTIC for all of
ATLANTIC's existing properties, remaining acquisitions budgeted in 1997, as
well as those development properties included in ATLANTIC's 1997 operating
budget which were currently identified and which were scheduled to begin
construction prior to December 31, 1997. Security Capital chose this group of
assets because it wanted to base the valuation of the REIT Manager and the
Property Manager only on assets that were currently owned or had been
identified to be acquired or developed within the next twelve months. Security
Capital then multiplied the 1999 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 July 1, 1997 and
23
<PAGE>
December 31, 1998 back to July 1, 1997 using an annual discount rate of 17.5%.
The valuation multiple of 9.0x was applied to 1999 net operating income
because that is the first year in which all budgeted properties under
development or to be acquired are expected to be stabilized. The 9.0x multiple
for the 1999 net operating income for Security Capital was based on publicly
available information on selected public and private companies that could be
viewed as comparable to the REIT Manager and Property Manager, including:
(i) A publicly available report prepared by an independent third party
(The Future of Money Management in America, Bernstein Research, 1995
Edition) of private and public companies in the financial services sector.
Earnings multiples on comparable transactions completed since 1992 ranged
between 6.0x and 14.1x.
(ii) Comparison with ten transactions in which REITs valued their
external management operations in the process of becoming internally
managed. Security Capital used publicly available information to determine
the acquisition price which, expressed as a multiple of net income for the
four REITs that disclosed this information, ranged between 7.8x and 10.2x.
The four comparison REITs were Realty Income Corporation, Shurgard Storage
Centers, Franchise Finance Corp., and Storage Equities Incorporated.
(iii) Comparison with 16 publicly traded management companies, including
property management companies and selected companies from various
investment management industries, for which an estimated net operating
income multiple could be calculated. Security Capital computed that the
current public market price for these companies expressed as a multiple of
consensus earnings estimates ranged between 5.2x and 15.1x. Public
management companies considered by Security Capital were: Insignia
Financial Group Incorporated, National Housing Property Incorporated, CB
Commercial Real Estate, United Asset Management Corp., Alliance Capital
Management, New England Investment Company, Amresco, Inc., Atalanta/Sosnoff
Capital, Cardinal Realty Services Incorporated, Central Parking
Corporation, Eaton Vance Corp., Franklin Resources, Oppenheimer Capital LP,
Square Industries, Inc., The John Nuveen Co. and T. Rowe Price Associates.
The 17.5% discount rate applied to Security Capital's 30-month net operating
income ending December 31, 1999 is a reflection of Security Capital's
estimation of the compounded annual total rate of return for these businesses.
Security Capital's announced strategy is to deploy capital with a goal of
achieving a 15% to 20% compounded annual total rate of return.
Security Capital estimates that the purchase price of $54,608,549 that will
be paid for the REIT Manager and Property Manager under the terms of the
Transaction reflects a multiple of 7.0 times the net change in ATLANTIC's pro
forma 1997 funds from operations assuming that the Transaction occurred as of
January 1, 1997 and assuming the stabilization of pre-stabilized operating
assets that are in the process of being repositioned and the stabilization of
assets that are under development or in lease up. By making this adjustment,
the multiple calculation takes into account not only the costs that ATLANTIC
would incur in developing or transitioning these assets but also the fee that
would otherwise have been paid to the REIT Manager as those properties
generated additional cash flow.
No separate consideration was attributed to the operating systems
contributed by Security Capital.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS AND REASONS FOR THE TRANSACTION
At the March 18, 1997, telephonic meeting of the Special Committee, the
Special Committee concluded that, subject to final documentation satisfactory
to the Chairman of the Special Committee in consultation with counsel, the
proposed transaction was fair and reasonable to ATLANTIC and the shareholders
of ATLANTIC other than Security Capital and on terms and conditions not less
favorable to ATLANTIC than those available from unaffiliated third parties.
The Special Committee based its conclusion upon the total mix of factors
considered, the advice of its advisors and its determination that the services
provided by the REIT Manager and the Property Manager were unique in the
industry. The Special Committee therefore recommended that the Board of
Directors approve the proposed transaction and recommend to the shareholders
of ATLANTIC that they approve it. At a special meeting of the Board of
Directors on March 24, 1997, following a review of the information considered
by Security Capital and a review of the terms of the Merger Agreement and the
Transaction, as well as consideration of the recommendation of the Special
Committee, the Board of Directors approved the Merger Agreement and the
Transaction. As noted below, the Board of Directors considered the
24
<PAGE>
determination by the Special Committee that the Merger Agreement and the
Transaction are fair to and in the best interests of ATLANTIC and its
shareholders (other than Security Capital) and their recommendation that the
Board of Directors approve the Merger Agreement and the Transaction.
As more fully discussed below, the Board of Directors considered each of the
positive and negative factors presented by Security Capital described above
under "--Security Capital Recommendations and Reasons" and, on the whole,
viewed each such factor as being favorable to its determination to approve the
Transaction.
In making its determination with respect to the Transaction, the Board of
Directors considered the following factors which were material to its
decision:
(i) Security Capital's stated objective of maximizing shareholder value
for the shareholders of ATLANTIC (and in turn, its own investment in
ATLANTIC). The Board of Directors viewed this as positive in that any
increase in the value of Security Capital's interest would also accrue to
unaffiliated shareholders of ATLANTIC.
(ii) The immediate accretion to ATLANTIC's funds from operations because
of the internalization of management and the resulting ability to
capitalize qualifying acquisition and development related costs in
accordance with GAAP and ATLANTIC's ability to continue to make cash
distributions to shareholders at the current level. Based on Security
Capital's methodology for valuing the REIT management and property
management operations as discussed below and including ATLANTIC's 1998
budgeted development, acquisition and disposition activity, management
believes that the Transaction will be accretive to ATLANTIC's funds from
operations by $6.9 million, or $0.05 per share, for 1998. Because the Board
of Directors believes that, among other factors, the stock of REITs trades
in the public markets based upon a multiple of the REITs' funds from
operations, the Board of Directors believes that an increase in funds from
operations will result in a corresponding increase in the price at which
Common Shares trade in the market. The Board of Directors viewed the
forecasted increase in funds from operations as favorable.
(iii) The valuation methodology used to determine the purchase price of
the REIT management and property management companies, which methodology
took into account the following:
. Budgeted development activities including development budgets,
construction schedules, anticipated lease-up schedules and budgeted
operating results.
. Budgeted acquisition activities and acquisition opportunities,
including acquisition timetables, anticipated initial yields and
improvement reserves.
. Budgeted dispositions.
. The 1997 budget and 1998 and 1999 forecasts of operating results,
including rental and operating expense assumptions for ATLANTIC's
operating portfolio, including the risks in achieving the anticipated
results.
. The REIT Manager's and Property Manager's 1997 budgets and 1998 and
1999 forecasts, including the risks in achieving the anticipated
results.
. The reasonableness of the multiple used to value the REIT management
and property management businesses, based in part on the review of
ten similar transactions.
. The discount rate used in the valuation.
. The accounting methodology used in arriving at the budgets and
forecasts, including the impact of the Transaction on both the
accrual and cash basis accounting methods.
Overall, the Board of Directors, based upon consultations with J.P.
Morgan and management, believes that the valuation methodology used in
determining the value of the REIT Manager and Property Manager was
reasonable.
(iv) The franchise value of the REIT Manager and Property Manager and the
operating system and the value to ATLANTIC of retaining the entire group of
REIT Manager and Property Manager employees as an entity. The Board of
Directors viewed this factor as favorable to its decision.
25
<PAGE>
(v) The yield that ATLANTIC could expect to earn on its investment was
forecasted to be 11.8% for 1998. The yield was calculated by dividing the
net funds from operations effect of the Transaction as reflected in the
elimination of fees and internalization of management and giving effect to
the ability to capitalize qualifying acquisition and development activities
by the purchase price paid. The Board of Directors viewed this factor as
favorable.
(vi) Other methods of valuing the REIT management and property management
businesses, including the following:
. The net impact on ATLANTIC's 1997 and 1998 funds from operations
expressed as a multiple of the purchase price.
. A five-year discounted cash flow analysis and the return on
investment that is produced by the Transaction.
. The cost and practicality of engaging third party firms to conduct
the activities currently conducted by the REIT Manager and the
Property Manager. In considering this issue, the Board of Directors
took into account ATLANTIC's prior experience with third party
developers and property managers. The Board of Directors considered
the fact that it would be extremely difficult to identify qualified
firms that had an appropriate geographic market capability,
experience level and financial capability to meet ATLANTIC's
requirements for acquisition, development, disposition and property
management activities. The Board of Directors considered the impact
of engaging multiple firms.
. The cost and practicality of building its own staff to conduct the
REIT Manager's and Property Manager's activities.
(vii) Different ways of determining the value of the Warrants and their
impact on the Transaction. The Board of Directors considered the impact of
the Transaction on ATLANTIC shareholders including and excluding the
Warrants. The Board of Directors viewed the Warrants as favorable to
ATLANTIC shareholders, despite the taxability of the Warrant issuance
discussed below.
(viii) The tax, accounting and legal issues relating to, and disclosure
requirements for, the Transaction. The Board of Directors viewed this
factor as favorable.
(ix) The results produced by the REIT management and property management
companies including a review of the current staffing levels. The Board of
Directors considered the impact on prospective performance levels of the
individuals of internalizing the REIT management and property management
companies. The Board of Directors viewed this factor as favorable.
(x) The current compensation levels of REIT and property management
personnel, compensation trends and projected compensation trends following
the Transaction. Overall administrative expenses after capitalization of
qualifying acquisition and development costs in accordance with GAAP,
including compensation, are expected to be less than the fees that would be
paid to the REIT Manager and Property Manager under the existing
agreements. The Board of Directors viewed this as a favorable factor.
(xi) The financial impact on ATLANTIC of the 1997 Incentive Plan,
including ranges of options and stock purchase arrangements prepared by
ATLANTIC's Compensation Committee, and ATLANTIC's proposed 401(k) plan. The
1997 Incentive Plan will result in dilution and will therefore decrease the
accretion in ATLANTIC's forecasted funds from operations per share. Despite
this dilution, the Board of Directors believes that the 1997 Incentive Plan
aligns the interests of management and shareholders and, therefore, as a
whole, viewed the 1997 Incentive Plan as a positive factor in its decision.
(xii) The range of services currently provided by the REIT Manager and
the Property Manager and the costs of such services and the services which
will be provided by Security Capital in the future under the Administrative
Services Agreement and the cost of these services. The Board of Directors
viewed this factor as favorable.
(xiii) The current Investor Agreement (as defined below) between Security
Capital and ATLANTIC and the amended Investor Agreement and the likely
impact such agreement will have on ATLANTIC's future operations. The
Amended and Restated Investor Agreement will continue to provide ATLANTIC
with access to strategic guidance from Security Capital. The Board of
Directors viewed this factor as positive in its deliberations with respect
to the Transaction.
26
<PAGE>
(xiv) The existing relationships with Security Capital and the continuing
relationships with Security Capital after the Transaction and the benefits
to ATLANTIC of those continuing relationships. In this regard, the Board of
Directors considered the impact of the Transaction on the rating agencies'
perceived conflicts of interest with respect to ATLANTIC's externally
managed structure. The Board of Directors believed that the Transaction
will help to eliminate the rating agencies' issues regarding any perceived
conflicts. Further, the Board of Directors believed the elimination of its
externally managed structure as a potential factor in allowing ATLANTIC to
participate more efficiently in the current REIT industry consolidation.
The Board of Directors viewed this factor as favorable.
(xv) The nature of the Transaction in light of ATLANTIC's policies
against principal transactions and the existing provisions of the ATLANTIC
Charter. The Board of Directors considered that the approval by ATLANTIC
shareholders was required and that Security Capital would control the
outcome of such vote. The Board of Directors considered all of the
foregoing factors and concluded that the Transaction was in the best
interests of all ATLANTIC shareholders.
(xvi) The condition to the closing of the Merger that the Special
Committee receive a written opinion from an investment banking firm
satisfactory to the Special Committee that, as of the date of this Proxy
Statement and Prospectus, the consideration to be received in the
transactions contemplated by the Merger Agreement and by the Related
Agreements (as defined in the Merger Agreement) was fair, from a financial
point of view, to ATLANTIC and its shareholders (other than Security
Capital). The Board of Directors viewed this condition as positive.
(xvii) As noted above, the Board of Directors placed special emphasis on
the recommendation of the Special Committee. In reaching this
determination, the Special Committee considered the same factors described
herein which were considered by the Board of Directors as a whole. The
Special Committee consulted with Security Capital management as well as
with Hogan & Hartson L.L.P. and with J.P. Morgan. In addition, the Special
Committee considered the oral opinion, analyses and presentations of J.P.
Morgan described below under "--Fairness Opinion," including the oral
opinion of J.P. Morgan to the effect that, as of the date of such opinion,
and based upon and subject to certain matters stated therein, the
consideration to be received in the transactions contemplated by the Merger
Agreement and by the Related Agreements (as defined in the Merger
Agreement) was fair, from a financial point of view, to ATLANTIC and its
shareholders (other than Security Capital). In this respect, while the
Special Committee did not explicitly adopt J.P. Morgan's financial
analyses, the Special Committee placed special emphasis on such analyses in
its overall evaluation of the Transaction and viewed such analyses as
favorable to its determination. See "--Background" above. The Board of
Directors viewed J.P. Morgan's opinion as favorable in its determination
because J.P. Morgan is an internationally recognized investment banking
firm with experience in the valuation of businesses and their securities in
connection with mergers and acquisitions and in providing advisory services
and raising capital for companies in the real estate industry.
The Board of Directors also considered the following potentially negative
factors in its deliberations concerning the Merger:
(i) The fact that, because the number of Common Shares being issued to
Security Capital in the Merger is fixed based on an aggregate value of
$54,608,549, if the aggregate price of the Common Shares to be issued in
the Merger rises above such price before the Closing, Security Capital will
receive Common Shares having a value in excess of the negotiated purchase
price.
(ii) The taxability of the Warrant Issuance to holders of Common Shares
and the estimated amount of such tax in light of the anticipated value of
the Warrants. For a description of the taxability of the Warrants, see "--
Federal Income Tax Consequences--The Warrant Issuance."
(iii) The REIT Manager and Property Manager have not been profitable. The
fees paid by ATLANTIC for the REIT Manager and the Property Manager
services in 1996 were approximately $655,000 less than the direct costs and
indirect costs incurred by Security Capital in providing these services.
27
<PAGE>
(iv) The Transaction would result in ATLANTIC recording higher
administrative expenses related to the internalization of the management
function in lieu of paying a fee to the REIT Manager and Property Manager.
Security Capital has anticipated that ATLANTIC would incur approximately
$15.5 million of additional administrative expenses in 1998 by
internalizing the management function. Of these expenses, an amount which
is subject to a maximum limit of $3.7 million for 1998, is expected to be
purchased from Security Capital under an administrative services agreement.
See "The Transaction--Administrative Services Agreement." ATLANTIC would,
however, no longer pay estimated REIT management and property management
fees of $22.2 million in 1998. The increased administrative costs of
internalizing the management function may be greater than anticipated and
no assurance can be given that the cost to ATLANTIC of providing such
services internally will not exceed the fees that would be payable to the
REIT Manager and the Property Manager under the current agreements.
(v) Although the Transaction is expected to be immediately accretive to
ATLANTIC's funds from operations, the Transaction may not result in a
corresponding increase in the price at which Common Shares trade on the
NYSE.
In addition, the Board of Directors was aware that certain directors,
officers and employees have certain interests in the Transaction that are
separate from the interests of shareholders generally. See "--Interests of
Certain Persons in the Transaction." On balance, the Board of Directors viewed
such interests as neutral to its determination because of the Board of
Directors' belief that such interests were reasonable under all of the
circumstances.
In view of the wide variety of factors considered by the Board of Directors,
the Board of Directors did not quantify or otherwise attempt to assign
relative weights to the specific factors considered in making its
determination. However, in the view of the Board of Directors, the potentially
negative factors considered by it were not sufficient, either individually or
in the aggregate, to outweigh the positive factors considered by the Board of
Directors in its deliberations.
FAIRNESS OPINION
Pursuant to an engagement letter dated February 28, 1997 (the "Engagement
Letter"), the Special Committee, acting on behalf of ATLANTIC, retained J.P.
Morgan to deliver a fairness opinion in connection with the proposed
Transaction.
At the meeting of the Special Committee on March 11, 1997, J.P. Morgan
rendered its oral opinion to the Special Committee that, as of such date, the
consideration to be received in the proposed transactions contemplated by the
Merger Agreement and by the Related Agreements (as defined in the Merger
Agreement) was fair, from a financial point of view, to ATLANTIC and its
shareholders (other than Security Capital). J.P. Morgan has confirmed its
March 11, 1997 oral opinion by delivering its written opinion to the Special
Committee, dated as of the date of this Proxy Statement and Prospectus, that,
as of such date, the consideration to be received in the proposed transactions
contemplated by the Merger Agreement and by the Related Agreements (as defined
in the Merger Agreement) was fair, from a financial point of view, to ATLANTIC
and its shareholders (other than Security Capital). No limitations were
imposed by the Special Committee upon J.P. Morgan with respect to the
investigations made or procedures followed by it in rendering its opinions.
THE FULL TEXT OF THE WRITTEN OPINION OF J.P. MORGAN DATED AS OF THE DATE OF
THIS PROXY STATEMENT AND PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX
III TO THIS PROXY STATEMENT AND PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. ATLANTIC SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS
ENTIRETY. J.P. MORGAN'S WRITTEN OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE,
IS DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED IN THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT AND BY THE RELATED AGREEMENTS (AS DEFINED
IN THE MERGER AGREEMENT), AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
ATLANTIC SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF J.P. MORGAN SET FORTH
28
<PAGE>
IN THIS PROXY STATEMENT AND PROSPECTUS DESCRIBES THE MATERIAL ASPECTS OF SUCH
OPINION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In arriving at its opinions, J.P. Morgan reviewed, among other things: in
the case of its March 11, 1997 opinion, a draft of the Merger Agreement and,
in the case of its written opinion dated as of the date of this Proxy
Statement and Prospectus, the Merger Agreement and this Proxy Statement and
Prospectus; certain information concerning the REIT Manager and the Property
Manager (collectively, the "Management Companies") and ATLANTIC and certain
transactions involving companies comparable to the Management Companies and
ATLANTIC and the consideration received in connection with such transactions;
the audited financial statements of ATLANTIC for the fiscal year ended
December 31, 1995; and certain internal financial analyses and forecasts
concerning the Management Companies and ATLANTIC prepared by the management of
the Management Companies and ATLANTIC, respectively. J.P. Morgan also held
discussions with certain members of the management of Security Capital, the
Management Companies and ATLANTIC with respect to certain aspects of the
Transaction, and the past and current business operations of the Management
Companies and ATLANTIC, the financial condition and future prospects and
operations of the Management Companies and ATLANTIC, the effects of the
Transaction on the financial condition and future prospects of the Management
Companies and ATLANTIC and certain other matters believed necessary or
appropriate to J.P. Morgan's inquiry. In addition, J.P. Morgan reviewed such
other financial studies and analyses and considered such other information as
it deemed appropriate for the purposes of its opinions.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by Security Capital, the Management Companies and
ATLANTIC or otherwise reviewed by J.P. Morgan, and J.P. Morgan has not assumed
any responsibility or liability therefor. J.P. Morgan has not conducted any
valuation or appraisal of any assets or liabilities, nor have any valuations
or appraisals been provided to J.P. Morgan. In relying on financial analyses
and forecasts provided to J.P. Morgan, J.P. Morgan has assumed that they have
been reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management of Security Capital, the
Management Companies or ATLANTIC, as applicable, as to the expected future
results of operations and financial condition of the Management Companies and
ATLANTIC, respectively. J.P. Morgan has also assumed that the Transaction will
have the tax consequences described in this Proxy Statement and Prospectus and
materials furnished to J.P. Morgan by representatives of Security Capital, the
Management Companies and ATLANTIC, and that the other transactions
contemplated by the Merger Agreement will be consummated as described in the
Merger Agreement and this Proxy Statement and Prospectus.
The projections furnished to J.P. Morgan for the Management Companies and
ATLANTIC were prepared by the management of each company. Neither the
Management Companies nor ATLANTIC publicly discloses internal management
projections of the type provided to J.P. Morgan in connection with J.P.
Morgan's analysis of the Transaction, and such projections were not prepared
with a view toward public disclosure. These projections were based on numerous
variables and assumptions that are inherently uncertain and may be beyond the
control of management, including, without limitation, factors related to
general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in
such projections.
J.P. Morgan's opinions are based on economic, market and other conditions as
in effect on, and the information made available to J. P. Morgan as of, the
date of such opinions. Subsequent developments may affect the written opinion
dated as of the date of this Proxy Statement and Prospectus, and J.P. Morgan
does not have any obligation to update, revise, or reaffirm such opinion. J.P.
Morgan expressed no opinion as to the price at which ATLANTIC's or Security
Capital's securities will trade at any future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinions. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its written opinion dated as of the date
of this Proxy Statement and Prospectus.
Because J.P. Morgan's opinion related to the fairness, from a financial
point of view, to ATLANTIC shareholders (other than Security Capital) of the
consideration to be paid by ATLANTIC in the proposed
29
<PAGE>
Transaction, for purposes of its analysis J. P. Morgan determined that the
portion of the consideration to be paid by ATLANTIC in the proposed
Transaction allocable to the shareholders of ATLANTIC (other than Security
Capital) was $24.2 million; after giving effect to the value of the Warrants
to be issued to the shareholders of ATLANTIC (other than Security Capital) in
the proposed transaction (described below), J.P. Morgan determined that the
portion of the consideration to be paid by ATLANTIC in the proposed
transaction allocable to the shareholders of ATLANTIC (other than Security
Capital) was between $19.1 million and $22.9 million.
J.P. Morgan used publicly available information to compare selected
financial data of the Management Companies with similar data for selected
companies (the "Comparables Universe"), both public and private, from several
sectors of the asset and property management industries. The Comparables
Universe was divided into the following categories: (i) public market
transaction comparables, including (a) equity and fixed income asset
management companies, (b) dedicated REIT asset management companies and (c)
property management companies; (ii) public/private market transaction
comparables of real estate asset management companies; and, (iii) public
market going-concern multiples for (a) mutual fund managers, (b) institutional
partnerships, (c) limited partnerships and (d) property management companies.
With respect to comparable transactions, J.P. Morgan reviewed 17 REIT and
nine public/private real estate asset management transactions. Additionally,
J.P. Morgan reviewed eight public asset management transactions (primarily
fixed-income asset management transactions). Based on this review, J.P. Morgan
selected four REIT asset management transactions, five public/private real
estate asset management transactions, two public asset management transactions
and one private asset management transaction to comprise the Comparables
Universe. The transaction median and mean EBITDA multiples for real estate
asset management comparables were 8.0x and 8.4x, respectively, based on a
range of 6.5x to 13.6x. The transaction median and mean EBITDA multiples for
asset management comparables were 8.7x and 8.9x, respectively, based on a
range of 7.1x to 11.0x. The comparable transactions were selected based on
similarities in the lines of business and the size of the transaction. Based
on its review of these transactions, J.P. Morgan applied an earnings before
interest, income taxes, depreciation and amortization ("EBITDA") transaction
multiple range of 7.5x to 8.5x to 1997 projected EBITDA received by ATLANTIC
shareholders (other than Security Capital) of the Management Companies of
between $16.9 million and $19.2 million. With respect to going-concern
multiples, J.P. Morgan compared selected financial data of the Management
Companies with similar data for selected publicly traded companies engaged in
business which J.P. Morgan judged to be similar to the Management Companies,
given that no company is directly comparable to the Management Companies. J.P.
Morgan selected comparables from mutual fund managers, institutional managers,
limited partnerships and property management companies. These companies were
selected, among other reasons, because of their respective business focus
which was in at least certain respects similar to the Management Companies.
For each comparable company, publicly available financial performance through
the twelve months ended September 30, 1996 was measured. J.P. Morgan
calculated the mean and the median value for the latest twelve months firm
value-to-EBITDA multiple for the comparable companies; the median and mean
EBITDA multiples were 9.1x and 10.5x, respectively, based on a range of 4.9x
to 13.9x based on its review of these companies, J.P. Morgan applied a firm
value-to-EBITDA going-concern multiple range of 9.0x to 10.0x. This implied a
value to ATLANTIC shareholders (other than Security Capital) of the Management
Companies of between $20.3 million and $22.5 million. The implied values
calculated by applying transaction and going-concern multiples to projected
1997 EBITDA result in a range of value of between $16.9 million and $22.5
million, which compares favorably to the consideration to be paid by ATLANTIC
allocable to the shareholders of ATLANTIC (other than Security Capital) of
between $19.1 million and $22.9 million.
A description of the Comparables Universe analyzed by J.P. Morgan is
detailed below:
Asset Management Comparable Transactions. Public market asset management
company transactions considered by J.P. Morgan included Morgan Stanley's
acquisition of Miller Anderson & Sherrerd; Phoenix Home Life's acquisition of
Duff & Phelps; Nicholas-Appelgate's acquisition of Criterion Investment;
Liberty Financial's acquisition of Colonial Group; and PNC Bank Corporation's
acquisition of Black-Rock Financial.
REIT Asset Management Comparable Transactions. Public market REIT asset
management company transaction comparables considered by J.P. Morgan included
the spin-off of Homestead Village Incorporated
30
<PAGE>
from ATLANTIC, PTR and Security Capital; Realty Income Corporation's
acquisition of R.I.C. Adviser; Storage Equities, Inc.'s acquisition of Public
Storage Management, Inc.; Mid-American Apartment Communities' acquisition of
America First REIT Inc. (and Advisory Co.); Shurgard REIT's acquisition of
Shurgard Inc.; the acquisition of R.M. Bradley & Co., Inc. by the Bradley Real
Estate Trust; and FFCA I and its eleven Limited Partnership's acquisition of
the FFCA Management Company.
Real Estate Asset Management Comparable Transactions. J.P. Morgan also
considered certain private market acquisitions of real estate asset management
companies to provide a general understanding of the private market for this
type of transaction. Knowledge of these transactions was obtained from
information publicly available in the press and other trade journals. The
transactions considered by J.P. Morgan include New England Investment
Companies' acquisition of Aldrich Eastman & Waltch; TA Associates' acquisition
of Aetna Asset Management; Heitman's acquisition of JMB Realty; LaSalle
Advisors' acquisition of Alex. Brown/Kleinwort Benson; Coldwell Banker's
acquisition of TCW-Westmark; O'Connor's acquisition of Eastdil Realty Asset
Management; Lend Lease's acquisition of the Yarmouth Group; and United Asset
Management's acquisition of Heitman.
Property Management Comparable Transactions. Public market property
management company transaction comparables considered by J.P. Morgan included;
LaSalle Advisors' acquisition of CIN; and Insignia Financial Group's
acquisition of the following property managers: Edward S. Gordon, Paragon
Commercial, National Property Investors, Allegiance Realty Group, Security
Management Corporation and Angeles Corporation.
Going-Concern Comparables. The universe considered for this group were
selected companies from various investment management industries. Although
there are no publicly traded entities directly comparable to the Management
Companies, J.P. Morgan selected certain companies from the investment
management industry which J.P. Morgan believed were in a similar line of
business to that of the Management Companies. The companies selected were as
follows: (a) Mutual Fund Managers (Eaton Vance Corporation, Franklin
Resources, The John Nuveen Company, T. Rowe Price Associates, and Pioneer
Group, Inc.); (b) Institutional Managers (Atalanta/Sosnoff Capital, Phoenix
Duff & Phelps, and United Asset Management Corp.); (c) Limited Partnerships
(Alliance Capital Management, L.P., New England Investment Cos., L.P.,
Oppenheimer Capital, L.P., and Pimco Advisors, L.P.); and (d) Property
Managers (Insignia Financial Group and NHP, Inc.)
J.P. Morgan also analyzed three-year discounted cash flows ("DCF"), prepared
by management, to determine a range of values for the Management Companies. In
particular, J.P. Morgan performed several DCF analyses for the cash flows of
the Management Companies to consider the effects of various terminal multiples
and discount rates. Appropriate terminal multiples were determined by
analyzing going-concern comparables' firm value-to-EBITDA multiples (as
discussed above) and appropriate discount rates were determined by analyzing
the cost of equity for each of the going-concern comparables. J.P. Morgan
applied a range of terminal value multiples between 7.5x and 9.0x to 1999
EBITDA and discounted both the terminal value and the three-year cash flows
back to present at discount rates between 12.5% and 17.5%. This implied a
value to ATLANTIC shareholders (other than Security Capital) of the Management
Companies of between $21.5 million and $26.7 million.
In connection with the Warrants to be received by ATLANTIC shareholders
(other than Security Capital) in connection with the Transaction, J.P. Morgan
analyzed the Warrants based on the Black-Scholes framework for valuing options
and utilized a proprietary trinomial pricing application. The valuation was
based on the terms of the Warrants as provided by Security Capital and is
subject to fluctuations based on changes in the share price of the Class B
Shares of Security Capital, time to expiration, the volatility of the Class B
Shares of Security Capital, the strike price, the dividends and the risk-free
interest rate. In performing the valuation, J.P. Morgan considered the strike
on the Warrants and the risk free rate of return based on a one year interest
rate swap curve, estimated the expected volatility of the Class B Shares of
Security Capital after the dilution caused by the Warrants and reviewed the
terms as presented by Security Capital. J.P. Morgan's analysis concluded that
the total value of the Warrants to be issued to the ATLANTIC shareholders
(other than Security Capital) was approximately $5 million. To adjust for
potential liquidity in the Warrants, J.P. Morgan calculated the adjustment to
the portion of the consideration to be paid by ATLANTIC in the proposed
Transaction allocable to the shareholders of ATLANTIC (other than Security
Capital) based on 25%, 50%, 75%, and 100% of the value of the Warrants, which
implied a value of the Warrants of between $1.3 million and $5.0 million.
31
<PAGE>
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set
forth above and their analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and
opinion. J.P. Morgan based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The other principal assumptions upon
which J.P. Morgan based its analyses are set forth above under the description
of each such analysis. J.P. Morgan's analyses are not necessarily indicative
of actual values or actual future results that might be achieved, which values
may be higher or lower than those indicated. Moreover, J.P. Morgan's analysis
are not and do not purport to be appraisals or otherwise reflective of the
prices at which businesses actually could be bought or sold.
As part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to deliver an opinion to the
Special Committee with respect to the Transaction on the basis of such
experience and its familiarity with ATLANTIC as well as its familiarity with
Security Capital Group.
Pursuant to the Engagement Letter, ATLANTIC has agreed to pay J.P. Morgan a
fee of $250,000 for the delivery of its opinion. In addition, ATLANTIC has
agreed to reimburse J.P. Morgan for its expenses incurred in connection with
its services, including the fees and disbursements of counsel, and will
indemnify J.P. Morgan against certain liabilities, including liabilities
arising under the securities laws.
J.P. Morgan and its affiliates maintain banking and other business
relationships with ATLANTIC, PTR, Security Capital U.S. Realty ("Security
Capital USREALTY") and Security Capital, including Morgan Guaranty Trust
Company of New York acting as the agent bank under ATLANTIC's existing
commercial bank facility and as a participating bank under Security Capital
USREALTY's existing commercial bank facility. Specifically, in 1996 and 1997,
J.P. Morgan acted as a financial advisor to ATLANTIC in the spinoff of
Homestead Village Incorporated, acted as co-manager for ATLANTIC in a $104
million equity offering, acted as lead manager for SCI in a $200 million bond
offering, acted as co-manager for SCI in a $175 million preferred stock
issuance and a $100 million bond offering, acted as a lead manager for PTR in
bond offerings of $150 million, $100 million, $130 million, and $50 million,
acted as a co-manager for Security Capital USREALTY in a $250 million and $200
million equity offering, acted as financial advisor to Security Capital in the
private placement of approximately $165 million of equity securities and
performed various exposure management transactions for SCI and PTR. In
connection with these credit facilities, capital markets activities, and
advisory assignments, J.P. Morgan has received aggregate compensation of
approximately $12,000,000. J.P. Morgan also has been selected to act as a lead
manager for Security Capital's proposed initial public offering. In the
ordinary course of their businesses, J.P. Morgan's affiliates may actively
trade the debt and equity securities of ATLANTIC, SCI, PTR, Security Capital
USREALTY, Security Capital or their affiliates for their own account or for
the accounts of customers and, accordingly, they may at any time hold long or
short positions in such securities.
THE WARRANT ISSUANCE
An aggregate of $46,926,322 of Warrants will be issued by Security Capital
directly to holders of Common Shares (other than Security Capital) following
approval of the proposals by ATLANTIC shareholders and subject to the
satisfaction of certain conditions to the Merger Agreement. The Warrants are
being offered by Security Capital as an incentive for the shareholders of
ATLANTIC to vote in favor of the Transaction, 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. As of
July 31, 1997, there were 41,968,780 Common Shares outstanding. In addition,
ATLANTIC is conducting the Concurrent Rights Offering in which up to an
additional approximately 2.6 million Common Shares could be issued if all
32
<PAGE>
rights are exercised and as of July 31, 1997 has options outstanding to
purchase 6,000 Common Shares. ATLANTIC will also make available to employees
the right to purchase up to a total of $14,435,000 of Common Shares at the
closing price of the Common Shares on the date the 1997 Incentive Plan is
approved by shareholders. To the extent that additional Common Shares are
issued prior to the Warrant Issuance Record Date, the number of Warrants
issuable to individual holders of Common Shares will decrease.
The Warrants will be issued to the Warrant Issuance Agent (as defined below)
for distribution to holders of Common Shares on a date (the "Warrant Issuance
Date") within 30 days following the Warrant Issuance Record Date, as
determined by the Security Capital Board. The Warrant Issuance will be made to
holders of Common Shares of record at the close of business on the Warrant
Issuance Record Date, which record date will be within 31 days after the
Closing Date. The amount of Warrants to be received by each holder of Common
Shares will depend on the number of Common Shares outstanding on the Warrant
Issuance Record Date and the closing price of the Class B Shares on the
Warrant Issuance Date.
No certificates or scrip representing fractional Warrants will be issued to
holders of Common Shares as part of the Warrant Issuance. The First National
Bank of Boston, 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 Common Shares who would otherwise be entitled to receive
fractional Warrants.
NO HOLDER OF COMMON SHARES WILL BE REQUIRED TO PAY ANY CASH OR OTHER
CONSIDERATION FOR THE WARRANTS THEY RECEIVE OR TO SURRENDER OR EXCHANGE COMMON
SHARES IN ORDER TO RECEIVE THE WARRANTS. THE WARRANT ISSUANCE WILL NOT AFFECT
THE NUMBER OF, OR THE RIGHTS ATTACHING TO, OUTSTANDING COMMON SHARES.
For a description of the terms of the Warrants and the Class B Shares
issuable upon exercise thereof, see "Description of Capital Stock" in the
attached Security Capital Prospectus.
CONCURRENT RIGHTS OFFERING
ATLANTIC is conducting the Concurrent Rights Offering pursuant to the terms
of the Merger Agreement to allow its holders of Common Shares (other than
Security Capital) to maintain (and, to the extent a shareholder successfully
oversubscribes for Common Shares pursuant to the oversubscription privilege
described below, to increase) their proportionate ownership and to allow
holders of Common Shares to purchase Common Shares at a discount to the price
at which Security Capital is acquiring Common Shares in the Merger. The price
at which Common Shares are being offered in the Concurrent Rights Offering is
equal to 94.51% of the five-day trailing average closing price of Common
Shares on the day prior to the ATLANTIC Record Date. Shareholders will also be
entitled to subscribe for Common Shares not purchased by other shareholders
pursuant to an oversubscription privilege. The Concurrent Rights Offering will
only be made by means of a separate prospectus of ATLANTIC. The closing of the
Concurrent Rights Offering is not contingent upon the consummation of the
Transaction nor is the consummation of the Transaction contingent upon the
closing of the Concurrent Rights Offering. Proceeds from the Concurrent Rights
Offering are expected to be used to retire revolving credit debt.
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion summarizes the material U.S. federal income tax
considerations of the Merger and the Warrant Issuance to ATLANTIC and its
shareholders. To the extent such summary discusses matters of law, it is based
upon the opinion of Mayer, Brown & Platt or a private letter ruling from the
IRS. The following discussion is based upon the 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. The
following discussion does not address the tax consequences of the Merger and
the Warrant Issuance 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 ATLANTIC shareholders, such as dealers in securities, insurance
companies, foreign persons, financial institutions and tax-exempt
organizations (except with regard to "unrelated business taxable income"). THE
FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY. ALL ATLANTIC
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER OR WARRANT ISSUANCE, INCLUDING ANY STATE, LOCAL
AND NON-U.S. TAX CONSEQUENCES.
33
<PAGE>
The Merger
In the opinion of Mayer, Brown & Platt, based on certain representations of
Security Capital and ATLANTIC, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code. Accordingly, ATLANTIC will not recognize income, gain or loss upon the
consummation of the Merger (assuming that ATLANTIC makes the election
described under "--Built-in Gain Rules" below). In addition, the Merger will
not result in a taxable event to the ATLANTIC shareholders. Nonetheless, such
opinion is not binding on the IRS nor will it preclude the IRS from adopting a
contrary position. Moreover, since no ruling from the IRS will be sought with
respect to the federal income tax consequences of the Merger, there can be no
complete assurance that the IRS will agree with the conclusions set forth
herein. The discussion below assumes that the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code.
Basis and Holding Period. Immediately following the Closing Date, the assets
of the REIT Manager and the Property Manager in the hands of ATLANTIC will
have the same adjusted tax basis as they had in the hands of the REIT Manager
and the Property Manager immediately prior to the Closing Date. The holding
period for each of the assets of the REIT Manager and the Property Manager in
the hands of ATLANTIC following the Closing Date will include the period each
asset was held by the REIT Manager and the Property Manager immediately prior
to the Closing Date.
Built-in Gain Rules. Under the "Built-in Gain Rules" of IRS Notice 88-19,
1988-1 C.B. 486, ATLANTIC will be subject to a corporate level tax if it
disposes of any of the assets acquired from Security Capital in the Merger at
any time during the 10-year period beginning on the Closing Date (the
"Restriction Period"). This tax would be imposed on ATLANTIC at the top
regular corporate rate (currently 35%) in effect at the time of the
disposition on the excess of (i) the lesser of (a) the fair market value on
the Closing Date of the assets disposed of or (b) the selling price of such
assets over (ii) ATLANTIC's adjusted basis on the Closing Date in such assets
(such excess being referred to as the "Built-in Gain"). ATLANTIC currently
does not intend to dispose of any of the assets acquired in the Merger during
the Restriction Period, but there can be no assurance that one or more of such
dispositions will not occur. The results described above with respect to the
recognition of Built-in Gain assume that ATLANTIC will make the appropriate
election pursuant to the Built-in Gain Rules or applicable future
administrative rules or Treasury regulations. Under the Merger Agreement,
ATLANTIC has covenanted to make this election.
Liability for Other Taxes. Pursuant to the Merger Agreement, Security
Capital will be responsible for income tax liabilities attributable to the
operations of the REIT Manager and the Property Manager through the
consummation of the Merger. However, ATLANTIC, as successor to the REIT
Manager and the Property Manager in the Merger, will be severally liable
(together with Security Capital and the members of its "affiliated group"
within the meaning of Section 1502 of the Code) for income tax liabilities of
Security Capital and the members of its "affiliated group" for periods prior
to and including the year in which the consummation of the Merger occurs.
Security Capital, however, has agreed to indemnify and hold harmless ATLANTIC
from and against any income tax liabilities of the REIT Manager and Property
Manager for all periods prior to the Closing Date and any income tax
liabilities of Security Capital and the members of its "affiliated group." See
"The Transaction--The Merger--Terms of the Merger--Indemnification" for a
description of this indemnification and the related limitations on it.
Consequences of the Merger on ATLANTIC's Qualification as a REIT. In light
of the unique federal income tax requirements applicable to REITs, the Merger
could have adverse consequences on ATLANTIC's continued qualification as a
REIT. In the opinion of Mayer, Brown & Platt, based upon certain
representations of Security Capital and ATLANTIC, the consummation of the
Transaction will not jeopardize the status of ATLANTIC as a REIT under the
Code.
The Warrant Issuance
Receipt of Warrants. Pursuant to the Warrant Issuance: (i) a shareholder
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 shareholder's tax basis in the Warrants
received will equal the fair
34
<PAGE>
market value of the Warrants received on the Warrant Issuance Date and (iii) a
shareholder's holding period for the Warrants received will begin on the
Warrant Issuance Date. For a discussion of the federal income tax consequences
from holding or disposing of the Warrants, see "Federal Income Tax
Consequences" in the attached Security Capital Prospectus.
Fractional Warrants. If a shareholder receives cash in lieu of a fractional
Warrant, such shareholder will recognize gain or loss measured by the
difference between the tax basis of such fractional Warrant (i.e. the fair
market value of such fractional Warrant on the Warrant Issuance Date) and the
amount of cash received. Such gain or loss will constitute capital gain or
loss if the shareholder holds the Warrants as a capital asset on the Warrant
Issuance Date, and will be short-term capital gain or loss since the holding
period for such fractional Warrants will be less than one year.
Disposition of Common Shares Prior to the Warrant Issuance Record Date.
While a shareholder generally would not recognize ordinary income on the
disposition of his or her Common Shares, a shareholder disposing of his or her
Common Shares on or after the Closing Date and prior to the Warrant Issuance
Record Date may recognize ordinary income in an amount equal to the fair
market value of the right of a holder of the Common Shares to receive the
Warrants, measured as of the time of disposition of the Common Shares. A
shareholder would not be able to offset any portion of such ordinary income
with his or her tax basis in his or her Common Shares. To the extent a
shareholder recognizes ordinary income, the amount realized for purposes of
calculating capital gain or loss on such disposition will be reduced by the
amount of such ordinary income.
Tax-Exempt Shareholders. 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 tax-exempt
shareholders of ATLANTIC of the Warrants pursuant to the Warrant Issuance will
be treated as unrelated business taxable income.
Backup Withholding. Under the backup withholding rules of the Code (which
generally impose a 31% withholding tax on certain persons who fail to furnish
the information required under the United States tax reporting requirements),
an ATLANTIC shareholder may be subject to backup withholding with respect to
the receipt of the Warrants unless such shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a correct taxpayer identification number and
certifies under penalties of perjury that the taxpayer identification number
is correct and that the holder is not currently subject to backup withholding
because of a failure to report all dividend and interest income. Any amount
withheld under these rules will be credited against the shareholder's Federal
income tax liability.
Information Reporting. Security Capital is required to report to the
ATLANTIC shareholders receiving Warrants and the IRS the value of the Warrants
issued pursuant to the Warrant Issuance on Form 1099-MISC.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
If the Transaction is consummated, the current officers and employees of the
REIT Manager and the Property Manager (except Jeffrey A. Klopf) will become
officers and employees of ATLANTIC and be compensated for their service by
ATLANTIC. The following table sets forth the compensation for each of the
Named Executive Officers and for all executive officers as a group (who will
become employees of ATLANTIC) for 1996. All compensation for 1996 was paid by
Security Capital.
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND TITLE SALARY BONUS COMPENSATION
-------------- -------- -------- ------------
<S> <C> <C> <C>
James C. Potts, Co-Chairman............... $186,000 $199,000 $ 0
Constance B. Moore, Co-Chairman........... 190,000 185,000 0
J. Lindsay Freeman, Senior Vice President. 160,446 100,000 0
Bradley Miller, Senior Vice President (1). 99,205 50,000 0
William Kell, Vice President and
Controller............................... 125,000 28,000 0
Executive Officers as a group (5 persons). 760,651 562,000 0
</TABLE>
- --------
(1) Began on June 1, 1996
35
<PAGE>
For 1997, each Named Executive Officer will remain an employee of the REIT
Manager and be compensated by Security Capital until the closing of the
Transaction, at which time he or she will become an employee of ATLANTIC and
be compensated by ATLANTIC. For 1997, each Named Executive Office will receive
a salary and be eligible for a target bonus. The actual amount of the bonus
(which may be higher or lower than the target bonus) will be determined by the
Compensation Committee at the end of the year and will be based on several
factors, including individual performance, ATLANTIC's performance, ATLANTIC's
financial condition, competitive conditions in the real estate industry and
recommendations of senior management. ATLANTIC will continue the same
compensation arrangements for the portion of 1997 in which the Named Executive
Officers are employees of ATLANTIC. The Named Executive Officers are expected
to be paid the following salaries for 1997 and will be eligible for the
following target bonuses for 1997:
<TABLE>
<CAPTION>
TARGET
NAME AND TITLE SALARY BONUS
-------------- -------- --------
<S> <C> <C>
James C. Potts, Co-Chairman............................ $230,000 $115,000
Constance B. Moore, Co-Chairman........................ 230,000 115,000
J. Lindsay Freeman..................................... 195,000 65,000
Bradley C. Miller...................................... 185,000 60,000
William Kell........................................... 137,500 25,625
</TABLE>
In addition, subject to shareholder approval, during 1997 officers of
ATLANTIC will be granted options to purchase Common Shares. Officers and
certain employees of ATLANTIC will also be granted the right to purchase
Common Shares under the 1997 Incentive Plan. The following table shows the
options and share purchase rights that are expected to be received by (i) the
Named Executive Officers, (ii) all executive officers as a group, and (iii)
all employees, including all officers who are not executive officers, as a
group.
<TABLE>
<CAPTION>
DOLLAR VALUE OPTION AWARDS SHARE AWARDS
OF SHARES ----------------------------- ---------------------
SUBJECT TO NUMBER EXERCISE EXPIRATION DOLLAR NUMBER
NAME AND TITLE OPTION(1) OF SHARES PRICE DATE VALUE(2)(4) OF SHARES
-------------- ------------ --------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
James C. Potts, Co-
Chairman............... $ 300,000 (2) (2) (3) $ 6,000,000 (2)
Constance B. Moore,
Co-Chairman............ 300,000 (2) (2) (3) 6,000,000 (2)
J. Lindsay Freeman,
Senior Vice President.. 175,500 (2) (2) (3) 3,000,000 (2)
Bradley C. Miller,
Senior Vice President.. 175,500 (2) (2) (3) 3,000,000 (2)
William Kell, Vice
President and
Controller............. 97,500 (2) (2) (3) 1,350,000 (2)
All executive officers
as a group (5 persons). 1,048,500 (2) (2) (3) 19,350,000 (2)
All employees, including
all officers who are
not executive officers,
as a group
(65 persons)........... $1,056,900 (2) (2) (3) $23,955,000 (2)
</TABLE>
- --------
(1) Non-qualified options with dividend equivalent units and vesting schedule
of 25% exercisable on the second anniversary and an additional 25% on each
of the third, fourth and fifth anniversaries of the date of grant.
(2) The exercise price of the options and the purchase price for the share
awards will be the price of the Common Shares as of the date the
shareholders approve the 1997 Incentive Plan. The number of shares subject
to options and share awards will be determined by dividing the aggregate
exercise price or aggregate share award covered by the price of the Common
Shares as of the date the shareholders approve the 1997 Incentive Plan.
(3) Ten years from the date on which the shareholders approve the 1997
Inventive Plan.
(4) Includes shares which may be purchased plus matching options for two
shares granted with respect to each Common Share purchased.
36
<PAGE>
In addition to the awards under the 1997 Incentive Plan, options will be
granted to 25 officers of ATLANTIC to purchase an aggregate of $4,002,000 of
Class A Shares of Security Capital (based on the exercise price). See "Long-
Term Incentive Plan."
The Board of Directors will also adopt a 401(k) plan which will permit
eligible employees to make pre-tax contributions of up to $9,500 to the plan
or such other amount as may be permitted under Code Section 401(k). ATLANTIC
will match 50% of participants' contributions that do not exceed 6% of their
compensation. ATLANTIC intends to make such matching contributions in the form
of Common Shares. Participants will become vested in the matching
contributions 20% per each year of service. Employees of the REIT Manager and
Property Manager will be credited for service for the time they were employees
of Security Capital.
THE MERGER AGREEMENT
Pursuant to the Merger Agreement, ATLANTIC and Security Capital will take
all actions necessary to cause the REIT Manager and the Property Manager to be
merged with and into a wholly owned subsidiary of ATLANTIC in exchange for
2,306,591 Common Shares. The number of Common Shares to be issued to Security
Capital was based upon the average closing price of the Common Shares for the
five trading days ending on the day prior to the ATLANTIC Record Date, subject
to the price being within an 11.24% range of the closing price of the Common
Shares on March 14, 1997 ($23.25). If the average closing price of the Common
Shares on the ATLANTIC Record Date had been outside of the range, then the
number of Common Shares issuable to Security Capital would have been based on
the high end ($25.8633) or low end ($20.6367) of the range, as the case may
be. The minimum and maximum number of Common Shares issuable to Security
Capital in the Transaction would have been 2,111,430 and 2,646,186,
respectively. For a description of the Warrants to be received by holders of
Common Shares, see "--The Warrant Issuance" above.
The following is a summary of the Merger Agreement, which is attached as
Annex I to this Proxy Statement and Prospectus and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the
Merger Agreement.
Representations and Warranties. The Merger Agreement contains customary
representations and warranties of ATLANTIC and Security Capital, including,
(i) documents filed with the Commission and the accuracy of the information
included or incorporated therein, (ii) the preparation of the financial
statements in accordance with GAAP applied on a consistent basis, (iii) the
absence of undisclosed liabilities, (iv) the absence of certain material
adverse events and (v) the accuracy of the information supplied to the other
with respect to the Registration Statement of which this Proxy Statement and
Prospectus forms a part.
Certain Covenants and Agreements. Pursuant to the Merger Agreement, ATLANTIC
has agreed that, during the period from the date of the Merger Agreement until
the Closing Date or the earlier termination of the Merger Agreement, it will,
among other things (except as permitted by the Merger Agreement or consented
to in writing by Security Capital): (i) conduct its business in the ordinary
and usual course of business and consistent with past practice; (ii) not take
any action which would jeopardize its status as a REIT under the Code; and
(iii) operate in compliance with the terms and conditions of its Investor
Agreement with Security Capital (see "--Investor Agreement").
Pursuant to the Merger Agreement, Security Capital has agreed that, during
the period from the date of the Merger Agreement until the Closing Date or the
earlier termination of the Merger Agreement, it will, among other things
(except as permitted by the Merger Agreement or consented to in writing by
ATLANTIC) cause the REIT Manager and the Property Manager to: (i) conduct
their respective businesses in the ordinary and usual course of business and
consistent with past practice and, as to the REIT Manager, the requirements of
the REIT Management Agreement, and as to the Property Manager, the management
agreements between ATLANTIC and it; (ii) not issue, sell, pledge or dispose
of, or agree to issue, sell, pledge or dispose of, any additional shares of,
or any options, warrants or rights of any kind to acquire any shares of,
capital stock of the REIT Manager or the Property Manager of any class or any
debt or equity securities convertible into or exchangeable for such stock or
37
<PAGE>
amend or modify the terms and conditions of any of the foregoing; (iii) not
(a) incur or become contingently liable with respect to any additional
indebtedness for borrowed money, (b) take any action which would jeopardize
ATLANTIC's status as a REIT under the Code, (c) sell or otherwise dispose of
any of its assets, (d) prepay or cause to be prepaid any principal amount
outstanding with respect to indebtedness for borrowed money or (e) enter into
any contract, agreement, commitment or arrangement with respect to any of the
foregoing; (iv) use reasonable efforts to preserve intact its businesses,
organization and goodwill, keep available the services of its present officers
and employees and preserve the goodwill and business relationships with all
lessees, operators, suppliers, distributors, customers and others having
business relationships with it and ATLANTIC and not engage in any action,
directly or indirectly, with the intent to adversely impact the Transaction;
(v) confer with one or more representatives of ATLANTIC when requested to
report on material operational matters and the general status of ongoing
operations of their respective businesses; (vi) maintain, in full force and
effect, with all premiums due thereon paid, policies of insurance covering all
of their respective insurable assets and businesses in amounts and as to
foreseeable risks usually insured against by persons operating similar
businesses under valid and enforceable policies of insurance issued by
nationally recognized insurers; (vii) except as may be required to distribute
earnings and profits, not declare, set aside or pay any dividends on, or make
any other distributions in respect of, any of their capital stock, or
purchase, redeem or otherwise acquire any shares of their capital stock;
(viii) not acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association, or other business organization or division thereof; (ix) not
acquire or agree to acquire any assets that are material, individually or in
the aggregate, to either of the REIT Manager or the Property Manager, or make
or agree to make any capital expenditures except in the ordinary course of
business consistent with past practice; (x) not adopt or amend in any material
respect any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
present or former director or employee or, other than increases for
individuals (other than officers and directors) in the ordinary course of
business consistent with past practice, increase the compensation or fringe
benefits of any present or former director or employee, and not pay any
benefit not required by an existing plan, arrangement or agreement, or grant
any new or modified severance or termination arrangement or increase or
accelerate any benefits payable under its severance or termination pay
policies; (xi) not take any action that would, or is reasonably likely to,
result in any of its or ATLANTIC's representations and warranties in the
Merger Agreement becoming untrue, or in any of the conditions to the Merger
not being satisfied; (xii) not pay, discharge or satisfy any claims (including
claims of shareholders), liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), except for the payment,
discharge or satisfaction, of (a) liabilities or obligations in the ordinary
course of business (including for taxes) consistent with past practice or in
accordance with their terms as in effect on the date hereof, (b) liabilities
reflected or reserved against in, or contemplated by, the financial statements
of the REIT Manager and the Property Manager, or waive, release, grant, or
transfer any rights of material value or modify or change in any material
respect any existing license, lease, contract or other documents, other than
as contemplated by the Merger Agreement or in the ordinary course of business
consistent with past practice; (xiii) not (a) adopt a plan of complete or
partial liquidation, (b) adopt any amendment to its respective charter or
bylaws, (c) enter into any contract, agreement or arrangement involving more
than $500,000 annually, except for agreements entered into in the ordinary
course of business and with prior written consent, (d) authorize or enter into
any agreement relating to property management services to be provided by it to
a third party property owner on other than customary terms, (e) modify or
change in any material respect any existing material agreements, except in the
ordinary course and consistent with past practice, (f) engage in any conduct
the nature of which is materially different than the business in which it is
currently engaged or (g) enter into any agreement providing for acceleration
of payment or performance or other consequences as a result of a change of
control of it; and (xiv) not authorize any of, or commit or agree to take any
of, the foregoing actions set forth in clauses (ii), (iii), and (vii) through
(xiii).
Pursuant to the Merger Agreement, each of ATLANTIC and Security Capital will
(i) afford to each other and their respective accountants, counsel, financial
advisors and other representatives full access during normal business hours
throughout the period prior to the Closing Date to all properties, books,
contracts, commitments
38
<PAGE>
and records of such party, as appropriate and, during such period, shall
furnish promptly to the other, (a) a copy of each report, schedule and other
document filed or received pursuant to the requirements of federal or state
securities laws or filed with the Commission in connection with the
transactions contemplated by the Merger Agreement, (b) such other information
concerning their respective businesses, properties and personnel which are the
subject of the Merger Agreement as shall be reasonably requested and (c) a
writing indicating any change or occurrence which may have any material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of such party; (ii)
in the case of Security Capital, file the Registration Statement with the
Commission as soon as is reasonably practicable after the date of the Merger
Agreement and use all reasonable efforts to have the Registration Statement
declared effective by the Commission as promptly as practicable and take any
action required to be taken under applicable state blue sky or securities
laws; (iii) promptly take such action as is necessary to obtain shareholder
approval of the Merger Agreement and the Transaction; (iv) in the case of
ATLANTIC, use its best efforts to obtain and deliver to Security Capital
certain letters from the principal executive officers, trustees and
"affiliates" (as defined under Rule 145 under the Securities Act) agreeing to
certain restrictions on resale of Warrants (and the Class B Shares issuable
upon exercise thereof) received in the Transaction; (v) in the case of
Security Capital, use its best efforts to effect, at or before the Closing
Date, authorization for quotation or listing on a national securities exchange
or interdealer quotation system upon official notice of issuance, the Warrants
to be issued in the Warrant Issuance; (vi) cooperate and use its best efforts
to take all actions, make all filings, registrations and submissions, and do
all things necessary and advisable to consummate the Transaction, including,
but not limited to, obtaining all required consents, waivers and approvals
from the Commission and any other applicable governmental entity; (vii)
consult with each other prior to issuing any press release or any written
public statement with respect to the Merger Agreement or the Transaction and
shall not issue any such press release or written public statement prior to
review by the other party, except that prior review and approval shall not be
required if, in the reasonable judgment of the party seeking to issue such
release or public statement, prior review and approval would prevent the
timely dissemination of such release or public statement in violation of any
applicable law, rule, regulation or policy of a national securities exchange
or interdealer quotation system; (viii) in the case of Security Capital, vote
all Common Shares owned by it in favor of approval and adoption of the Merger
Agreement and the Transaction, provided, however, that Security Capital will
not be obligated to vote any such shares in favor of such matters in the event
the Board of Directors, the Special Committee or the Security Capital Board
withdraws, modifies or amends its recommendation to shareholders; (ix)
maintain as confidential certain information provided by the other during the
negotiation of the Merger Agreement and the Transaction; (x) in the case of
Security Capital, be responsible for amounts to employees who will become
employees of ATLANTIC for earned but unpaid salary, wages and benefits, and be
responsible for, and entitled to the benefit of, any other rents, taxes, fees,
charges and income for periods prior to the Closing Date; (xi) in the case of
ATLANTIC, make an election in accordance with IRS Notice 88-19, 1988-1 C.B.
486, or any future applicable administrative rules or treasury regulations, to
be subject to a corporate level tax on the disposition of any assets acquired
in the Merger at any time during the 10-year period beginning on the Closing
Date; and (xii) in the case of Security Capital, not sell any Common Shares
owned by it for a period of six months following the Closing Date.
Conditions to the Transaction. The respective obligations of ATLANTIC and
Security Capital to effect the Transaction are subject to a number of
conditions, including, among others: (i) the other party shall have performed
in all material respects its agreements contained in the Merger Agreement
required to be performed on or prior to the Closing Date and all
representations and warranties of such party shall be true and correct in all
material respects on and as of the date made and the Closing Date; (ii) the
Merger Agreement and the Transaction shall have been approved by the
shareholders of each of ATLANTIC and Security Capital; (iii) the Registration
Statement and the registration statement relating to the Concurrent Rights
Offering shall have become effective and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
shall have been initiated or threatened by the Commission; (iv) ATLANTIC and
Security Capital shall have received a study from Arthur Andersen LLP or
another nationally recognized independent certified public accounting firm
concluding that the accumulated earnings and profits for the REIT Manager and
the Property Manager as of December 31, 1996 and the projected earnings and
profits of the REIT Manager and the Property Manager for the period beginning
January 1, 1997 and ending on the Closing Date are in the
39
<PAGE>
aggregate less than $5 million; (v) each of ATLANTIC and Security Capital
shall have received a favorable opinion of Mayer, Brown & Platt to the effect
that the Merger will qualify as a reorganization within the meaning of Section
368 of the Code and that each of ATLANTIC, the REIT Manager and the Property
Manager, and the subsidiary of ATLANTIC that shall be the surviving
corporation in the Merger will be a party to the reorganization within the
meaning of Section 368(b) of the Code; (vi) ATLANTIC and Security Capital
shall have received (a) an opinion from Mayer, Brown & Platt that the
performance of the Merger Agreement will not jeopardize the status of ATLANTIC
as a REIT under the Code or (b) a favorable ruling from the IRS to the effect
that the Warrant Issuance will be respected for federal income tax purposes as
a direct issuance of the Warrants by Security Capital to the shareholders of
ATLANTIC and an opinion from Mayer, Brown & Platt that the performance of the
Merger Agreement will not jeopardize the status of ATLANTIC as a REIT under
the Code; (vii) no preliminary or permanent injunction or other order or
decree by any federal or state court which prevents the consummation of the
Transaction shall have been issued or taken and remain in effect (each party
agreeing to use its best efforts to have any such injunction, order or decree
lifted); (viii) all governmental consents, orders and approvals legally
required for the consummation of the Transaction shall have been obtained and
be in effect at the Closing Date and such consents, orders and approvals shall
have become final; (ix) all material consents from third parties necessary to
consummate the Transaction shall have been obtained; (x) the REIT Management
Agreement and property management agreements with the Property Manager shall
have been cancelled; and (xi) Security Capital shall have forgiven all
indebtedness owed to it by the REIT Manager and the Property Manager.
In addition to the conditions set forth above, the obligations of ATLANTIC
to effect the Transaction are subject to the following conditions: (i) the
receipt by the Special Committee from J.P. Morgan or another investment
banking firm satisfactory to the Special Committee, of a written opinion to
the effect that, as of the date of this Proxy Statement and Prospectus, the
consideration to be received in connection with the Merger Agreement and the
transactions contemplated by the Merger Agreement and by the Related
Agreements (as defined in the Merger Agreement) was fair, from a financial
point of view, to the ATLANTIC shareholders (other than Security Capital),
which opinion shall not have been withdrawn, revoked or modified; (ii) the
receipt from Security Capital of the Amended and Restated Investor Agreement
described below; (iii) the receipt from Security Capital of the executed
Administrative Services Agreement described below; (iv) the receipt from
Security Capital of the executed License Agreement described below; (v) the
receipt from Security Capital of the executed Protection of Business Agreement
described below; (vi) the receipt of a "comfort letter" in form and substance
reasonably satisfactory to ATLANTIC from the independent certified public
accountants of Security Capital; (vii) the Warrants to be issued in connection
with the Warrant Issuance shall have been authorized for quotation or listing,
upon official notice of issuance, on the national securities exchange or
interdealer quotation system, if any, on which the Class B Shares are listed
or quoted; (viii) no governmental consent, order or approval legally required
to consummate the Transaction shall have any terms which, in the reasonable
judgment of ATLANTIC, when taken together with the terms of all such consents,
orders or approvals, would materially impair the value of the Transaction to
ATLANTIC; and (ix) no governmental authority shall have promulgated any
statute, rule or regulation which, when taken together with all such
promulgations, would materially impair the value of the Transaction to
ATLANTIC.
In addition to the conditions set forth above, the obligations of Security
Capital to effect the Transaction are subject to the following conditions: (i)
the receipt of letters from affiliates of ATLANTIC relating to the
restrictions on transferability of the Warrants to be received in the Warrant
Issuance pursuant to Rule 145 promulgated under the Securities Act; (ii) the
receipt from ATLANTIC of the executed Amended and Restated Investor Agreement
described below; (iii) the receipt from ATLANTIC of the executed
Administrative Services Agreement described below; (iv) the receipt from
ATLANTIC of the executed License Agreement described below; (v) the receipt of
a "comfort letter" in form and substance reasonably satisfactory to Security
Capital from the independent certified public accountants of ATLANTIC; (vi) no
governmental consent, order or approval legally required to consummate the
Transaction shall have any terms which, in the reasonable judgment of Security
Capital, when taken together with the terms of all such consents, orders or
approvals, would materially impair the value of the Transaction to Security
Capital; and (vii) no governmental authority shall have
40
<PAGE>
promulgated any statute, rule or regulation which, when taken together with
all such promulgations, would materially impair the value of the Transaction
to Security Capital.
Termination. The Merger Agreement may be terminated at any time prior to the
Closing Date (i) by mutual consent of ATLANTIC and Security Capital; (ii) by
either of ATLANTIC or Security Capital after December 31, 1997 if the
Transaction has not been consummated on or before that date (so long as the
terminating party has not breached its obligations under the Merger Agreement
except for immaterial breaches); (iii) unilaterally by ATLANTIC or Security
Capital if (a) the other party fails to perform any covenant or agreement in
the Merger Agreement in any material respect and does not cure such failure in
all material respects within 15 business days after receipt of a written
notice of the alleged failure from the other party, (b) the other party fails
to fulfill or complete a condition to the obligations of that party (which
condition is not waived) by reason of a breach by that party of its
obligations in the Merger Agreement or (c) any condition to the obligations of
the other party is not satisfied (other than by reason of a breach by that
party of its obligations under the Merger Agreement), and it reasonably
appears that the condition cannot be satisfied prior to December 31, 1997;
(iv) unilaterally by Security Capital if ATLANTIC, through the Board of
Directors or the Special Committee, either fails to recommend to ATLANTIC
shareholders the approval of the Merger Agreement and the Transaction or
withdraws, modifies or amends such recommendation; and (v) unilaterally by
ATLANTIC if Security Capital, through the Security Capital Board, either fails
to recommend to Security Capital shareholders the approval of the Merger
Agreement and the Transaction or withdraws, modifies or amends such
recommendation.
In the event of termination of the Merger Agreement by either party as
provided above, the Merger Agreement will become void and there will be no
further obligation on the part of any party or their respective officers and
trustees or directors (except as set forth in certain provisions of the Merger
Agreement, including the expense reimbursement described under "--Expenses").
However in the event that termination is pursuant to clause (iv) or (v) in the
previous paragraph, Security Capital or ATLANTIC, as the case may be, shall
pay to the other party all of the documented, out-of-pocket expenses incurred
by such party after execution of the Merger Agreement in connection with the
transactions contemplated thereby.
Amendment and Waiver. Subject to applicable law, the Merger Agreement may be
amended by the written agreement of ATLANTIC and Security Capital. However,
the Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of ATLANTIC and Security Capital.
ATLANTIC and Security Capital may agree to (a) extend the time for the
performance of any of the obligations or other acts of the parties, (b) waive
any inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto and (c) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement. To the extent that the Merger Agreement is amended in any material
respect after the date of this Proxy Statement and Prospectus, or to the
extent that any material provisions of the Merger Agreement are waived,
ATLANTIC will notify shareholders and resolicit their votes in the manner and
to the extent required by law.
Indemnification. Security Capital has agreed to indemnify and hold harmless
ATLANTIC from and against any losses incurred by ATLANTIC as a result of any
(i) breach of, or inaccuracy in, any of Security Capital's representations and
warranties or other agreements contained in the Merger Agreement, (ii) any
breach of, or inaccuracy in, any of ATLANTIC's representations and warranties
contained in the Merger Agreement other than those relating to the issuance of
Common Shares and authority of ATLANTIC with respect to the Merger Agreement
and (iii) any acts or omissions of either the REIT Manager or Property Manager
in their capacities as such prior to the closing of the Merger, but, in the
case of clauses (ii) and (iii), only to the extent that such breach,
inaccuracy, act or omission arises out of or results from the gross
negligence, bad faith or willful misconduct of either the REIT Manager or
Property Manager. Security Capital has also agreed to indemnify and hold
harmless ATLANTIC from and against any income tax liabilities of the REIT
Manager and Property Manager for all periods prior to the Closing Date and any
income tax liabilities arising pursuant to Treasury Regulation 1.1502-6 or any
analogous provision. ATLANTIC has agreed to indemnify and hold harmless
Security Capital from and against losses incurred by Security Capital as a
result of any breach of, or inaccuracy in, ATLANTIC's representations and
warranties relating to the issuance of Common Shares and authority of
41
<PAGE>
ATLANTIC with respect to the Merger Agreement. The indemnification obligations
of ATLANTIC and Security Capital (other than Security Capital's
indemnification obligations as to certain tax matters) are subject to a
maximum amount of the fair market value (as defined and determined on the
ATLANTIC Record Date) of the Common Shares issuable to Security Capital in the
Transaction. The obligations to indemnify terminate two years after the
Closing Date (other than Security Capital's indemnification obligations as to
certain tax matters for which the obligation to indemnify terminates upon the
expiration of the applicable statute of limitations) and may be invoked only
in the event of losses that exceed $250,000, in which event the
indemnification will cover all losses (including the initial amount).
INVESTOR AGREEMENT
Pursuant to an investor agreement (the "Investor Agreement"), between
ATLANTIC and Security Capital, Security Capital is entitled to designate three
persons to be nominated for election to the Board of Directors. So long as
Security Capital beneficially owns at least 10% of the Common Shares, ATLANTIC
is prohibited from increasing the number of members of the Board of Directors
to more than seven. Additionally, the Investor Agreement, among other things,
requires ATLANTIC to obtain Security Capital's approval of (i) the annual
operating budget and substantial deviations therefrom, (ii) contracts for
investment management, property management or leasing services or that
contemplate annual payments in excess of $100,000 and (iii) acquisitions or
dispositions in a single transaction or a group of related transactions where
the purchase or sale price exceeds $5 million. The Investor Agreement also
provides certain registration rights to Security Capital in respect of Common
Shares beneficially owned by Security Capital.
As part of the Transaction, ATLANTIC and Security Capital will amend and
restate the Investor Agreement (as so amended and restated, the "Amended and
Restated Investor Agreement"), which will provide 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) incurring 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 acquisition 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 paid or
received by ATLANTIC exceeds $25 million; and (iv) entering into 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, Security Capital will have the right to approve the
following matters proposed by ATLANTIC: (i) the issuance or sale of any Common
Shares, (including the grant of any rights, options or warrants to subscribe
for or purchase Common Shares or any security convertible into or exchangeable
for Common Shares or the issuance or sale of any security convertible into or
exchangeable for Common Shares) at a price per share less than the fair market
value of a Common Share on the date of such issuance or sale; (ii) the
issuance and sale of any disqualified shares (as defined) if, as a result
thereof, ATLANTIC's Fixed Charge Coverage Ratio (as defined) would be less
than 1.4 to 1.0; (iii) the adoption of any employee benefit plan pursuant to
which shares of ATLANTIC or any securities convertible into shares of ATLANTIC
may be issued and any action with respect to the compensation of the senior
officers of ATLANTIC (including the granting or award of any bonuses or share-
based incentive awards); and (iv) the incurrence of any additional
indebtedness (including guarantees and including renegotiations and
restructurings of existing indebtedness) if, as a result thereof, ATLANTIC's
Interest Expense Coverage Ratio (as defined) would be less than 2.0 to 1.0.
The restriction referred to in clause (i) above does not apply to (A) the sale
or grant of any options to purchase shares of ATLANTIC pursuant to the
provisions of any benefit plan approved by the shareholders of ATLANTIC, (B)
the issuance or sale of shares upon the exercise of any rights, options or
warrants granted, or upon the conversion or exchange of any convertible or
exchangeable security issued or sold, prior to the Closing Date or in
accordance with the provisions of the Amended and Restated Investor Agreement,
(C) the issuance and sale of any shares of ATLANTIC pursuant to any dividend
42
<PAGE>
reinvestment and share purchase plan approved by the 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 Amended and Restated Investor Agreement will also provide that, so long
as Security Capital owns at least 10% of the outstanding Common Shares,
ATLANTIC may not increase the number of persons serving on the Board of
Directors to more than seven. Security Capital also will be entitled to
designate one or more persons as directors of ATLANTIC, as follows: (i) so
long as Security Capital owns at least 10% but less than 25% of the
outstanding Common Shares, it is entitled to nominate one person; and (ii) so
long as Security Capital owns at least 25% of the outstanding Common Shares,
it is entitled to nominate that number of persons as shall bear approximately
the same ratio to the total number of members of the 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 Board
of Directors consists of no more than seven members.
As part of the Amended and Restated Investor Agreement, Security Capital may
make employment opportunities with Security Capital or its affiliates
available to the officers and employees of ATLANTIC. Prior to commencing
discussions with a senior officer of ATLANTIC about any such opportunity,
Security Capital must give the Board of Directors 14 days' prior written
notice.
In addition, the Amended and Restated Investor Agreement provides Security
Capital with registration rights pursuant to which, in certain specified
circumstances, Security Capital may request at any time, registration of all
of Security Capital's Common Shares pursuant to Rule 415 under the Securities
Act. Security Capital may request one such registration for every $100 million
(based on market value) of Common Shares it owns.
ADMINISTRATIVE SERVICES AGREEMENT
Upon consummation of the Transaction, ATLANTIC and Security Capital will
enter into an administrative services agreement (the "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 closing of the Merger and
December 31, 1997 and the remainder will apply to 1998. Cost savings under the
Administrative Services 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 Board of Directors.
LICENSE AGREEMENT
ATLANTIC and Security Capital will enter into a license agreement on the
Closing Date (the "License Agreement") pursuant to which Security Capital will
grant ATLANTIC a non-exclusive license to use Security Capital's registered
logo and the non-exclusive right to use the name "Security Capital." The term
of the license will be for a period of 15 years, subject to ATLANTIC's right
to extend the license for up to two additional five-year periods.
PROTECTION OF BUSINESS AGREEMENT
ATLANTIC and Security Capital will enter into a protection of business
agreement on the Closing Date (the "Protection of Business Agreement"), which
will prohibit Security Capital and its affiliates from providing,
43
<PAGE>
anywhere within the United States, directly or indirectly, substantially the
same services as those currently provided by the REIT Manager and the Property
Manager to any entity that owns or operates multifamily properties. The
Protection of Business Agreement does not prohibit Security Capital or its
affiliates from owning the securities of any class of ATLANTIC or PTR. The
Protection of Business Agreement will terminate in the event of an
acquisition, directly or indirectly, (other than by purchase from Security
Capital or any of its affiliates), by any person (or group of persons acting
in concert), other than Security Capital or any of its affiliates, of the
greater of (i) 25% or more of the outstanding shares of voting securities of
ATLANTIC and (ii) the percentage of outstanding voting securities of ATLANTIC
owned directly or indirectly by Security Capital and its affiliates, in either
case without the prior written consent of the Board of Directors. Subject to
earlier termination pursuant to the preceding sentence, the Protection of
Business Agreement will terminate on the third anniversary of the Closing
Date.
REIT MANAGEMENT AGREEMENT
ATLANTIC has a REIT management agreement (the "REIT Management Agreement")
pursuant to which the REIT Manager provides management services to ATLANTIC.
All officers of ATLANTIC are employees of the REIT Manager and ATLANTIC
currently has no employees. The REIT Manager provides both strategic and day-
to-day management of ATLANTIC, including research, investment analysis,
acquisition, development, marketing, disposition of assets, asset management,
due diligence, capital markets, legal and accounting services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent directors of ATLANTIC and (iii) 33% of any
interest paid by ATLANTIC on convertible subordinated debentures (of which
there have been none since inception); and after deducting (i) regularly
scheduled principal payments (excluding prepayments or balloon payments) for
debt with commercially reasonable amortization schedules, (ii) assumed
principal and interest payments on senior unsecured debt treated as having
regularly scheduled principal and interest payments like a 20-year level-
payment, fully amortizing mortgage (of which there have been none since
inception) and (iii) distributions actually paid with respect to any non-
convertible preferred stock (of which there have been none since inception).
Cash flow does not include (i) realized gains or losses from dispositions of
investments, (ii) interest income from cash equivalent investments and the
convertible mortgage notes of Homestead Village Incorporated and dividend and
interest income from Atlantic Development Services Incorporated, (iii)
provisions for possible losses on investments and (iv) extraordinary items.
The REIT Manager also receives a fee of 0.20% per year on the average daily
balance of cash equivalent investments. The REIT management fee aggregated
$3.0 million for the three months ended March 31, 1997 and $10.4 million, $6.9
million and $3.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The REIT Management Agreement will be terminated upon closing of the Merger.
PROPERTY MANAGEMENT
Commencing May 12, 1994, the Property Manager began providing property
management services for certain of ATLANTIC's communities. The agreements
terminate September 30, 1997, subject to earlier termination by ATLANTIC on 30
days' notice, is renewable annually upon approval of ATLANTIC's independent
directors and contemplates a fee to the Property Manager of 3.5% of community
revenues for communities located in Atlanta and Washington, D.C. markets and
3.75% of community revenues for all other communities, paid monthly, which was
$1.3 million for the three months ended March 31, 1997 and $4.2 million for
the year ended December 31, 1996. ATLANTIC may terminate the property
management agreements on 60 days' notice.
44
<PAGE>
The management agreements between ATLANTIC and the Property Manager will be
terminated upon closing of the Merger.
REGULATORY FILINGS AND APPROVALS
Pursuant to the Merger Agreement, ATLANTIC or Security Capital may terminate
the Merger Agreement if (i) any governmental consent, order or approval
legally required for the consummation of the Transaction has not been obtained
and in effect on the Closing Date or (ii) any governmental consent, order or
approval legally required for the consummation of the Transaction shall have
any terms, which in the reasonable judgement of either ATLANTIC or Security
Capital, would materially impair the value of the Transaction to ATLANTIC or
Security Capital, respectively.
RESTRICTIONS ON SALES BY AFFILIATES
The Warrants to be issued in the Transaction will be registered under the
Securities Act. Such securities will be freely transferable under the
Securities Act, except for those issued to any person who may be deemed to be
an affiliate (as such term is defined for purposes of Rule 145 under the
Securities Act, an "Affiliate") of ATLANTIC. Affiliates may not sell their
Warrants (or Class B Shares issuable upon exercise thereof) acquired in
connection with the Transaction except pursuant to (i) an effective
registration statement under the Securities Act covering such securities, (ii)
paragraph (d) of Rule 145 or (iii) any other applicable exemption under the
Securities Act. ATLANTIC has agreed to use its best efforts to procure written
agreements from executive officers, directors and other Affiliates containing
appropriate representations and commitments intended to ensure compliance with
the Securities Act.
ACCOUNTING TREATMENT
Because ATLANTIC, the REIT Manager and Property Manager are under common
control, the difference between the market value of the Common Shares issued
to Security Capital on the date the Merger is consummated and the
approximately $1.1 million of net tangible assets of the REIT Manager and
Property Manager being acquired by ATLANTIC will be accounted for as a
distribution to Security Capital. The accounting for this transaction is more
thoroughly explained in the pro forma financial statements of ATLANTIC
presented at page F-1.
EXPENSES
The Merger Agreement provides that, whether or not the Transaction is
consummated, all expenses incurred in connection with the Merger Agreement and
the Transaction will be paid by the party incurring such expenses; provided,
however, that (i) all costs and expenses of the Special Committee (including
fees and expenses of counsel and its financial advisors), and all fees and
expenses in connection with the filing, printing and distributing the
registration statement relating to the Concurrent Rights Offering and this
Proxy Statement (not including the Security Capital Prospectus) shall be paid
by ATLANTIC and (ii) all costs and expenses in connection with filing,
printing and distributing the Registration Statement (not including the Proxy
Statement) and all fees and expenses in connection with the listing of the
Warrants on any national securities exchange or interdealer quotation system
shall be paid by Security Capital. See "Expenses of Solicitation."
DISSENTERS' APPRAISAL RIGHTS
Holders of Common Shares are not entitled to dissenters' appraisal rights in
connection with the Transaction.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTION AND RECOMMENDS THAT ATLANTIC SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE MERGER AGREEMENT AND THE TRANSACTION. The affirmative vote of a
majority of the outstanding Common Shares is required to approve this
proposal.
45
<PAGE>
LONG-TERM INCENTIVE PLAN
(PROPOSAL 2)
General
The Board of Directors has adopted, subject to shareholder approval, the
1997 Incentive Plan which contains the following terms and conditions. A copy
of the 1997 Incentive Plan is attached to this Proxy Statement and Prospectus
as Annex II and is incorporated herein by reference. The number of Common
Shares which may be awarded under the Incentive Plan may not exceed 3,000,000
in the aggregate and no individual may be granted awards with respect to more
than 500,000 Common Shares in any one-year period. Common Shares issued under
the 1997 Incentive Plan may be authorized and unissued shares, or treasury
shares. In the event of certain transactions affecting the type or number of
outstanding shares, the number of shares subject to the 1997 Incentive Plan,
the number or type of shares subject to outstanding awards and the exercise
price thereof will be appropriately adjusted. The 1997 Incentive Plan
authorizes the establishment of one or more option programs and share purchase
programs and authorizes the award of share grants (any of which may be subject
to restrictions). All employees of ATLANTIC or any of its affiliates are
eligible to participate in the 1997 Incentive Plan. The Compensation Committee
of the Board of Directors of ATLANTIC (the "Compensation Committee") will
administer the 1997 Incentive Plan. Subject to the terms of the 1997 Incentive
Plan, the Compensation Committee determines which employees shall be eligible
to receive awards under the 1997 Incentive Plan, and the amount, price, timing
and other terms and conditions applicable to such awards. Non-employee
directors are not eligible to participate in the 1997 Incentive Plan.
Options awarded under the 1997 Incentive Plan may be either incentive share
options which are intended to satisfy the requirements of Section 422 of the
Code, or non-qualified share options which are not intended to satisfy Section
422 of the Code. Options become exercisable in accordance with the terms
established by the Compensation Committee, which may include conditions
relating to completion of a specified period of service or achievement of
performance standards or such other criteria as the Compensation Committee
deems appropriate. Options expire on the date determined by the Compensation
Committee which shall not be later than the earliest to occur of (i) the tenth
anniversary of the grant date, (ii) the first anniversary of the participant's
termination of employment by reason of death, disability or retirement or
(iii) the three month anniversary of the participant's termination of
employment for any other reason. Shares transferred to a participant pursuant
to the exercise of an option may be subject to such additional restrictions or
limitations as the Compensation Committee may determine. The 1997 Incentive
Plan provides generally that participants who are awarded options will also
receive dividend equivalent units with respect to the options. The dividend
equivalent units will be subject to the same vesting schedule as the options
and will be payable when the options are exercised, unless the participant
elects to defer receipt, or expire. Generally, each participant will be
credited with dividend equivalent units at the end of each calendar year in an
amount equal to (i) the average dividend yield during such year with respect
to a Common Share that is in excess of the S&P 500 average dividend yield for
such year, multiplied by (ii) the number of Common Shares underlying the
participant's outstanding options that were granted with dividend equivalent
units. Each dividend equivalent unit also accumulates additional dividend
equivalent units on an annual basis. All dividend equivalent units are paid in
the form of Common Shares at the rate of one Common Share per dividend
equivalent unit.
The 1997 Incentive Plan provides that the Compensation Committee may award
participants performance stock, the distribution of which is subject to
achievement of performance objectives. The number of shares and the
performance measures and periods shall be established by the Compensation
Committee at the time the award is made, provided that any performance period
shall be at least one year.
Non-Qualified Options
The Compensation Committee may grant non-qualified options to acquire Common
Shares. Concurrently with the consummation of the Transaction, the Named
Executive Officers and certain other officers and employees of ATLANTIC will
be granted options to purchase Common Shares at the closing price of the
46
<PAGE>
Common Shares on the date the 1997 Incentive Plan is approved by shareholders.
The options will become exercisable 25% on the second anniversary of the date
of grant and an additional 25% on each of the third, fourth and fifth
anniversaries of the date of grant and expire ten years after the date of
grant. The participants have no rights as shareholders with respect to the
shares subject to his or her options until the option is exercised. No income
will be recognized by a participant at the time the options or the dividend
equivalent units are granted. The exercise of a non-qualified stock option is
generally a taxable event that requires the participant to recognize, as
ordinary income, the difference between the fair market value of the shares at
the time of exercise and the option price. Receipt of a dividend equivalent
unit by the participant is generally a taxable event that requires the
participant to recognize, as ordinary income, the fair market value of the
shares at the time of receipt. ATLANTIC ordinarily will be entitled to claim a
federal income tax deduction on account of the exercise of a non-qualified
option and payment of dividend equivalent units. The amount of the deduction
is equal to the ordinary income recognized by a participant. ATLANTIC has
adopted the provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123") "Accounting for Stock Based Compensation." Under the
provisions of this statement, ATLANTIC will continue to account for its share
options under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Share Purchase Program
Concurrently with the consummation of the Transaction, ATLANTIC will permit
the Named Executive Officers and certain other officers and employees to
purchase up to a total of $14,435,000 Common Shares at the closing price of
the Common Shares on the date the 1997 Incentive Plan is approved by
shareholders with two matching options for each share purchased. Each matching
option shall have an exercise price equal to the closing price of a Common
Share on the date the 1997 Incentive Plan is approved by the shareholders. No
dividend equivalent units will be issued with respect to such matching
options. The share purchases provide for a one-year restricted period during
which the participants may not, while employed, sell the purchased shares. If
a participant leaves the employ of ATLANTIC prior to the end of the restricted
period, ATLANTIC has the right to repurchase the shares at the fair market
value of such shares at the time the participant's employment is terminated.
At the end of the restricted period, the participant will own the shares
without further restriction. However, if the participant sells the restricted
shares after the end of the restricted period, the participant's matching
options may be adversely affected. ATLANTIC will make loans for up to 95% of
the purchase price available to participants. Each loan will be fully recourse
to the participant and be secured by the purchased shares. Each loan will have
a 10 year term and have an interest rate which is equal to the lower of 6% or
the dividend yield of a Common Share, determined based on the purchase date
fair market value of a Common Share. The loan will become due and payable (i)
immediately upon sale of the purchased shares or ATLANTIC's termination of the
participant's employment for cause, (ii) 90 days following the participant's
termination of employment with ATLANTIC for any reason other than death,
disability, retirement or following a change in control of ATLANTIC, (iii) 180
days following ATLANTIC's termination of the participant's employment
following a change in control or (iv) 365 days following the participant's
termination of employment with ATLANTIC by reason of death, disability or
retirement.
47
<PAGE>
New Plan Benefits
The following table shows the benefits that are expected to be received by
(i) the Named Executive Officers, (ii) all executive officers as a group, and
(iii) all employees, including all officers who are not executive officers, as
a group.
<TABLE>
<CAPTION>
DOLLAR VALUE OPTION AWARDS SHARE AWARDS
OF SHARES ----------------------------- ---------------------
SUBJECT TO NUMBER EXERCISE EXPIRATION DOLLAR NUMBER
NAME AND TITLE OPTION(1) OF SHARES PRICE DATE VALUE(2)(4) OF SHARES
-------------- ------------ --------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
James C. Potts, Co-
Chairman............... $ 300,000 (2) (2) (3) $ 6,000,000 (2)
Constance B. Moore,
Co-Chairman............ 300,000 (2) (2) (3) 6,000,000 (2)
J. Lindsay Freeman,
Senior Vice President.. 175,500 (2) (2) (3) 3,000,000 (2)
Bradley C. Miller,
Senior Vice President.. 175,500 (2) (2) (3) 3,000,000 (2)
William Kell, Vice
President and
Controller............. 97,500 (2) (2) (3) 1,350,000 (2)
All executive officers
as a group (5 persons). 1,048,500 (2) (2) (3) 19,350,000 (2)
All employees, including
all officers who are
not executive officers,
as a group
(65 persons)........... $1,056,900 (2) (2) (3) $23,955,000 (2)
</TABLE>
- --------
(1) Non-qualified options with dividend equivalent units and vesting schedule
of 25% exercisable on the second anniversary and an additional 25% on each
of the third, fourth and fifth anniversaries of the date of grant.
(2) The exercise price of the options and the purchase price for the share
awards will be the price of the Common Shares as of the date the
shareholders approve the 1997 Incentive Plan. The number of shares subject
to options and share awards will be determined by dividing the aggregate
exercise price or aggregate share award covered by the price of the Common
Shares as of the date the shareholders approve the 1997 Incentive Plan.
(3) Ten years from the date on which the shareholders approve the 1997
Incentive Plan.
(4) Includes shares which may be purchased plus matching options for two
shares granted with respect to each Common Share purchased.
In addition to the awards under the 1997 Incentive Plan, options will be
granted to 25 officers of ATLANTIC to purchase an aggregate of $4,002,000 of
Class A Shares of Security Capital (based on the exercise price). The options
will be granted in December 1997 at an exercise price per Class A Share equal
to the fair market value of the Class A Shares on the date of grant, will
become exercisable 25% on the second anniversary of the date of grant and an
additional 25% on each of the third, fourth and fifth anniversaries of the
date of grant. Such options will continue to vest so long as such officers
remain employees of ATLANTIC and will expire not later than the earliest to
occur of the tenth anniversary of the grant date, the first anniversary of the
participant's termination of employment by reason of death, disability or
retirement or the three month anniversary of the participant's termination of
employment for any other reason. In addition, all officers of ATLANTIC who
hold options to purchase Class A Shares of Security Capital will continue to
hold such options after the Merger. Such options will continue to vest and be
exercisable by such officers in accordance with the existing vesting schedule.
If any officer leaves the employ of ATLANTIC, such options will cease to vest
and, if vested, must be exercised within the periods described above.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
APPROVE THE 1997 INCENTIVE PLAN. Assuming the presence of a quorum, the
affirmative vote of a majority of the votes cast in person or by proxy at the
Special Meeting is required to approve this proposal.
48
<PAGE>
THE SPECIAL MEETING
PURPOSE OF THE MEETING
At the Special Meeting, the holders of Common Shares will be asked to (i)
consider and vote upon a proposal to approve and adopt the Merger Agreement
and the Transaction and (ii) consider and vote upon the approval of the 1997
Incentive Plan. A copy of the Merger Agreement is attached as Annex I hereto,
a copy of the 1997 Incentive Plan is attached hereto as Annex II and a copy of
the Security Capital Prospectus is attached hereto as Appendix A, each of
which is incorporated herein by reference.
DATE, TIME AND PLACE; RECORD DATE
The Special Meeting is scheduled to be held at 10:00 a.m., local time, on
Monday, September 8, 1997, at the offices of ATLANTIC, Six Piedmont Center,
Atlanta, Georgia 30305. The Board of Directors has fixed the close of business
on August 6, 1997 as the record date for the determination of holders of
Common Shares entitled to notice of and to vote at the Special Meeting. On
July 31, 1997, there were 41,968,780 Common Shares outstanding and ATLANTIC
had approximately 300 record holders. As of July 31, 1997, Security Capital
and ATLANTIC's directors and executive officers beneficially owned an
aggregate of 21,654,770 Common Shares or approximately 52% of the outstanding
Common Shares. Security Capital has agreed, subject to certain conditions, and
each of such other persons has indicated his or her intent, to vote his or her
Common Shares in favor of the Merger Agreement and the Transaction as well as
in favor of the 1997 Incentive Plan.
Registered owners of Common Shares who plan to attend the Special Meeting in
person must detach and retain the admission ticket which is attached to the
proxy card. Beneficial owners of Common Shares who plan to attend the Special
Meeting in person may obtain admission tickets in advance by sending written
requests, along with proof of ownership, such as a bank or brokerage firm
account statement, to: Assistant Secretary, Security Capital Atlantic
Incorporated, Six Piedmont Center, Atlanta, Georgia 30305. Record owners and
beneficial owners (including the holders of valid proxies therefrom) who do
not present admission tickets at the meeting will be admitted upon
verification of ownership at the admission counter at the Special Meeting.
Verification of ownership for record holders (including the holders of valid
proxies therefrom) will consist of a valid form of personal identification
(such as a driver's license or passport) and for beneficial owners will
consist of a bank or brokerage firm account statement together with a valid
form of personal identification.
Any ATLANTIC shareholder who executes and returns a proxy card may revoke
such proxy at any time before it is voted by (i) notifying in writing the
Secretary of ATLANTIC at Six Piedmont Center, Atlanta, Georgia 30305, (ii)
granting a subsequent proxy or (iii) appearing in person and voting at the
Special Meeting. As described above, no person will be admitted to the Special
Meeting without verification of ownership and, therefore, if a person is not
admitted to the Special Meeting, such person will not be able to revoke a
previously granted proxy by appearing in person.
VOTING RIGHTS
Although the approval by shareholders of the Transaction is not required
under the ATLANTIC Charter or under Maryland law, the rules of the NYSE
require shareholder approval of the Transaction. The Board of Directors has
also conditioned the Transaction on the approval by the holders of at least a
majority of the outstanding Common Shares. Assuming the existence of a quorum,
the affirmative vote of the holders of at least a majority of the outstanding
Common Shares is required to approve the Merger Agreement and the Transaction.
The affirmative vote of a majority of the votes cast at the Special Meeting is
required to approve the 1997 Incentive Plan. Holders of record of Common
Shares on the ATLANTIC Record Date are entitled to one vote per Common Share
at the Special Meeting. The presence, either in person or by proxy, of the
holders of a majority of the outstanding Common Shares is necessary to
constitute a quorum at the Special Meeting.
49
<PAGE>
If a shareholder attends the Special Meeting, he or she may vote by ballot.
However, since many shareholders may be unable to attend the Special Meeting,
the Board of Directors is soliciting proxies so that each holder of Common
Shares on the ATLANTIC Record Date has the opportunity to vote on the
proposals to be considered at the Special Meeting. When a proxy card is
returned properly signed and dated, the Common Shares represented thereby will
be voted in accordance with the instructions on the proxy card. If a
shareholder does not return a signed proxy card, his or her Common Shares will
not be voted and thus will have the effect of a vote against the Merger
Agreement and the Transaction, but will have no effect on the proposal to
approve the 1997 Incentive Plan. Similarly, broker non-votes and abstentions
have the effect of a vote against the Merger Agreement and the Transaction,
but will have no effect on the proposal to approve the 1997 Incentive Plan.
Shareholders are urged to mark the box on the proxy card to indicate how their
Common Shares are to be voted. If a shareholder returns a signed proxy card,
but does not indicate how his or her Common Shares are to be voted, the Common
Shares represented by the proxy card will be voted "FOR" the Merger Agreement
and the Transaction and "FOR" the approval of the 1997 Incentive Plan. The
proxy card also confers discretionary authority on the individuals appointed
by the Board of Directors and named on the proxy card to vote the Common
Shares represented thereby on any other matter that is properly presented for
action at the Special Meeting. Such discretionary authority will not be used
to vote for adjournment of the Special Meeting to permit further solicitation
of proxies if the shareholder votes against any proposal.
Any ATLANTIC shareholder who executes and returns a proxy card may revoke
such proxy at any time before it is voted by (i) notifying in writing the
Secretary of ATLANTIC at Six Piedmont Center, Atlanta, Georgia 30305, (ii)
granting a subsequent proxy or (iii) appearing in person and voting at the
Special Meeting. Attendance at the Special Meeting will not in and of itself
constitute revocation of a proxy.
OTHER MATTERS
ATLANTIC is not aware of any business or matter other than those indicated
above which may be properly presented at the Special Meeting. If, however, any
other matter properly comes before the Special Meeting, the proxy holders will
vote thereon in their discretion.
INFORMATION CONCERNING ATLANTIC
GENERAL
ATLANTIC's objective is to be the preeminent real estate operating company
focusing on multifamily communities in its southeastern United States target
market. Through the REIT Manager and Property Manager, ATLANTIC has access to
services which provide ATLANTIC with the same resources as a fully integrated
operating company. The REIT Manager and Property Manager have approximately
100 professionals and 450 property-level support personnel dedicated to
implementing ATLANTIC's highly focused operating strategy. ATLANTIC focuses on
the development, acquisition, operation and long-term ownership of multifamily
communities. At June 30, 1997, ATLANTIC's portfolio consisted of 26,232
multifamily units, including 6,967 units under construction or in planning, in
15 metropolitan areas and 50 submarkets in growth areas of the southeastern
United States. The expected investment cost of ATLANTIC's 69 operating
communities, including budgeted renovations and total budgeted development
expenditures, was approximately $979.1 million at June 30, 1997 and the total
budgeted development cost of ATLANTIC's 24 communities under construction or
in planning was approximately $446.1 million. Additionally, at June 30, 1997,
ATLANTIC had land in planning and under control for the development of 3,406
units with a total budgeted development cost of $222.8 million.
ATLANTIC seeks to achieve long-term sustainable growth in per Common Share
cash flow by maximizing the operating performance of its core portfolio
through value-added operating systems and concentrating its experienced team
of professionals on developing and acquiring industry-leading multifamily
communities in targeted submarkets exhibiting strong job growth and favorable
demographic trends. Since its inception in 1993, ATLANTIC has employed a
research-driven investment approach, deploying its capital in markets and
50
<PAGE>
submarkets that exhibit strong market fundamentals. ATLANTIC believes that
population and employment growth are the primary demand generators for
multifamily product.
STRONG PRIMARY TARGET MARKET
ATLANTIC believes the southeastern United States is geographically and
economically diverse and, therefore, ATLANTIC has a strong primary target
market in which to seek future growth. Although 34.7% of ATLANTIC's pro forma
revenues for the three months ended March 31, 1997 were derived from the
Atlanta, Georgia metropolitan area, as ATLANTIC continues to develop and
acquire new communities outside of Atlanta, it expects the percentage of its
revenues derived from communities located in Atlanta to decline. ATLANTIC's
primary target market cities are Atlanta, Georgia; Birmingham, Alabama;
Charlotte, North Carolina; Jacksonville, Florida; Nashville, Tennessee;
Orlando, Florida; Raleigh, North Carolina; Richmond,Virginia; Southeast
Florida (which includes Ft. Lauderdale and West Palm Beach); Tampa, Florida;
and Washington, D.C. Based on forecasts published by Woods & Poole Economics,
Inc., the projected population growth in ATLANTIC's primary target market
cities is 34.5% for the years 1997 through 2016, whereas the projected
population growth of the United States as a whole for the same period is
16.8%. For the same period, job growth is projected to be 31.2% in ATLANTIC's
primary target market cities, compared to 20.8% for the United States as a
whole. Depending on the level of new construction starts by other multifamily
developers, ATLANTIC believes that the anticipated population and job growth
in its primary target market cities should contribute to ATLANTIC's objective
of long-term growth in cash flow.
EMPLOYEES
ATLANTIC currently has no employees. The REIT Manager, whose sole activity
is advising ATLANTIC, manages the day-to-day operations of ATLANTIC. The REIT
Manager and Property Manager have assembled a team of approximately 100
operating professionals, collectively possessing extensive experience in
multifamily real estate. All such employees are expected to become employees
of ATLANTIC after the Merger.
LEGAL PROCEEDINGS
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of its business. ATLANTIC 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.
COMPETITION
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.
51
<PAGE>
ATLANTIC COMMON SHARE PRICES AND PER COMMON SHARE DISTRIBUTIONS
The Common Shares are listed on the NYSE under the symbol "SCA." As of June
30, 1997, ATLANTIC had 41,968,780 Common Shares issued and outstanding, which
were held of record by approximately 300 shareholders. The Common Shares
commenced trading on the NYSE on October 15, 1996 and the high and low sales
prices of the Common Shares were $24 5/8 and $20 7/8, respectively, for the
fourth quarter of 1996 (as adjusted for the Homestead Distribution described
below), and were $26 1/2 and $22, respectively, for the first quarter of 1997,
24 1/8 and $20 3/4, respectively, for the second quarter of 1997 and $24 1/16
and 22 1/4, respectively, for the third quarter of 1997 (through August 5).
Stock prices above are as reported on the NYSE Composite Tape by America
Online. The following table sets forth ATLANTIC's cash distributions per
Common Share for the periods indicated.
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
PER COMMON SHARE
----------------
<S> <C>
1995:
First Quarter.......................................... $0.40
Second Quarter......................................... $0.40
Third Quarter.......................................... $0.40
Fourth Quarter......................................... $0.40
-----
$1.60
=====
1996:
First Quarter.......................................... $0.42
Second Quarter......................................... $0.42
Third Quarter.......................................... $0.42
Fourth Quarter......................................... $0.39(1)
-----
$1.65
=====
1997:
First Quarter.......................................... $0.39
Second Quarter......................................... $0.39
Third Quarter (through July 21)........................ $0.39(2)
</TABLE>
- --------
(1) In light of the Homestead transaction and ATLANTIC's initial public
offering, the Board of Directors adjusted the distribution in the fourth
quarter of 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Homestead Transaction."
(2) On July 21, 1997, the Board of Directors declared a distribution of $0.39
per Common Share for the third quarter of 1997. The distribution is
payable on August 26, 1997 to holders of record of Common Shares on August
12, 1997.
In addition to the quarterly cash distributions shown above, ATLANTIC made
the Homestead Distribution (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Homestead Transaction") on November 12, 1996 to shareholders of
record on October 29, 1996. The securities distributed in the Homestead
Distribution had a market value of $2.67 per Common Share based on the closing
prices of such securities on the American Stock Exchange ("ASE") on November
11, 1996, the day prior to the distribution date. The Homestead Distribution
resulted in an adjustment of $2.75 per Common Share to ATLANTIC's Common Share
price information on the NYSE on November 12, 1996. Accordingly, ATLANTIC's
October 1996 initial public offering price, as adjusted for the Homestead
Distribution, was $21.25 per Common Share (as compared to the pre-adjustment
price of $24.00 per Common Share).
ATLANTIC, in order to qualify as a REIT, is required to make distributions
(other than capital gain distributions) to its shareholders in amounts at
least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends-paid deduction and its net capital gain) and
(B) 95% of the
52
<PAGE>
net income (after tax), if any, from foreclosure property, minus (ii) the sum
of certain items of non-cash income. ATLANTIC's long-term distribution
strategy is to distribute what it believes is a conservative percentage of its
cash flow, permitting ATLANTIC to retain funds for capital improvements and
other investments while funding its distributions. ATLANTIC has paid 14
consecutive quarterly cash distributions since its inception in October 1993.
ATLANTIC announces the following year's projected annual distribution level
after the Board of Directors' annual budget review and approval in December of
each year. At its December 19, 1996 Board meeting, the Board of Directors
announced a projected annual distribution level of $1.56 per Common Share for
1997. The payment of distributions is subject to the discretion of the Board
of Directors and is dependent upon the financial condition and operating
results of ATLANTIC. ATLANTIC's unsecured line of credit contains covenants
which provide that ATLANTIC's distributions for the preceding four quarters,
excluding the Homestead Distribution, may not exceed 95% of funds from
operations (as defined in the credit agreement) for the preceding four
quarters.
ATLANTIC expects to continue to pay regular quarterly distributions to its
shareholders, but the historical distributions presented above prior to the
fourth quarter of 1996 did not take into account the cost of being a public
company and should not be considered to be indicative of future distributions.
ATLANTIC's ability to pay future distributions depends on a number of factors
including, among other things, continued property occupancy, capital
expenditures and other costs relating to ATLANTIC's existing communities and
ATLANTIC's financial condition and capital requirements. A change in any such
factor could affect ATLANTIC's ability to pay future distributions. Moreover,
ATLANTIC's operating results may be adversely affected if occupancy levels
decrease, if revolving credit borrowing costs increase or if any other adverse
changes occur.
Cash available for distribution will be affected by a number of factors,
including rental revenues from existing and new residents, the level of
acquisition and new leasing activity, ATLANTIC's operating expenses, the
interest expense and other debt service costs of ATLANTIC, the ability of
residents to meet their obligations, taxes payable by ATLANTIC and
unanticipated capital expenditures. ATLANTIC's policy is to expense, rather
than capitalize, repairs and maintenance, in determining net earnings and cash
available for distribution. Only major renovations, replacements or
improvements with a substantial expected economic life (such as roofs, parking
lots and additions) are capitalized. ATLANTIC has budgeted $5.4 million for
such purposes for the remainder of 1997. No assurances can be given that cash
available for distribution will be sufficient to pay future distributions.
Although ATLANTIC does not expect any future cash shortfalls, any such
shortfalls which do arise could result in reductions in ATLANTIC's cash
available for distribution which could result in lower than expected
distributions.
In addition to the $5.4 million of budgeted capital expenditures, as of June
30, 1997, ATLANTIC had $96.7 million of unfunded construction commitments and
$321.8 million of communities in planning (owned and under control), of which
$303.5 million had not been funded. In addition, pursuant to its Funding
Commitment Agreement (as defined below), ATLANTIC has agreed to fund mortgage
loans to Homestead of up to approximately $111.1 million in exchange for
convertible mortgage notes of up to $98.0 million, of which $59.1 million had
not been funded as of June 30, 1997. ATLANTIC expects to finance its
renovation, acquisition and development investments and its funding commitment
under its Funding Commitment Agreement with borrowings under its $350 million
unsecured revolving line of credit (which matures in December 1998) and future
offerings of debt and equity securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed ATLANTIC's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather
than a dividend and reduce the shareholder's basis in the Common Shares. To
the extent that a distribution exceeds both current and accumulated earnings
and profits and the shareholder's basis in the Common Shares, it will
generally be treated as gain from the sale or exchange of that shareholder's
Common Shares.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 31, 1997, the beneficial
ownership of Common Shares for (i) each person known to ATLANTIC to be the
beneficial owner of more than 5% of ATLANTIC's Common Shares, (ii) each
director of ATLANTIC and (iii) the directors and executive officers of
ATLANTIC as a group. 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>
NUMBER OF COMMON
SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY ALL COMMON
OF BENEFICIAL OWNER OWNED SHARES
------------------- ---------------- ----------
<S> <C> <C>
Security Capital Group Incorporated...... 21,546,620(1) 51.3%
125 Lincoln Avenue
Santa Fe, NM 87501
Ameritech Pension Trust.................. 2,223,320(2) 5.3
Ameritech Corporation
225 West Randolph Street
HQ-13A
Chicago, IL 60606
General Motors Investment Management
Corporation............................. 2,173,913(3) 5.2
767 Fifth Avenue
New York, NY 10153
Manuel A. Garcia III..................... 12,000(4) *
P.O. Box 2066
Davgar Restaurants, Inc.
Winter Park, FL 32790
Ned S. Holmes............................ 59,500(4)(5) *
Parkway Investments/Texas, Inc.
55 Waugh Drive
Houston, TX 77007
Constance B. Moore....................... 11,600 *
Six Piedmont Center
Atlanta, GA 30305
James C. Potts........................... 13,050 *
Six Piedmont Center
Atlanta, GA 30305
John M. Richman.......................... 12,000(4) *
Wachtell, Lipton, Rosen & Katz
227 West Monroe Street, Suite 4825
Chicago, IL 60606
All Directors and executive officers as a
group
(9 persons)............................. 108,150 *
</TABLE>
- --------
*Less than 1%
(1) These Common Shares are owned of record by SC Realty Incorporated, a
wholly-owned subsidiary of Security Capital, and are pledged to secure
Security Capital's $400 million revolving line of credit facility with a
syndicate of banks. As of July 31, 1997, there were $188.5 million in
outstanding borrowings under the line of credit. The line of credit is
also secured by securities owned by Security Capital of PTR, SCI,
Homestead and Security Capital U.S. Realty, a publicly traded entity based
in Luxembourg which invests in real estate operating companies in the
United States. Security Capital estimates that the aggregate market value
of the pledged securities exceeded $3.2 billion as of July 31, 1997.
Security Capital was in compliance with all covenants under the line of
credit at March 31, 1997.
(2) This information is based on a Schedule 13G dated February 14, 1997.
According to the Schedule 13G, the Common Shares were not acquired for the
purpose of changing or influencing the control of ATLANTIC.
54
<PAGE>
(3) 1,956,522 of these Common Shares are owned by the General Motors Hourly-
Rate Employees Pension Trust and 217,391 of these Common Shares are owned
by the General Motors Salaried Employees Pension Trust.
(4) Includes 2,000 Common Shares each for Messrs. Garcia, Holmes and Richman
which are issuable upon exercise of Options granted under the Outside
Directors Plan.
(5) Mr. Holmes directly owns 2,500 of these Common Shares. Mr. Holmes may be
deemed to beneficially own 55,000 of these Common Shares which are owned
by Mr. Holmes' wife and children and by Holmes Family Venture Ltd., a
family entity with respect to which Mr. Holmes shares voting and
dispositive power.
REIT MANAGEMENT
GENERAL
The REIT Manager and its specialized service affiliates provide ATLANTIC
with strategic and day-to-day management, research, investment analysis,
acquisition, development, marketing, disposition of assets, asset management,
due diligence, capital markets, and legal and accounting services, all of
which are included in the REIT Management fee. ATLANTIC currently has no
employees. Hence, ATLANTIC depends on the quality of the management provided
by the REIT Manager. ATLANTIC believes that its relationship with the REIT
Manager provides ATLANTIC with access to high quality and depth of management
personnel and resources, savings from a dedicated capital markets group, and
access to centralized research, accounting and legal support. Approximately 55
operating professionals are employed by the REIT Manager. The REIT Manager
also provides office and other facilities supporting ATLANTIC's needs. The
REIT Manager's address is the same as ATLANTIC's. The owner of the REIT
Manager, Security Capital, currently owns approximately 51% of ATLANTIC's
outstanding Common Shares.
The owner of the REIT Manager has a substantial shareholder interest in
ATLANTIC, creating alignment of interest with ATLANTIC's shareholders.
Furthermore, the REIT Manager provides all its services for one fee, and an
affiliate provides property management services at market rates in a
competitive environment. The REIT Manager does not receive additional fees for
investment banking, financing, asset sales or similar services.
The REIT Manager has organized itself such that each operating professional
specializes in a particular discipline (such as research, marketing,
development, acquisition, due diligence, asset management, capital markets or
financial operations) rather than being responsible for all functions on a
project-by-project basis. Local investments are approved by the REIT Manager's
investment committee, using uniform criteria, prior to being submitted to
ATLANTIC's investment committee. Regional operating professionals focus on
specific target markets to ensure attention to resident services.
ATLANTIC believes that the quality of management should be assessed in light
of the following factors:
Management Depth/Succession
ATLANTIC believes that management should have several senior executives with
the leadership, operational, investment and financial skills and experience to
oversee the entire operations of the REIT. ATLANTIC believes that several of
its senior officers could serve as the principal executive officer and
continue ATLANTIC's performance. See "--Directors and Officers of ATLANTIC and
the REIT Manager" below.
Strategic Vision
ATLANTIC believes that management should have the strategic vision to
determine an investment focus that provides favorable initial yields and long-
term growth prospects. The REIT Manager has demonstrated its strategic vision
by focusing ATLANTIC on multifamily communities in the southeastern United
States, where demographic and supply factors have permitted high occupancies
at increasing rents.
55
<PAGE>
ATLANTIC focuses primarily on moderate income communities, which comprise
one of the largest segments of the renter population. Based on ATLANTIC's
review of information filed under the Exchange Act regarding other REITs in
ATLANTIC's primary target market and other publicly available data, ATLANTIC
believes that few other REITs in its primary target market currently focus on
the moderate income segment. Consequently, ATLANTIC believes that the moderate
income segment is a significantly underserved market with limited competition.
Research Capability
ATLANTIC believes that management should have the means for researching
markets to determine appropriate investment opportunities. ATLANTIC divides
its target market cities into numerous submarkets for analysis purposes. The
REIT Manager and its affiliates have several persons who devote substantial
time to research, on a submarket-by-submarket basis, and are closely
supervised by senior officers of the REIT Manager.
Investment Committee Process
ATLANTIC believes that investment committees should provide discipline and
guidance to the investment activities of the REIT in order to achieve its
investment goals. The four members of the REIT Manager's investment committee
have a combined 95 years experience in the real estate industry. See "--
Directors and Officers of ATLANTIC and the REIT Manager" below. The investment
committee receives detailed written analyses and research, in a standardized
format, from the REIT Manager's personnel and evaluates all prospective
investments pursuant to uniform underwriting criteria prior to submission of
investment recommendations to the investment committee of the Board of
Directors. The quality of the REIT Manager's investment committee process is
demonstrated by ATLANTIC's ability to achieve its investment goals and
generally realize its projected initial returns and growth from multifamily
investments.
Development/Redevelopment and Acquisition Capability
ATLANTIC believes that by internally developing projects and redeveloping
well located operating communities, management can capture for the REIT the
value that normally escapes through sales premiums paid to successful
developers. The REIT Manager's personnel have substantial development and
redevelopment experience, as described in "--Directors and Officers of
ATLANTIC and the REIT Manager" below. The REIT Manager has 20 full-time
professionals committed to development and acquisition activities. The REIT
Manager has arranged for over $980.6 million of successful acquisitions for
ATLANTIC. As of June 30, 1997, the REIT Manager was developing 6,967
multifamily units for ATLANTIC with a total budgeted development cost of
$446.1 million. Additionally, as of June 30, 1997, ATLANTIC had land in
planning and under control for the development of 3,406 units with a total
budgeted development cost of $222.8 million. The REIT Manager has engaged in
substantial development on behalf of ATLANTIC at attractive yields that have
exceeded projections and ATLANTIC believes that development will contribute to
ATLANTIC's objective of long-term growth in cash flow.
Disposition Capability
The ability to identify and effectively complete the cost-effective
disposition of targeted communities is essential to the successful execution
of ATLANTIC's asset optimization strategy. From inception through June 30,
1997, ATLANTIC disposed of 2,140 units, realizing an aggregate gain, net of
provisions for possible losses, of $4.3 million on aggregate proceeds of
$107.7 million, which were redeployed into strategic acquisitions and
developments. Marketing efforts and related costs and negotiation were
conducted primarily by the REIT Manager and, therefore, broker fees were
minimal.
Due Diligence Process
ATLANTIC believes that management should have experienced senior personnel
dedicated to performing intelligent and thorough due diligence. The REIT
Manager has three full time due diligence professionals and has developed
uniform systems and procedures for due diligence. The REIT Manager's due
diligence personnel have screened and selected a large volume of investments.
56
<PAGE>
Operating Capability
ATLANTIC believes that management can substantially improve funds from
operations by actively and effectively managing assets. The REIT Manager and
its affiliates have devoted substantial personnel and financial resources to
control and effectively manage ATLANTIC's multifamily portfolio.
Capital Markets Capability
ATLANTIC believes that management must be able effectively to raise equity
and debt capital in order for the REIT to achieve superior growth through
investment. The REIT Manager has successfully arranged funding for ATLANTIC's
investment program.
Communications/Shareholder Relations Capability
ATLANTIC believes that a REIT's success in capital markets and investment
activities can be enhanced by management's ability to effectively communicate
the REIT's strategy and performance to investors, sellers of property and the
financial media. The REIT Manager provides full time personnel who prepare
informational materials for and conduct periodic meetings with the investment
community and analysts.
ATLANTIC believes that successfully combining the foregoing attributes
significantly enhances a REIT's ability to increase cash flow and increase the
market valuation of the REIT's portfolio.
DIRECTORS AND OFFICERS OF ATLANTIC AND THE REIT MANAGER
Upon consummation of the Transaction, each of the persons discussed below
will become officers or directors of ATLANTIC and be compensated for such
services by ATLANTIC (other than Mr. Klopf who will be compensated by Security
Capital).
Directors of ATLANTIC
Members of the REIT Manager's Investment Committee are designated by an
asterisk.
C. RONALD BLANKENSHIP--47--Advisory Director of ATLANTIC since September
1996 and Director from April 1996 to September 1996; Managing Director of
Security Capital since March 1991; Non-Executive Chairman of PTR since June
1997 and Chairman from June 1991 to June 1997. Mr. Blankenship is a director
of Strategic Hotel Capital Incorporated and an advisory director of 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.
MANUEL A. GARCIA III--53--Director of ATLANTIC since December 1995; Chief
Executive Officer of Davgar Restaurants, Inc. since May 1969 where he is the
owner/operator of ten Burger King Restaurants in central Florida, five Pebbles
Restaurants, Harvey's Bistro and Manuel's on the 28th Restaurant in Orlando,
Florida; Director of Homestead, a corporation affiliated with Security
Capital, The Foundation for Orange County Public Schools, Florida State
University Seminole Boosters' Association, a Director and Member of the
Executive Committee of the Florida Citrus Sports Association and National
Director of Cities in Schools. Mr. Garcia is also on the Board of the National
Conference of Christians and Jews and an Honorary Director of the Boys' Clubs
and Boy Scouts of Central Florida. In addition, Mr. Garcia is a former member
of former President Bush's Drug Advisory Council.
NED S. HOLMES--52--Director of ATLANTIC since May 1994; President and Chief
Executive Officer of Laing Properties, Inc. since May 1990; from April 1984 to
present, Chairman and President of Parkway Investments/Texas Inc., a Houston-
based real estate investment and development company which specializes in
residential (apartment and townhouse), commercial (office and warehouse) and
subdivision projects. Mr. Holmes also serves as a Director of Commercial
Bancshares, Inc. and Heritage Bank, both based in Houston, Texas. Mr. Holmes
is a Chairman of the Port Commission of the Port of Houston Authority and a
Director of the Greater Houston Partnership.
57
<PAGE>
*CONSTANCE B. MOORE--41--Co-Chairman, Chief Operating Officer and Director
of ATLANTIC and the REIT Manager since January 1996, where she has overall
responsibility for operations of ATLANTIC; from May 1994 to December 1995,
Managing Director of PTR, Director and Managing Director of PTR's REIT
manager; Senior Vice President of Security Capital from March 1993 to April
1994; from January 1990 to December 1992, President and Director of Kingswood
Realty Advisors, Inc., investment advisor to ICM Property Investors, a NYSE-
listed REIT, and from March 1991 to December 1992, President and Director of
ICM Property Investors.
*JAMES C. POTTS--50--Co-Chairman and Chief Investment Officer of ATLANTIC
and the REIT Manager since January 1996 and Director of ATLANTIC and the REIT
Manager since October 1993, where he has overall responsibility for
investments of ATLANTIC; Chairman of ATLANTIC and the REIT Manager from May
1994 to December 1995; from December 1992 to April 1994, Managing Director of
PTR's REIT manager, where he supervised the asset management of all of PTR's
multifamily communities and oversaw the relationship of PTR's REIT manager
with SCG Realty Services Incorporated, which provides on-site management for
these communities; from April 1984 to December 1992, Chief Executive Officer
of four regional multifamily management companies of Trammell Crow Residential
Services.
JOHN M. RICHMAN--69--Director of ATLANTIC since September 1996; Counsel to
the law firm of Wachtell, Lipton, Rosen & Katz since January 1, 1990; Mr.
Richman is a member of the American, Illinois and New York Bar Associations.
He was Chairman and Chief Executive Officer of Kraft, Inc. from 1979 to 1989,
prior to which he was Senior Vice President--Administration and General
Counsel of that company. He is currently a director of BankAmerica Corporation
and Bank of America National Trust and Savings Association, USX Corporation,
R. R. Donnelley & Sons Company and the Evanston Hospital Corporation. He is
also a Trustee of the Chicago Symphony Orchestra, Northwestern University and
The Johnson Foundation. In addition, Mr. Richman is a Director of The Chicago
Council on Foreign Relations and Lyric Opera of Chicago and a member of The
Business Council, The Commercial Club of Chicago and the Economic Club of
Chicago.
Senior Officers of ATLANTIC and the REIT Manager
CONSTANCE B. MOORE--See "--Directors of ATLANTIC" above.
JAMES C. POTTS--See "--Directors of ATLANTIC" above.
*J. LINDSAY FREEMAN--52--Senior Vice President of ATLANTIC and the REIT
Manager since May 1994 and Director of the REIT Manager since March 1995,
where he is responsible for operations. From June 1980 to March 1994, Mr.
Freeman was Senior Vice President and Operating Partner of Lincoln Property
Company in Atlanta, Georgia, where he was responsible for acquisitions,
financing, construction and management of multifamily communities within the
Atlantic region and oversaw operations of 16,000 multifamily units.
JEFFREY A. KLOPF--49--Senior Vice President and Secretary of ATLANTIC, the
REIT Manager and Security Capital since January 1996, where he provides
securities offerings and corporate acquisition services and oversees the
provisions of legal services for affiliates of Security Capital. From January
1988 to December 1995, Mr. Klopf was a partner with Mayer, Brown & Platt where
he practiced corporate and securities law.
*BRADLEY C. MILLER--50--Senior Vice President of ATLANTIC and the REIT
Manager since June 1996 and Director of the REIT Manager since February 1997,
where he is responsible for investments. From October 1979 to May 1996, Mr.
Miller was Senior Vice President and Operating Partner of Lincoln Property
Company in Tampa, Florida, where he was responsible for acquisitions,
financing, construction and management of multifamily communities within the
Atlantic region and oversaw the development of over 6,500 new multifamily
units and operations of 11,000 multifamily units.
WILLIAM KELL--41--Vice President and Controller of ATLANTIC and the REIT
Manager since January 1996, where he supervises accounting and financial
reporting for ATLANTIC; from June 1991 to December 1995, Vice President and
Controller of PTR, where he had overall responsibility for multifamily
accounting and financial reporting; from 1987 to 1991, Vice President and
Treasurer, Bohannon Development Corporation, El Paso, Texas (multifamily
development); prior thereto, Manager with KPMG Peat Marwick in its El Paso,
Texas office.
58
<PAGE>
Other Officers
STEVEN A. ABNEY--42--Vice President of ATLANTIC and the REIT Manager since
March 1997 where he has been responsible for property accounting and reporting
since April 1996; from August 1994 to March 1996, Division Controller for
Lincoln Property Company in Dallas, Texas, where he was responsible for
financial reporting activities for all Dallas/Ft. Worth area commercial
properties; from July 1989 to August 1994, Director of Finance and Accounting
for Bramalea USA Retail Group, a shopping center developer/manager in Dallas,
Texas.
RAYMOND D. BARROWS--35--Vice President of ATLANTIC and the REIT Manager
since May 1994, where he is a member of the development group; prior thereto,
he supervised the due diligence group; from January 1994 to December 1995, a
member of ATLANTIC's asset management group and prior thereto, a member of
PTR's asset management group; from May 1990 to August 1993, Portfolio Manager
with The First National Bank of Chicago where he was responsible for
underwriting and structuring transactions for both project and corporate
facilities.
LESLIE L. BIVINS--43--Vice President of ATLANTIC and the REIT Manager since
June 1996, where she is responsible for asset and property management for the
States of Georgia and Alabama and with the Property Manager since May 1994;
from January 1992 to May 1994, Senior Regional Manager of Laing Management
Company in Atlanta, Georgia, where she was responsible for management of over
2,000 units throughout the southeastern United States; from November 1987
through December 1991, District Manager of Trammell Crow Residential, Atlanta,
Georgia, where she supervised the management of approximately 2,000
multifamily units in the Atlanta market.
NEIL T. BROWN--41--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he is responsible for directing the development of new
multifamily communities in the mid-Atlantic region; from July 1992 to December
1995, Regional Vice President/Regional Partner of JPI Development Partners,
Inc. where he was responsible for all development activity in Florida; prior
thereto, Partner of Trammell Crow Residential where he was responsible for
development of residential projects in Dade and Broward Counties, Florida.
ANDREW W. COLQUITT--30--Vice President of ATLANTIC and the REIT Manager
since December 1996, where he is responsible for land acquisition for all
markets north of Florida; prior thereto, he was a member of the Development
Group; from March 1994 to October 1995, Development Associate for Trammell
Crow Residential in Portland, Oregon, where he was responsible for acquisition
and development management for the Portland development portfolio including
1,800 multifamily units; from June 1993 to February 1994, Acquisitions Analyst
for Prudential Real Estate Investors in San Francisco, with emphasis on
multifamily and office acquisitions; in May 1994, he obtained his M.B.A. from
the University of California at Berkeley; from June 1987 to June 1992, Cost
Engineer and Project Engineer for Holder Construction Company in Atlanta,
Georgia, with emphasis on project management, estimating and scheduling.
JOSEPH J. DOMINGUEZ--37--Vice President of ATLANTIC and the REIT Manager
since April 1996, where he is a member of the development group; prior
thereto, he was an associate in the development group; from November 1984 to
August 1995, Vice President of Operations for The Casden Company, where he had
overall responsibility for the start-up and operations of a general
contracting subsidiary; prior thereto, Project Manager with Pacific Southwest
Construction Company where he oversaw the construction of various residential
projects.
RICHARD L. GLEICHAUF--45--Vice President of ATLANTIC and the REIT Manager
since March 1997 where he has been responsible for financial planning and
analysis since April 1996; from 1977 to 1996, manager with various El Paso
Energy Corporation subsidiaries in El Paso, Texas and Paris, France where he
was responsible for financial accounting, budgeting and forecasting, and
auditing; prior thereto with KPMG Peat Marwick LLP in its El Paso, Texas
office.
59
<PAGE>
W. SCOTT HARTMAN--32--Vice President of ATLANTIC and the REIT Manager since
September 1996, where he oversees financing activities, coordinates external
financial reporting and supervises acquisition due diligence compliance
activities; prior thereto, he was in the Management Development Program with
Security Capital working in six-month rotational assignments with Managing
Directors of Security Capital and its affiliates; from May 1993 to May 1994,
Research Analyst with AMB Institutional Realty Advisors; in May 1994, Mr.
Hartman obtained his J.D. from The University of California, Hastings College
of the Law and his M.B.A. from The University of California, Haas School of
Business.
GEORGE E. KELLY--44--Vice President of ATLANTIC and the REIT Manager since
December 1996, where he is responsible for planning, coordinating and
executing the production of development of multifamily communities; from May
1995 to December 1996, Development Manager of ATLANTIC; from February 1995 to
April 1995, Real Estate and Construction Management Consultant to property
management companies; from August 1992 to April 1995, Assistant Vice President
of The Travelers Realty Investment Company in Atlanta, Georgia.
MONA D. KING--36--Vice President of ATLANTIC and the REIT Manager since May
1997, where she has overall responsibility for human resources; from September
1994 to May 1997, she was Regional Human Resources Manager for the Property
Manager prior thereto, she had a variety of Human Resources positions for
Rich's Department Stores from June 1989 to September 1994.
MARY CAPERTON LESTER--42--Vice President of ATLANTIC and the REIT Manager
since July 1995, where she is responsible for asset and property management in
the Mid-Atlantic region (except Georgia and Alabama) and with the Property
Manager since June 1994; prior thereto, she was a member of the asset
management group; from May 1993 to May 1994, she was with Summit Management
Company, where she specialized in new business development; from April 1984 to
May 1993, with Trammell Crow Residential Services, most recently as a Vice
President, where she was responsible for property operations, marketing and
new business development.
JEFFREY G. MEGRUE--35--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is a member of the development group; prior thereto, he
was an associate in the development group; from March 1993 to May 1994, he was
a member of the acquisition group of PTR; from June 1988 to February 1993,
Vice President of Trammell Crow Residential Services North; prior thereto,
Development Associate for the New Jersey/Pennsylvania division of Trammell
Crow Residential.
GLENN T. RAND--37--Vice President of ATLANTIC and of the REIT Manager since
June 1996, where he is responsible for asset and property management for the
State of Florida, and with the Property Manager since May 1995; from August
1987 to April 1995, Vice President of Trammell Crow Residential and Avalon
Properties, where he was responsible for operations and third party management
solicitation in southern Florida and the northeastern United States.
JAMES C. ROOT--42--Vice President of ATLANTIC and the REIT Manager since
December 1996, where he is responsible for major capital expenditures; from
February 1994 to December 1996, Construction Services Manager, where he was
responsible for capital budgeting, major repairs and renovations of over
13,000 units located throughout the Southeast; from February 1993 to February
1994, Construction Manager and Consultant in Chicago, Illinois, where he
evaluated potential acquisitions for Republic Management, a Houston-based,
nationwide property management company; from June 1992 to February 1993,
Construction Services Director with Genmar Realty Group, Inc. in Chicago,
where he established the Construction Department responsible for capital items
for a nationwide portfolio of communities.
ANN L. SCHUMACHER--38--Vice President of ATLANTIC and the REIT Manager since
July 1995 and a member of the accounting group since January 1994, where she
is responsible for accounting and financial reporting; from September 1988 to
October 1993, she was with Trammell Crow Company, most recently as Regional
Controller, where she managed the accounting department for the company's 26
million-square-foot industrial portfolio in Southern California and Arizona;
prior thereto, Senior Accountant for Price Waterhouse.
60
<PAGE>
L. DOUGLAS SNIDER--43--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is responsible for directing the development of new
multifamily communities in the South Atlantic region; prior thereto, he was an
associate in the development group; from July 1993 to March 1995, Vice
President of Operations with American Constructors, where he was responsible
for all design/build activities; from June 1990 to July 1993, Vice President
of Robert L. Mayer Corporation, where he was responsible for residential and
commercial development activities.
C. MELVIN WHITE--58--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he has been a member of the development group since August
1995; from September 1991 to August 1995, Founder/Partner of Sherrill and
Associates, an interior specialty contracting firm; from 1985 to 1991,
Construction Manager of Laing where he was responsible for construction of
garden apartments, personal care retirement facilities and mid-rise office
space.
TIMOTHY C. YEAGER--33--Vice President for ATLANTIC and the REIT Manager
since May 1997, where he has overall responsibility for acquisitions; from
September 1994 to December 1996, he was a member of the asset management
group; from January 1997 to May 1997, he was a member of the acquisitions
group; from December 1991 to May 1992, Vice President and co-founder of SMAC,
Inc., a management consulting firm. Mr. Yeager obtained a Masters in
International Business Studies from the University of South Carolina in May
1994.
COMMUNITIES
PORTFOLIO COMPOSITION
ATLANTIC believes that moderate income communities offer better prospects
for long-term growth in cash flow. Based upon ATLANTIC's review of information
filed under the Exchange Act regarding other REITs in its primary target
market and other publicly available data, ATLANTIC believes that few other
REITs in ATLANTIC's primary target market currently focus on the moderate
income segment. Moreover, based on ATLANTIC's proprietary information
regarding available land parcels and construction starts in its primary target
market, ATLANTIC believes that less than 10% of the 1995 and 1996 multifamily
starts in ATLANTIC's primary target market cities constituted moderate income
product. Consequently, ATLANTIC believes that the moderate income segment is a
significantly underserved market with limited competition. In ATLANTIC's
experience, moderate income residents are typically longer-term residents
because they often lack the financial resources required to purchase single-
family homes. As a result, resident turnover is often lower in ATLANTIC's
moderate income communities than in the upper middle income or middle income
communities. The total cost of refurbishing and re-leasing a unit ranges from
$700 to $1,500; therefore, reducing resident turnover can have a material
impact on an asset's profitability. The following table indicates the product
type composition of communities owned by ATLANTIC at June 30, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
ASSETS BASED
ON TOTAL
NUMBER OF EXPECTED
COMMUNITIES INVESTMENT(1)
----------- -------------
<S> <C> <C>
Moderate Income(2).............................. 49 50.2%
Middle Income(3)................................ 37 40.5
Upper Middle Income(4).......................... 7 9.3
--- -----
Total....................................... 93 100.0%
=== =====
</TABLE>
- --------
(1) For operating communities, represents cost through June 30, 1997 plus
budgeted renovations as of June 30, 1997. For communities under
construction and in planning, represents cost through June 30, 1997 plus
additional budgeted development expenditures as of June 30, 1997, 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.
61
<PAGE>
(2) These communities appeal to residents with incomes ranging from 65% to 90%
of submarket median household income. Residents in this category, which
typically include couples, single family parents and families with one or
two children, are value-driven and focus on unit livability and practical
amenities such as washer/dryer hookups, storage space and playground.
(3) These communities appeal to residents with incomes ranging from 90% to
115% of submarket median household income. These communities have smaller
units and fewer amenities than upper middle income communities.
(4) These communities appeal to residents with incomes ranging from 115% to
140% of submarket median household income. These communities typically
feature large luxurious units and numerous amenities, including large
exercise facilities and attached garages.
GEOGRAPHIC DISTRIBUTION
In order to effectively manage its multifamily communities, ATLANTIC has
organized its operations with a regional focus (Mid-Atlantic and South
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 (operating
communities and total communities, which includes operating communities and
owned communities under construction and in planning) at June 30, 1997:
<TABLE>
<CAPTION>
OPERATING COMMUNITIES TOTAL COMMUNITIES
------------------------- -------------------------
PERCENTAGE OF PERCENTAGE OF
ASSETS BASED ASSETS BASED
ON TOTAL ON TOTAL
NUMBER OF EXPECTED NUMBER OF EXPECTED
COMMUNITIES INVESTMENT(1) COMMUNITIES INVESTMENT(1)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North
Carolina............. 4 6% 6 6%
Greenville, South
Carolina............. 1 1 1 1
Memphis, Tennessee.... 4 4 4 3
Nashville, Tennessee.. 2 4 3 4
Raleigh, North
Carolina............. 6 9 8 8
Richmond, Virginia.... 2 3 6 7
Washington, D.C....... 4 7 6 9
--- --- --- ---
Total Mid-Atlantic.. 23 34% 34 38%
--- --- --- ---
SOUTH ATLANTIC:
Atlanta, Georgia...... 21 34% 25 29%
Birmingham, Alabama... 4 5 5 5
Ft. Lauderdale/West
Palm Beach, Florida.. 7 10 10 11
Ft. Myers, Florida.... 1 1 1 1
Jacksonville,
Florida.............. 2 3 6 6
Orlando, Florida...... 5 4 6 4
Sarasota, Florida..... 1 3 1 2
Tampa, Florida........ 5 6 5 4
--- --- --- ---
Total South
Atlantic........... 46 66% 59 62%
--- --- --- ---
Total............... 69 100% 93 100%
=== === === ===
</TABLE>
- --------
(1) For operating communities, represents cost through June 30, 1997 plus
budgeted renovations as of June 30, 1997. For communities under
construction and in planning, represents cost through June 30, 1997 plus
additional budgeted development expenditures as of June 30, 1997, 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.
62
<PAGE>
No single property is materially important to ATLANTIC, and there are no
mortgages, liens or other encumbrances against any properties which are
material to ATLANTIC. Whereas ATLANTIC has at present no material plans for
the renovation or improvement of properties in operation, ATLANTIC budgets for
regular maintenance, repair and upgrades to its properties. As set forth
below, ATLANTIC is actively engaged in the development of additional
properties. In the opinion of management of ATLANTIC, the properties of the
operating companies are adequately covered by insurance.
ATLANTIC has selectively developed multifamily communities where land costs
and demographic and market trends indicate a high likelihood of achieving
attractive, sustainable operating results. At 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. As of June 30, 1997, the development
portion of ATLANTIC's multifamily portfolio consisted of the following:
<TABLE>
<CAPTION>
TOTAL
NUMBER EXPECTED
OF 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
----- --------
Totals........................................... 8,865 $548,058
===== ========
</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, 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 ATLANTIC's 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.
As of June 30, 1997, only two of ATLANTIC's primary target market cities had
more than 10% of ATLANTIC's communities based on total expected investment.
The Atlanta market has experienced substantial job growth in recent years but
it has also attracted strong competition from institutional capital 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 Fort Lauderdale/West Palm Beach market has experienced
high net in-migration and expanding business with South and Latin American
countries. Although this market has high barriers to entry, there has been
strong investment interest in this market by institutional capital, 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. Information regarding permit levels and
population movement is based on U.S. Bureau of the Census statistics.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
REIT MANAGEMENT AGREEMENT
Pursuant to the REIT Management Agreement, the REIT Manager assumed the day-
to-day management of ATLANTIC. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--REIT Management Agreement." The REIT Management Agreement will be
terminated upon closing of the Merger. See "The Transaction--REIT Management
Agreement." Management believes that the terms of the REIT Management
Agreement are at least as favorable as could be obtained from unaffiliated
third parties.
63
<PAGE>
SECURITY CAPITAL INVESTOR AGREEMENT
As described under "The Transaction--Investor Agreement," ATLANTIC and
Security Capital are parties to the Investor Agreement, which will be amended
and restated upon consummation of the Merger.
ADMINISTRATIVE SERVICES AGREEMENT
As described under the caption "The Transaction--Administrative Services
Agreement," ATLANTIC and Security Capital will enter into an agreement whereby
Security Capital will provide certain administrative services to ATLANTIC.
Management believes that the terms of the Administrative Services Agreement
are at least as favorable as could be obtained from unaffiliated third
parties.
LICENSE AGREEMENT
As described under the caption "The Transaction--License Agreement,"
ATLANTIC and Security Capital will enter into an agreement whereby Security
Capital will grant ATLANTIC a non-exclusive license to use Security Capital's
logo and the name "Security Capital." Management believes that the terms of
the License Agreement are at least as favorable as could be obtained from
unaffiliated third parties.
PROTECTION OF BUSINESS AGREEMENT
As described under the caption "The Transaction--Protection of Business
Agreement," ATLANTIC and Security Capital will enter into an agreement whereby
Security Capital and its affiliates will be prohibited from providing
substantially the same services as those currently provided by the REIT
Manager and Property Manager to any entity that owns multifamily properties.
SHAREHOLDERS' AGREEMENT
To facilitate ATLANTIC's acquisition of certain communities from Laing
Properties, Inc. ("Laing"), Security Capital granted Laing certain rights to
require Security Capital to purchase Laing's Common Shares at pre-agreed
prices. ATLANTIC assumed Security Capital's first put obligation for 2,500,000
Common Shares and on March 31, 1995 purchased such Common Shares from Laing at
$22.00 per Common Share. In exchange for ATLANTIC's assumption of the first
put obligation, Security Capital purchased $94.8 million of Common Shares at
$22.00 per Common Share from ATLANTIC in a private offering. In November 1995,
ATLANTIC assumed Security Capital's second put obligation for 1,250,000 Common
Shares at $23.136 per Common Share. In exchange for ATLANTIC's assumption of
the second put obligation, Security Capital purchased 1,250,000 Common Shares
at a price of $23.136 per Common Share and purchased an additional $21.1
million of Common Shares at $23.00 per Common Share in a private offering.
Security Capital's purchase under the third put obligation of 1,250,000 Common
Shares (representing all Common Shares owned by Laing) at $24.53 per Common
Share occurred on July 1, 1996.
PROPERTY MANAGEMENT COMPANY
Commencing May 12, 1994, the Property Manager began providing property
management services for certain of ATLANTIC's communities. See "The
Transaction--Property Management." The management agreements between ATLANTIC
and the Property Manager will be terminated upon closing of the Merger. See
"The Transaction--Property Management." Management believes that the terms of
the property management agreements are at least as favorable as could be
obtained from unaffiliated third parties.
HOMESTEAD TRANSACTION
In March 1996, the Board of Directors began considering ways for ATLANTIC to
maximize shareholder value with respect to its Homestead Village properties.
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 sell, through a series of merger transactions, all of their
respective assets relating to Homestead Village properties to Homestead, and
ATLANTIC and PTR agreed to enter into funding commitment agreements (see
64
<PAGE>
"--Funding Commitment Agreement"). 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 ATLANTIC (a) owning 4,201,220
shares of Homestead common stock, (b) owning 2,818,517 warrants to purchase
one share of Homestead common stock at $10.00 per share, (c) owning up to
$98.0 million in convertible mortgage notes as described below (see "--Funding
Commitment Agreement") and (d) providing a cash payment of $16.6 million to
Homestead on the closing date. The $16.6 million payment was required because
ATLANTIC's Homestead Village properties, only one of which was operating, were
in earlier stages of development than PTR's Homestead Village properties;
therefore, ATLANTIC had not funded the same percentage of total costs as PTR.
The payment also assured that ATLANTIC received all of its shares of Homestead
common stock at the closing of the transaction rather than in smaller
increments over time as funds are expended to complete the properties
contributed by ATLANTIC. ATLANTIC distributed the Homestead common stock and
warrants which it received to its shareholders pro rata in the Homestead
distribution on November 12, 1996. Each holder of record of a Common Share on
October 29, 1996 received 0.110875 shares of Homestead common stock and
warrants to purchase 0.074384 shares of Homestead common stock.
FUNDING COMMITMENT AGREEMENT
Pursuant to a funding commitment agreement entered into at the closing of
the Homestead transaction, ATLANTIC agreed to make mortgage loans to Homestead
of up to $111.1 million, which amount was anticipated to be sufficient to
complete the development of the Homestead Village facilities contributed by
ATLANTIC. ATLANTIC received 2,818,517 warrants, each to purchase one share of
Homestead common stock, in exchange for its entering into the funding
commitment agreement, which ATLANTIC subsequently distributed pro rata to its
shareholders in the Homestead Distribution. Each Homestead warrant is
exercisable at $10.00 per share and expires October 27, 1997. The exercise
price was determined based on the overall structure of the Homestead
transaction and, in particular, consideration of Homestead's future capital
needs and a desire to provide liquidity to ATLANTIC's shareholders with
respect to their warrants. ATLANTIC will receive convertible mortgage notes in
respect of fundings under the funding commitment agreement in stated amounts
of up to $98.0 million. The effect of these provisions of the funding
commitment agreement is that ATLANTIC will fund $1,133,535 for each $1,000,000
principal amount of convertible mortgage loans. The convertible mortgage loans
will be recorded for financial reporting purposes at a premium of
approximately $13.1 million which will be amortized and recorded as an
adjustment to interest income over the ten-year term of the mortgage loans
using the effective interest method. The relative ownership percentages of
ATLANTIC, PTR and Security Capital in Homestead were determined based upon the
relative value of the contributed assets assuming that all of the properties
to be contributed had been developed and were fully operational. ATLANTIC
agreed to fund convertible mortgages to provide for the development of the
Homestead Village properties and to achieve its ownership allocations. The
funded amount of ATLANTIC under the convertible mortgages therefore was in an
amount that was anticipated, pursuant to development budgets, to be sufficient
to complete the development of the Homestead Village properties contributed by
ATLANTIC. The difference between the funded amount and the stated amount of
the convertible mortgage loans arose because the rate of return on the
existing Homestead Village facilities contributed by PTR was projected to
exceed the rate of return on the Homestead Village facilities contributed by
ATLANTIC and PTR to Homestead which were under construction or in
predevelopment planning. This expected difference in the rates of return arose
because, as of July 1, 1996, PTR was expected to have 28 Homestead Village
facilities in operation and generating income, while ATLANTIC was expected to
have none and the average property development costs for the existing PTR
Homestead Village properties, on balance, were expected to be less than those
for the ATLANTIC and PTR Homestead Village properties projected to be built in
the future because a large portion of the existing PTR Homestead Village
properties were in planning or under development during 1992 and 1993 when
land prices and construction costs were less than they were when the
transaction was negotiated and were anticipated to be over the next 18 months.
Because of the foregoing factors, and as a result of Homestead's desire to
issue a single class of convertible mortgage notes bearing a 9% per annum
interest rate, the stated amounts of the convertible mortgage notes were
adjusted to provide an effective yield (after giving effect to the premium due
to the issuance of the Homestead warrants and the convertibility of the
mortgage notes) to each of ATLANTIC (8.46% on a fully funded basis)
65
<PAGE>
and PTR (12.42% on a fully funded basis) that was reflective of the relative
rates of return anticipated to be realized on all of the facilities
contributed by ATLANTIC and PTR, respectively. The obligation of ATLANTIC is
limited to a specific dollar amount for each property identified in the
funding commitment agreement. Upon any determination by Homestead to commence
development of a property identified in the funding commitment agreement,
Homestead is required to notify ATLANTIC and ATLANTIC is required to fund up
to the full amount of its obligation with respect to such property. Homestead
is required to endeavor in good faith to complete the development of such
property consistent with the development plans for such property. Each
mortgage note issued by Homestead pursuant to the funding commitment agreement
is convertible into shares of Homestead common stock on the basis of one share
of Homestead common stock for every $11.50 of principal outstanding on the
mortgage loan. The obligation of Homestead to call for funding of, and the
obligation of ATLANTIC to provide funding for, the mortgage loans expire on
March 31, 1998, except with respect to properties for which Homestead has
given notice that it intends to develop. Interest on the mortgage notes
accrues at the rate of 9% per annum on the unpaid principal balance, payable
every six months. The mortgage notes are scheduled to mature on October 31,
2006, and are not callable until October 27, 2001. Homestead has pledged the
assets being contributed by ATLANTIC as collateral for the mortgage loans
being made by ATLANTIC. At December 31, 1996, no funds had been advanced
pursuant to the funding commitment agreement and there were no convertible
mortgage notes outstanding. ATLANTIC advanced $56.0 million under the funding
commitment agreement through July 31, 1997 and $49.4 million of mortgage notes
was outstanding on such date.
HOMESTEAD PROTECTION OF BUSINESS AGREEMENT
ATLANTIC entered into a protection of business agreement with Homestead at
the closing of the Homestead transaction which prohibits ATLANTIC and its
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 properties. The
agreement does not prohibit ATLANTIC from: (i) owning securities of Homestead;
(ii) owning up to 5% of the outstanding securities of another person engaged
in owning, operating, developing, managing or leasing extended-stay lodging
properties, so long as it does not actively participate in the business of
such person; (iii) owning the outstanding securities of another person, a
majority-owned subsidiary, division, group, franchise or segment of which is
engaged in owning, operating, developing, managing or leasing extended-stay
lodging properties, so long as not more than 5% of such person's consolidated
revenues are derived from such properties; and (iv) owning securities of
another person primarily engaged in a business other than owning, operating,
developing, managing or leasing extended-stay lodging properties, including a
person primarily engaged in business as an owner, operator or developer of
hotel properties, whether or not such person owns, operates, develops, manages
or leases extended-stay lodging properties. The agreement does not prohibit
Homestead from: (i) owning securities of ATLANTIC, PTR or Security Capital;
(ii) owning up to 5% of the outstanding securities of another person engaged
in owning, operating, developing, managing or leasing garden-style multifamily
properties; 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 garden-style
multifamily properties, 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 protection of business
agreement will terminate on October 17, 2006.
HOMESTEAD INVESTOR AGREEMENT
ATLANTIC entered into an investor and registration rights agreement with
Homestead at the closing of the Homestead transaction pursuant to which
ATLANTIC is entitled to designate one person for nomination to the Homestead
board of directors, and Homestead will use its best efforts to cause the
election of such nominee,
66
<PAGE>
until March 31, 1998 and for so long thereafter as ATLANTIC has the right to
convert in excess of $20.0 million in principal amount of loans made pursuant
to its funding commitment agreement. Such nominee may, but need not, include
the same person(s) nominated by Security Capital pursuant to Security
Capital's investor agreement with Homestead. In addition, Homestead has
granted to ATLANTIC registration rights with respect to the distribution of
all of the shares of Homestead common stock issuable upon conversion of the
convertible mortgage notes. Prior to October 22, 1997, ATLANTIC may request
one registration of those shares of Homestead common stock which are issued
upon conversion of any or all of the convertible mortgage notes during such
one-year period and which it intends to distribute to its stockholders. After
such one-year anniversary, ATLANTIC may request three additional registrations
pursuant to Rule 415 promulgated under the Securities Act of all shares of
Homestead common stock issued or issuable upon conversion of the convertible
mortgage notes. Such registration, except for the fees and disbursements of
counsel to ATLANTIC, shall be at the expense of Homestead.
DEVELOPMENT AGREEMENT
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, Common
Shares or shares of Security Capital's common stock, as determined in 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, capitalized at a rate as provided by
the agreement, exceeds the total actual project costs. In February 1997,
ATLANTIC paid $0.8 million to one such developer/manager with respect to one
community. The aggregate amount of such earnout amounts for the seven
remaining communities cannot exceed $7.3 million. The developer/managers were
not entitled to receive any earnout payments at June 30, 1997 on the seven
remaining communities.
OTHER TRANSACTIONS WITH AFFILIATES
In ATLANTIC's March through June 1995 private offering, Security Capital
purchased $94.8 million of Common Shares at $22.00 per Common Share. In
ATLANTIC's December 1995 through May 1996 private offering, Security Capital
purchased an aggregate of $50.0 million of Common Shares, $21.1 million of
which were purchased at $23.00 per Common Share (which was the price per
Common Share paid by other investors in the offering) and $28.9 million of
which were purchased at $23.136 per Common Share. See "--Shareholders'
Agreement." In ATLANTIC's October 1996 initial public offering, Security
Capital purchased $10 million of Common Shares at $24.00 per Common Share.
Except as described above, all subscriptions were made on the same terms and
at the same times as made available to other investors. Management believes
that the terms of the foregoing transactions are at least as favorable as
could be obtained from unaffiliated third parties.
67
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth the Pro Forma Financial Results as of and for
the three months ended March 31, 1997 and for the year ended December 31,
1996, and the Historical Financial Results as of and for the three months
ended March 31, 1997 and for the years ended December 31, 1996, 1995 and 1994
and the period from inception (October 26, 1993) through December 31, 1993.
Such selected financial information is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and notes thereto included in this Proxy Statement and Prospectus. The Pro
Forma Financial Results are not necessarily indicative of what the actual
financial position and results of operations of ATLANTIC would have been as of
and for the periods indicated, nor do they purport to represent the financial
position and results of operations for future periods. Unless otherwise
indicated, all Common Share and per Common Share amounts have been adjusted to
give effect to ATLANTIC's one-for-two reverse Common Share split, which was
effective on September 10, 1996.
<TABLE>
<CAPTION>
PRO
FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
-------- ---------- ------------ ------------------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED PERIOD ENDED DECEMBER 31,
MARCH MARCH 31, DECEMBER 31, ------------------------------
31, 1997 1997 1996 1996 1995 1994 1993(2)
-------- ---------- ------------ -------- -------- ------- ----
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $39,715 $39,715 $148,361 $137,729 $103,634 $55,071 $156
Homestead Convertible
Mortgages interest
income................ 185 185 -- -- -- -- --
Property management
fees paid to
affiliate............. -- 1,280 -- 4,208 3,475 1,536 --
Property management
fees paid to third
parties............... 232 232 971 971 591 661 --
Interest expense....... 2,893 4,761 12,219 16,181 19,042 9,240 --
REIT management fee
paid to affiliate..... -- 3,029 -- 10,445 6,923 3,671 12
General and
administrative
expenses.............. 1,751 265 5,923 673 646 266 1
Net earnings before
extraordinary item.... 13,258 10,178 45,306 42,569 19,639 9,926 38
Extraordinary item--
loss on early
extinguishment of
debt.................. -- -- -- 3,940 -- -- --
Series A Preferred
Share dividend........ 1,125 -- 4,500 -- -- -- --
Net earnings
attributable to Common
Shares................ 12,133 10,178 40,806 38,629 19,639 9,926 38
Net earnings per Common
Share before
extraordinary item.... 0.27 0.27 1.01 1.33 0.89 0.81 0.13
Net earnings
attributable to Common
Shares per Common
Share................. 0.27 0.27 1.01 1.21 0.89 0.81 0.13
Cash distributions
declared and paid..... 14,778 14,778 53,064 53,064 35,119 14,648 --
Cash distributions
declared and paid per
Common Share.......... $ 0.39 $ 0.39 $ 1.65 $ 1.65 $ 1.60 $ 1.20 $--
Weighted average Common
Shares outstanding.... 44,241 37,892 40,246 32,028 21,944 12,227 286
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA(3) HISTORICAL
---------- -----------------------------------------------
PERIOD ENDED DECEMBER 31,
MARCH 31, MARCH 31, ------------------------------------
1997 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at
cost.................. $1,208,229 $1,208,229 $1,157,235 $888,928 $631,260 $31,005
Total assets........... 1,210,645 1,204,231 1,135,065 885,824 637,846 31,850
Line of credit(4)...... 21,020 295,250 228,000 190,000 153,000 --
Long-term debt......... 150,000 -- -- -- -- --
Mortgages payable...... 155,418 155,418 155,790 118,524 107,347 --
Total liabilities...... 367,043 489,511 436,423 328,886 271,216 178
Total shareholders'
equity................ $ 843,602 $ 714,720 $ 698,642 $556,938 $366,630 $31,672
Number of Common Shares
outstanding........... 44,241 37,892 37,892 27,763 18,567 1,582
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ---------- ------------ -------------------------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED PERIOD ENDED DECEMBER 31,
MARCH MARCH 31, DECEMBER 31, -------------------------------------
31, 1997 1997 1996 1996 1995 1994 1993(2)
------------ ---------- ------------ -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings
attributable to Common
Shares................ $12,133 $10,178 $ 40,806 $ 38,629 $ 19,639 $ 9,926 $ 38
Add (Deduct):
Real estate
depreciation.......... 6,132 6,132 22,534 20,824 15,925 8,770 28
Amortization related to
Homestead Convertible
Mortgages............. (20) (20) -- -- -- -- --
Gain on disposition of
real estate........... -- -- -- (6,732) -- -- --
Gain on sale of
Homestead Assets(5)... -- -- -- (2,839) -- -- --
Provision for possible
loss on investments... -- -- 2,500 2,500 -- -- --
Extraordinary item--
loss on early
extinguishment of
debt.................. 200 200 -- 3,940 -- -- --
------- ------- -------- -------- -------- -------- -------
Funds from
operations(6)......... $18,445 $16,490 $ 65,840 $ 56,322 $ 35,564 $ 18,696 $ 66
------- ------- -------- -------- -------- -------- -------
Net cash provided
(used) by operating
activities............ $19,804 $16,913 $ 69,685 $ 54,356 $ 39,732 $ 23,564 $ (492)
Net cash used by
investing activities.. (70,486) (69,354) (291,476) (287,418) (235,149) (390,077) (31,005)
Net cash provided by
financing activities.. $50,733 $52,055 $226,026 $230,907 $195,649 $372,638 $31,634
</TABLE>
- --------
(1) The pro forma condensed statements of earnings reflect: (i) the Merger,
(ii) the sale of the Homestead Village properties and subsequent
distribution of Homestead securities on November 12, 1996, (iii) the
acquisition and disposition of communities acquired or disposed of
subsequent to January 1, 1996 and related assumptions of mortgage debt and
(iv) the sale of Common Shares subsequent to January 1, 1996 (including
the sale of Common Shares on April 10, 1997) and the proposed Note
Offering, as defined, and Preferred Offering, as defined, and the related
repayments of ATLANTIC's $350 million unsecured line of credit as if all
of these transactions had occurred on January 1, 1996.
(2) For the period from inception (October 26, 1993) to December 31, 1993.
(3) The pro forma condensed balance sheet reflects: (i) the Merger, (ii) the
sale of Common Shares on April 10, 1997 and (iii) the proposed Note
Offering, as defined, and Preferred Offering, as defined, and the related
repayments of ATLANTIC's $350 million unsecured line of credit as if all
of these transactions had occurred on March 31, 1997.
(4) At July 31, 1997, ATLANTIC had $254.8 million of outstanding borrowings
under its $350 million unsecured line of credit and such outstanding
borrowings are expected to be approximately $85.0 million at the closing
of the Transaction and after giving effect to the Concurrent Rights
Offering and the proposed Preferred Offering and Note Offering.
(5) For a description of the transaction relating to these assets, see
"Management's Discussion and Analysis of Financial Condition and Results
of operations--Liquidity and Capital Resources--Homestead Transaction."
(6) Funds from operations represents net earnings computed in accordance with
GAAP, excluding gains (or losses) from real estate transactions,
provisions for possible losses, extraordinary items and real estate
depreciation. Funds from operations should not be considered as an
alternative to net earnings or any other GAAP measurement of performance
as an indicator of ATLANTIC's operating performance or as an alternative
to cash flows from operating, investing or financial activities as a
measure of liquidity. ATLANTIC believes that funds from operations is
helpful to a reader as a measure of the performance of an equity REIT
because, along with cash flow from operating activities, financing
activities and investing activities, it provides a reader with an
indication of the ability of ATLANTIC to incur and service debt, to make
capital expenditures and to fund other cash needs. Furthermore, management
believes that an understanding of funds from operations will enhance the
reader's comprehension of the impact of the Merger on ATLANTIC which was a
specific consideration of the Special Committee in recommending approval
of the Transaction to the Board of Directors. On January 1, 1996, ATLANTIC
adopted the NAREIT revised definition of funds from operations. Under this
more conservative definition, loan cost amortization is not added back to
net earnings in determining funds from operations. For comparability,
funds from operations for the periods prior to January 1, 1996 give effect
to the revised definition. The funds from operations measure presented by
ATLANTIC, while consistent with the NAREIT definition, will not be
comparable to similarly titled measures of other REITs which do not
compute funds from operations in a manner consistent with ATLANTIC. Funds
from operations is not intended to represent cash made available to
shareholders. Cash distributions paid to shareholders is presented above
under "Operations Summary."
69
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with ATLANTIC's
financial statements and the notes thereto included in this Proxy Statement
and Prospectus.
The statements contained in this discussion and elsewhere in this Proxy
Statement that are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in
which ATLANTIC 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. ATLANTIC's operating results
depend primarily on income from multifamily communities, which is
substantially influenced by (i) the demand for and supply of multifamily units
in ATLANTIC's primary target market and submarkets, (ii) operating expense
levels, (iii) the effectiveness of property-level operations and (iv) the pace
and price at which ATLANTIC can acquire and develop additional multifamily
communities. Capital and credit market conditions which affect ATLANTIC's cost
of capital also influence operating results.
OVERVIEW
Since its inception on October 26, 1993 and through March 31, 1997, ATLANTIC
has amassed a portfolio of 25,808 multifamily units with a total expected
investment cost of $1.38 billion located in the southeastern United States.
Additionally, at March 31, 1997, ATLANTIC had land in planning and under
control for the development of 2,332 units with a total budgeted development
cost of $137.5 million. ATLANTIC's investment in real estate has been financed
through both debt and equity. From inception through March 31, 1997, ATLANTIC
has raised approximately $806.2 million in net equity, primarily through
private and public sales of Common Shares. Additionally, ATLANTIC had long-
term mortgage debt at March 31, 1997 of approximately $155.4 million which is
secured by certain of the communities acquired. ATLANTIC's $350 million
unsecured line of credit provided the remaining investment capital.
The following table summarizes ATLANTIC's multifamily investment activity as
of and for the three-month period ended March 31, 1997 and as of and for the
years ended December 31, 1996, 1995 and 1994 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE-MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED --------------------------
MARCH 31, 1997 1996 1995 1994
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING COMMUNITIES AT
PERIOD END:
Communities................ 70 70 58 43
Units...................... 19,241 19,241 15,823 11,990
Total expected
investment(1)............. $968,081 $959,860 $783,448 $600,880
Cost per unit.............. $ 50.3 $ 49.9 $ 49.5 $ 50.1
DEVELOPMENT COMMUNITIES:
Starts During Period:
Communities................ 2 9 6 4
Units...................... 668 2,815 2,214 1,212
Total expected
investment(1)............. $ 42,910 $164,442 $143,822 $ 64,054
Cost per unit.............. $ 64.2 $ 58.4 $ 65.0 $ 52.8
Completions During Period:
Communities ............... -- 3 2 --
Units...................... -- 1,046 468 --
Total expected
investment(1)............. -- $ 56,370 $ 25,462 --
Cost per unit.............. -- $ 53.9 $ 54.4 --
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
THREE-MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED --------------------------
MARCH 31, 1997 1996 1995 1994
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Stabilizations During Period:
Communities................. 1 3 -- --
Units....................... 408 804 -- --
Total expected
investment(1).............. $ 20,799 $ 43,004 -- --
Cost per unit............... $ 51.0 $ 53.5 -- --
Under Construction at Period
End:
Communities................. 16 14 8 4
Units....................... 5,395 4,727 2,958 1,212
Total expected
investment(1).............. $335,591 $290,486 $176,740 $ 63,006
Cost per unit............... $ 62.2 $ 61.5 $ 59.7 $ 52.0
Investment to date.......... $238,176 $194,587 $ 94,094 $ 20,741
ACQUISITIONS:
Communities................. -- 13 15 40
Units....................... -- 3,556 3,961 11,307
Total expected
investment(1).............. -- $171,731 $182,242 $582,077
Cost per unit............... -- $ 48.3 $ 46.0 $ 51.5
DISPOSITIONS:
Communities................. -- 4 2 --
Units....................... -- 1,184 596 --
Proceeds.................... -- $ 64,150 $ 30,934 --
Gain........................ -- $ 6,732 -- --
</TABLE>
- --------
(1) For operating communities, represents cost through the period end, plus
budgeted renovations, if any, as of the period end. For communities under
construction, represents cost through the period end plus additional
budgeted development expenditures as of the period end, 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.
In addition to its multifamily investment activity, ATLANTIC developed
extended-stay lodging facilities known as Homestead Village that were sold to
Homestead, a newly formed company, in 1996, as discussed below in "--Liquidity
and Capital Resources--Investing and Financing Activities--Homestead
Transaction." ATLANTIC's investment, at cost, in Homestead Village properties
was $2.6 million at December 31, 1995. ATLANTIC did not begin developing
Homestead Village properties until 1995.
At March 31, 1997, 95.4% of ATLANTIC's portfolio, based upon total expected
investment, was located in ATLANTIC's primary target market cities. These
primary target market cities and submarkets have benefitted substantially in
recent periods from demographic trends, in particular population and job
growth. From July 1993 to July 1995, the population growth rate in ATLANTIC's
primary target market cities (3.8%) exceeded the population growth rate in the
United States as a whole (2.0%), based upon U. S. Census Bureau information.
From 1993 to 1996, the job growth rate in ATLANTIC's primary target market
cities (10.7%) exceeded the job growth rate in the United States as a whole
(8.0%), based upon U. S. Department of Labor Statistics information. As a
result, the demand for multifamily units in ATLANTIC's primary target market
cities has increased. The strong demand for multifamily units has resulted in
an increase in ATLANTIC's rental rates in each multifamily product type in
ATLANTIC's portfolio which has had a favorable impact on ATLANTIC's operating
results.
ATLANTIC's operating results are a function of rental collections and rental
expense levels. Rental collections are a function of rental rates and
occupancy levels achieved. ATLANTIC's operating personnel continually monitor
rental rates and occupancy levels in an effort to maximize rental collections.
At times, ATLANTIC finds it advantageous to increase rental rates even though
this may cause occupancy levels to decrease as long as the expected net result
is an increase in rental collections. While ATLANTIC experienced a slight
decrease in same store community occupancy in the fourth quarter of 1996 and
the first quarter of 1997
71
<PAGE>
compared to the same quarter of the preceding year, rental collections during
these periods increased by 1.00% and 2.42%, respectively. ATLANTIC expects
that rental collections will continue to increase at the same pace as has been
experienced over the past two years.
ATLANTIC's rental expenses as a percentage of rental revenues for ATLANTIC's
multifamily communities have generally remained flat (ranging between 39.4%
and 40.0%), primarily due to a continual effort by ATLANTIC to reduce resident
turnover, thereby reducing the costs associated with re-leasing vacated units.
ATLANTIC expects rental expenses as a percentage of rental revenues to remain
at a level consistent with the level achieved over the past two years. The
expected trends in rental rates, occupancy and rental expenses are expected to
have a positive impact on ATLANTIC's future operating results. See additional
discussion below in "--Results of Operations--Communities Fully Operating
Throughout Both Periods".
ATLANTIC believes that development of multifamily communities from the
ground up, which are built for long-term ownership and designed to meet broad
renter preferences and demographic trends, will provide a greater source of
long-term cash flow growth in the future than acquisitions. Therefore, while
land prices are favorable, ATLANTIC has acquired and will continue to acquire,
on an unleveraged basis, prudent amounts of land zoned for multifamily
development. ATLANTIC believes its ability to compete is significantly
enhanced relative to other companies because of the REIT Manager's depth of
development and acquisition personnel and presence in local markets combined
with ATLANTIC's access to investment capital.
ATLANTIC's overall results of operations and financial condition for the
first three months of 1997 and for 1996, 1995 and 1994 have been significantly
influenced by this investment activity. Detailed information about this
investment activity, which will significantly influence future operations, is
provided below.
Current Development Activity
At March 31, 1997, ATLANTIC had 5,395 units under construction, representing
a total expected investment cost of $335.6 million. These development
communities are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
NUMBER TOTAL
OF INVESTMENT EXPECTED AVERAGE
UNITS COST TO DATE INVESTMENT(1) % LEASED(2)
------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Communities under construction
and in lease-up(3).............. 2,628 $162,964 $168,355 55.8%
Other communities under
construction.................... 2,767 75,212 167,236 N/A
----- -------- --------
Total communities under
construction................ 5,395 $238,176 $335,591
===== ======== ========
</TABLE>
- --------
(1) Represents cost through March 31, 1997 plus additional budgeted
development expenditures as of March 31, 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.
(2) The percentage leased is based on total units upon completion.
(3) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
There are risks associated with ATLANTIC's development and construction
activities which include: development and acquisition opportunities explored
by ATLANTIC may be abandoned; construction costs of a community may exceed
original estimates due to increased materials, labor or other expenses, which
could make completion of the community uneconomical; occupancy rates and rents
at a newly completed community are dependent on a number of factors, including
market and general economic conditions, and may not be sufficient to make the
community profitable; financing may not be available on favorable terms for
the development of a community; and construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs. Development activities are also subject to risks relating
to the inability to obtain, or delays in obtaining, all necessary land-use,
building, occupancy and other required governmental permits and
authorizations. The occurrence of any of the events described above could
adversely affect ATLANTIC's ability to achieve its projected yields on
communities under development or redevelopment.
72
<PAGE>
Acquisition Activity
ATLANTIC completed the acquisition of $171.7 million of operating
communities, representing a total of 3,556 units, during the fifteen-month
period ended March 31, 1997. These acquisitions are summarized below (dollar
amounts in thousands):
<TABLE>
<CAPTION>
TOTAL
EXPECTED ACQUISITION
UNITS INVESTMENT(1) DATE
----- ------------- -----------
<S> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Carolina:
Cameron at Hickory Grove............... 202 $ 8,392 04/10/96
Greenville, South Carolina:
Cameron Court.......................... 234 11,060 04/22/96
Memphis, Tennessee:
Cameron Century Center................. 420 15,928 10/18/96
Country Oaks........................... 200 8,484 09/05/96
Raleigh, North Carolina:
Cameron Lake........................... 196 9,293 11/13/96
Cameron Ridge.......................... 228 10,131 10/17/96
Emerald Forest......................... 320 14,680 12/19/96
Washington, D.C.:
West Springfield Terrace............... 244 16,210 09/30/96
----- --------
Total Mid-Atlantic................... 2,044 $ 94,178
----- --------
SOUTH ATLANTIC:
Atlanta, Georgia:
Balmoral Village....................... 312 $ 19,215 10/22/96
Cameron Pointe......................... 214 14,891 05/30/96
Ft. Lauderdale/West Palm Beach, Florida:
Park Place at Turtle Run............... 350 15,714 04/22/96
The Pointe at Bayberry Lake............ 308 17,021 05/29/96
Tampa, Florida:
Cameron Bayshore....................... 328 10,712 12/20/96
----- --------
Total South Atlantic................. 1,512 $ 77,553
----- --------
Total.............................. 3,556 $171,731
===== ========
</TABLE>
- --------
(1) Represents the initial acquisition cost plus budgeted renovations
identified as of the date of acquisition.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost of
improvements to bring an acquired community up to standards established for
the market position intended for that community will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
Although ATLANTIC undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could
significantly increase ATLANTIC's total acquisition costs.
RESULTS OF OPERATIONS
Net earnings for the three-month periods ended March 31, 1997 and 1996 were
$10.2 million and $6.7 million, respectively. Net earnings increased $3.5
million in the three-month period ended March 31, 1997 over the three-month
period ended March 31, 1996. Net earnings for the years ended December 31,
1996, 1995 and 1994 were $38.6 million, $19.6 million and $9.9 million,
respectively. Net earnings increased $19.0 million in 1996 over 1995 and $9.7
million in 1995 over 1994.
Property Operations--Three-Month Period Ended March 31, 1997
At March 31, 1997, ATLANTIC had 19,241 operating multifamily units as
compared to 16,159 operating multifamily units at March 31, 1996. The
increased number of communities in operation resulted in increases in
73
<PAGE>
rental income ($8.9 million in 1997 over 1996), rental expenses ($1.5 million
in 1997 over 1996), real estate taxes ($0.7 million in 1997 over 1996),
property management fees ($0.4 million in 1997 over 1996) and depreciation
($1.3 million in 1997 over 1996).
During the period prior to a community being stabilized, the REIT Manager
and the property managers begin implementing expense controls, reconfiguring
the resident mix, supervising renovations and implementing a strategy to
increase rental income. The full benefits of the changes are not reflected
until the communities are stabilized. At March 31, 1997, 19.0% of ATLANTIC's
operating multifamily communities, based on total expected investment cost,
were classified as pre-stabilized as compared to 30.0% at March 31, 1996.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional operating communities in its target market,
ATLANTIC anticipates increases in rental income and property-level expenses in
subsequent periods.
Net cash flow provided by operating activities increased by $4.6 million for
the three-month period ended March 31, 1997 as compared to the same period in
1996 principally due to the increased number of communities in operation.
Property Operations--Years Ended December 31, 1996, 1995 and 1994
At December 31, 1996, ATLANTIC had 19,241 operating multifamily units as
compared to 15,823 operating multifamily units at December 31, 1995 and 11,990
operating multifamily units at December 31, 1994. The increased number of
communities in operation resulted in increases in rental income ($34.1 million
in 1996 over 1995 and $48.6 million in 1995 over 1994), rental expenses ($9.0
million in 1996 over 1995 and $12.6 million in 1995 over 1994), real estate
taxes ($2.7 million in 1996 over 1995 and $4.0 million in 1995 over 1994),
property management fees ($1.1 million in 1996 over 1995 and $1.9 million in
1995 over 1994) and depreciation ($4.9 million in 1996 over 1995 and $7.2
million in 1995 over 1994).
As a result of high levels of acquisitions of operating communities since
inception, 26.7% of ATLANTIC's operating multifamily communities, based on
total expected investment cost, were classified as pre-stabilized at December
31, 1996 as compared to 25.7% at December 31, 1995 and 94.7% at December 31,
1994.
Cash provided by operating activities was $54.4 million in 1996, an increase
of $14.6 million from the 1995 level of $39.7 million. Cash provided by
operating activities in 1995 increased by $16.2 million from the 1994 level.
These increases are primarily the result of the increased number of
communities in operation.
Communities Fully Operating Throughout Both Periods
The following table presents the operating performance of ATLANTIC's 50
"same store" communities that were fully operational throughout the first
three months of 1997 and 1996 and the 34 "same store" communities that were
fully operational throughout 1996 and 1995. Operating expenses and net
operating income have been adjusted for pre-stabilized versus stabilized
accounting differences that result from capitalizing certain costs during the
period after acquisition when a community is being repositioned and is
classified as pre-stabilized and expensing those costs once repositioning is
completed and the community is classified as stabilized. A summary of the same
store communities is as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
1997 1996
---------------- --------
<S> <C> <C>
SAME STORE COMMUNITIES:
Number of communities... 50 34
Number of units......... 13,503 9,458
Total expected
investment cost (in
millions).............. $679.1 $496.5
Percentage of ATLANTIC's
total portfolio........ 70.2% 38.1%
<CAPTION>
FIRST QUARTER
1997 COMPARED 1996
TO FIRST QUARTER COMPARED
1996 (1) TO 1995
---------------- --------
<S> <C> <C>
Collections growth...... 2.42% 2.76%
Operating expense
decrease, as adjusted.. -2.43% -0.97%
Net operating income
growth, as adjusted.... 5.72% 4.88%
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
FIRST QUARTER
1997 1996
------------- ------
<S> <C> <C>
Average physical occupancy....................... 94.36% 95.32%
Property operating expense ratio................. 40.05% 39.68%
Average rental rate per unit..................... $ 711(2) $ 719(2)
Recurring capital expenditures per unit.......... $ 38 $ 209
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER OF 1997 COMPARED TO FIRST QUARTER OF
1996
-----------------------------------------------------
COLLECTIONS
GROWTH TOTAL
AVERAGE AVERAGE (1997 SAME ATLANTIC
PHYSICAL PHYSICAL COMPARED TO STORE PORTFOLIO
OCCUPANCY OCCUPANCY 1996) COMMUNITIES % BY
1997 1996 (1) % BY MARKET MARKET
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North
Carolina............. 92.69% 96.36% (2.85)% 2.27% 5.72%
Greenville, South
Carolina(3).......... -- -- -- -- 0.85
Memphis, Tennessee.... 91.84 93.40 (4.27) 2.58 3.28
Nashville, Tennessee.. 94.42 94.70 0.31 5.09 4.48
Raleigh, North
Carolina............. 95.32 94.40 2.46 2.37 7.88
Richmond, Virginia.... 95.12 97.28 2.53 4.39 5.86
Washington, D.C....... 95.51 92.84 4.90 6.83 10.13
----- ----- ------ ------ ------
Total Mid-Atlantic.. 94.27% 94.69% 1.29% 23.53% 38.20%
----- ----- ------ ------ ------
SOUTH ATLANTIC:
Atlanta, Georgia...... 93.20% 93.91% 2.87% 40.78% 28.99%
Birmingham, Alabama... 93.22 92.31 (1.28) 5.77 5.54
Ft. Lauderdale/West
Palm Beach, Florida.. 95.86 95.35 2.49 9.70 10.66
Jacksonville, Florida. 92.20 98.44 (3.96) 1.81 6.14
Orlando, Florida...... 95.91 95.65 4.64 6.16 3.21
Tampa/Ft.
Myers/Sarasota,
Florida.............. 96.55 95.86 4.25 12.25 7.26
----- ----- ------ ------ ------
Total South
Atlantic........... 94.38% 94.62% 2.75% 76.47% 61.80%
----- ----- ------ ------ ------
Totals............ 94.36% 94.63% 2.42% 100.00% 100.00%
===== ===== ====== ====== ======
</TABLE>
- --------
(1) Compares the three-month period ended March 31, 1997 to the same period in
1996.
(2) ATLANTIC experienced rental rate increases in each multifamily product type
in its portfolio during the first quarter of 1997. However, ATLANTIC's 50
same store communities during this period had a higher percentage of
moderate income communities than the 34 same store communities in 1996.
Since moderate income communities have lower rental rates than middle
income and upper middle income communities, the overall same store
portfolio average rental rate per unit declined from $719 to $711.
(3) ATLANTIC entered this market subsequent to January 1, 1996; therefore,
there are no communities for the same store comparison.
75
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
-----------------------------------------------------
AVERAGE AVERAGE ANNUAL TOTAL
ANNUAL ANNUAL COLLECTIONS ATLANTIC
PHYSICAL PHYSICAL GROWTH SAME STORE PORTFOLIO
OCCUPANCY OCCUPANCY (1996 OVERCOMMUNITIES % BY
1996 1995 1995)(1) % BY MARKET MARKET
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North
Carolina............. 95.92% 95.96% 4.54% 3.09% 6.08%
Greenville, South
Carolina(2).......... -- -- -- -- 0.88
Memphis, Tennessee(2). -- -- -- -- 3.33
Nashville, Tennessee.. 94.62 95.68 1.10 3.66 4.65
Raleigh, North
Carolina............. 95.72 94.64 (0.94) 3.22 8.16
Richmond, Virginia.... 94.71 96.17 2.90 3.93 6.10
Washington, D.C....... 94.62 94.38 0.37 6.18 10.46
----- ----- ----- ------ ------
Total Mid-Atlantic.. 95.02% 95.32% 1.42% 20.08% 39.66%
----- ----- ----- ------ ------
SOUTH ATLANTIC:
Atlanta, Georgia...... 95.77% 96.31% 4.36% 42.21% 28.22%
Birmingham, Alabama... 92.25 95.40 (3.06) 4.03 5.75
Ft. Lauderdale/West
Palm Beach, Florida.. 94.72 95.00 0.15 11.35 9.29
Jacksonville, Florida. 97.04 96.25 5.12 2.46 6.35
Orlando, Florida...... 95.06 95.05 3.64 6.72 3.29
Tampa/Ft.
Myers/Sarasota,
Florida.............. 95.78 95.24 3.21 13.15 7.44
----- ----- ----- ------ ------
Total South
Atlantic........... 95.39% 95.72% 3.06% 79.92% 60.34%
----- ----- ----- ------ ------
Totals............ 95.32% 95.65% 2.76% 100.00% 100.00%
===== ===== ===== ====== ======
</TABLE>
- --------
(1) Compares the year ended December 31, 1996 to the year ended December 31,
1995.
(2) ATLANTIC entered this market subsequent to January 1, 1995; therefore,
there are no communities for the same store comparison.
At January 1, 1994, ATLANTIC's portfolio consisted of only three pre-
stabilized operating communities and, consequently, comparisons for fully
operational communities between 1995 and 1994 are not meaningful.
Development Dilution
ATLANTIC's development activity is dilutive to net earnings and funds from
operations in the short term, but is expected to add significantly to
ATLANTIC's long-term performance as the developments reach stabilization in
1997 and subsequent years.
During the construction period, the reduction to interest expense resulting
from the capitalization of interest on units under construction is less than
the operating income which could be earned on those expenditures if the
community were complete and earning a stabilized return, thus resulting in
dilution. Essentially, the return on investment during the construction period
is equivalent to ATLANTIC's cost of funds.
The lease-up phase commences when units are placed in service. During the
lease-up phase, ATLANTIC's policy is to expense operating expenses (including
pre-opening marketing expenses) and interest expense which during the
construction period is capitalized. The operating expenses and the interest
expense on such completed units will typically exceed rental revenues, due to
less than break-even occupancy, thus resulting in dilution in the form of a
"lease-up" deficit. These deficits are typically experienced for a period of
two to four months after "first units" are placed in service.
76
<PAGE>
Development dilution begins to decline once occupancy increases and revenues
from completed units exceed the operating expenses and interest expense
associated with such completed units. However, the net operating income
generated during this pre-stabilized period is less than the net operating
income which would be earned if the community were stabilized. The time
required to achieve stabilization generally ranges from six to twelve months
after completion of construction.
Homestead Convertible Mortgages Interest Income
ATLANTIC began funding the Homestead convertible mortgages in 1997. At March
31, 1997 ATLANTIC had funded $20.0 million of its total funding commitment to
Homestead of $111.1 million. For the three-month period ended March 31, 1997
ATLANTIC recognized interest income related to these mortgages of $185,000.
The interest income will increase as ATLANTIC funds the remaining Homestead
Convertible Mortgages in 1997 and early 1998.
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9% per annum, (ii) the
amortization of the original issue premium which reduces income, (iii) the
amortization of the discount on the conversion feature which increases income,
and (iv) the amortization of the deferred commitment fee which increases
income. ATLANTIC uses the effective interest method to calculate the
amortization of all items associated with the Homestead Convertible Mortgages.
The effective interest rate on the funded amount is 8.46% per annum for
purposes of calculating net earnings. The amortization of the discount on the
conversion feature and the amortization of the deferred commitment fee are
deducted from net earnings in calculating funds from operations. The effective
interest rate on the funded amount is 7.09% per annum for purposes of
calculating funds from operations.
Interest Expense
The following summarizes ATLANTIC's interest expense (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIODS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------
1997 1996 1996 1995 1994
------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Mortgage..................... $ 2,650 $ 2,041 $ 9,484 $ 7,662 $3,363
Line of credit............... 4,664 4,337 16,947 15,784 6,670
Capitalized interest......... (2,553) (2,036) (10,250) (4,404) (793)
------- ------- -------- ------- ------
Total interest expense... $ 4,761 $ 4,342 $ 16,181 $19,042 $9,240
======= ======= ======== ======= ======
</TABLE>
Mortgage interest expense increased $0.6 million in the three-month period
ended March 31, 1997 as compared to the same period in 1996. Mortgage interest
expense increased $1.8 million in 1996 as compared to 1995 and $4.3 million in
1995 as compared to 1994. These increases are the result of additional
weighted-average mortgage debt outstanding.
Line of credit interest expense increased $0.3 million in the three-month
period ended March 31, 1997 over the same period in 1996. This increase is
primarily a function of an increase in the average outstanding balance ($260.9
million in 1997 as compared to $203.3 million in 1996), partially offset by a
lower weighted-average daily interest rate (7.10% in 1997 as compared to 7.61%
in 1996). The increase is further offset by a decrease in amortization of debt
issuance costs and other loan-related costs as a result of the write-off of
loan-related costs in the fourth quarter of 1996. Line of credit interest
expense increased $1.2 million in 1996 over 1995 and $9.1 million in 1995 over
1994. The increase in 1996 is primarily a function of an increase in the
average outstanding balance ($204.3 million in 1996 as compared to $178.3
million in 1995) partially offset by a lower weighted-average daily interest
rate (7.39% in 1996 as compared to 7.92% in 1995). The increase in 1995 is
primarily a function of an increase in the average outstanding balance ($178.3
million in 1995 as compared to $65.6 million in 1994) and a higher weighted-
average daily interest rate (7.92% in 1995 as compared to 7.34% in 1994). The
increases were also affected by amortization of issuance costs and other loan-
related costs.
77
<PAGE>
The increase in interest expense in the three-month period ended March 31,
1997 over the same period in 1996 was offset by increases in capitalized
interest of $0.5 million. The increases in interest expense in 1996 and 1995
were offset by increases in capitalized interest of $5.8 million in 1996 over
1995 and $3.6 million in 1995 over 1994. These increases in capitalized
interest are the result of ATLANTIC's increased development activity.
REIT Management Fee Paid to Affiliate
The REIT management fee paid by ATLANTIC increased by $0.9 million in the
three-month period ended March 31, 1997 as compared to the same period in
1996. The REIT management fee paid by ATLANTIC increased by $3.5 million in
1996 over 1995 and $3.2 million in 1995 over 1994. Because the REIT management
fee fluctuates with the level of ATLANTIC's cash flow calculated before the
REIT management fee, these increases are expected based upon the larger
increases in revenues than expenses experienced by ATLANTIC. In the future,
interest income recognized on the convertible mortgage notes received by
ATLANTIC pursuant to the funding commitment agreement entered into as part of
the Homestead transaction will not be included in the calculation of the REIT
management fee to be paid by ATLANTIC. Because this interest income is not
included in cash flow for purposes of calculating the REIT management fee, the
REIT Management fee calculated as a percentage of ATLANTIC's funds from
operations will decline as the convertible mortgage notes are funded and the
related interest income increases. The REIT management fee is described more
thoroughly below under "--Liquidity and Capital Resources--REIT Management
Agreement."
If the Transaction is approved, the REIT Management Agreement will be
terminated.
Gains on Dispositions and Valuation of Long-Lived Investments
ATLANTIC's strategy is to build its asset base through the development and
acquisition of multifamily communities that will provide long-term growth in
cash flow. ATLANTIC's real estate investments have been made with a view to
effective long-term operation and ownership. ATLANTIC's "asset optimization
strategy" is based on market research and is aimed at optimizing its portfolio
composition. Under this strategy, ATLANTIC may from time to time dispose of
assets that no longer meet its long-term investment objectives and redeploy
the proceeds therefrom, preferably through tax-deferred exchanges, into assets
with better prospects for growth. As a result of this asset optimization
strategy, ATLANTIC disposed of four operating communities aggregating 1,184
units in 1996. A gain was recognized on each disposition with the total gain
aggregating $6.7 million on total proceeds of $67.2 million.
The four communities that were disposed of in 1996 accounted for $3.6
million and $5.2 million of net operating income during 1996 and 1995,
respectively. Each disposition was included in a tax-deferred exchange. At
December 31, 1996, ATLANTIC held a portion of the proceeds from one of these
dispositions aggregating $1.7 million in an interest-bearing escrow account.
These funds were used in the acquisition of a land parcel in January 1997,
completing the tax-deferred exchange. Two communities that ATLANTIC disposed
of in 1995 accounted for $2.4 million of net operating income during 1995.
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 ATLANTIC 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. ATLANTIC did not recognize any losses on the date it adopted
SFAS No. 121.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
March 31, 1997, such investments are carried at cost, which is not in excess
78
<PAGE>
of fair market value and no provisions for possible losses have been made.
ATLANTIC recognized a provision for possible loss of $0.2 million in the
three-month period ended March 31, 1997 and $2.5 million in 1996 associated
with a community that was being held for sale. ATLANTIC disposed of this
community in April 1997. The sales price approximated ATLANTIC's carrying
value at March 31, 1997. This community accounted for $0.2 million of net
operating income for each of the three-month periods ended March 31, 1997 and
1996. This community accounted for $1.0 million, $1.0 million and $0.5 million
of net operating income for 1996, 1995 and 1994, respectively. This income is
included in ATLANTIC's earnings from operations in those years.
Homestead Transaction
As more fully described under "--Liquidity and Capital Resources--Homestead
Transaction," ATLANTIC sold its Homestead Village properties (one operating
property and 25 properties under construction or in planning (or the rights to
acquire such properties)) and paid $16.6 million in cash to Homestead on
October 17, 1996 in exchange for 4,201,220 shares of Homestead common stock.
ATLANTIC recognized a gain on the transaction of $2.8 million, net of expenses
of $1.3 million. The Homestead transaction was treated as a sale for financial
accounting purposes, but was treated as a contribution for tax purposes.
Extraordinary Item--Loss on Early Extinguishment of Debt
In December 1996, ATLANTIC replaced its existing secured line of credit with
an unsecured line of credit. Such early extinguishment of debt resulted in the
write-off of unamortized loan costs of $3.9 million and is reflected as an
extraordinary item in the statement of earnings for the year ended December
31, 1996.
ENVIRONMENTAL MATTERS
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each community prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
communities that is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
ATLANTIC considers its liquidity and ability to generate cash from
operations and financings to be adequate and expects it to continue to be
adequate to meet ATLANTIC's development, acquisition, operating, debt service,
Homestead commitment and shareholder distribution requirements.
Investing and Financing Activities
Overview. ATLANTIC's investment activities, which consisted primarily of
acquiring and developing multifamily communities, used approximately $69.4
million and $41.5 million of cash during the first three months of 1997 and
1996, respectively. ATLANTIC's investment activities used approximately $287.4
million, $235.1 million and $390.1 million of cash for 1996, 1995 and 1994,
respectively.
ATLANTIC's financing activities provided net cash flow of $52.1 million and
$29.2 million for the first three months of 1997 and 1996, respectively.
ATLANTIC's financing activities provided net cash flow of $230.9 million,
$195.6 million and $372.6 million for 1996, 1995 and 1994, respectively. No
equity offerings were conducted in the three-month period ended March 31,
1997. Proceeds of $0.4 million were received in the three-month period ended
March 31, 1996. Combined proceeds from equity offerings of $229.1 million in
1996, $205.8 million in 1995 (net of Common Share repurchases) and $239.7
million in 1994 were the primary source of financing funds. Proceeds from line
of credit borrowings, net of repayments, were $67.3 million and $36.0
79
<PAGE>
million for the first three months of 1997 and 1996, respectively, and such
proceeds were $38.0 million in 1996, $37.0 million in 1995 and $153.0 million
in 1994.
1994 Investing and Financing Activities. ATLANTIC's investment strategy in
1994 focused on two components: the acquisition of a substantial base of
existing operating communities to provide operating cash flow and the creation
of an internal development process. During 1994, ATLANTIC acquired 40
operating communities, 31 of which were obtained in two large portfolio
acquisitions. These 40 communities, located in 14 metropolitan areas, added
11,307 units to the portfolio for a total of 11,990 operating units. See the
table of investment activity under "--Overview" above.
ATLANTIC's investment in real estate during 1994 of approximately $600.3
million was financed through a combination of debt and equity. As partial
payment for one of the portfolio acquisitions, ATLANTIC issued $100.0 million
in Common Shares to the seller of the portfolio and subsequently repurchased
certain of these Common Shares with proceeds from later equity offerings.
Sales of Common Shares through a private placement raised an additional $239.7
million. Existing debt of $107.5 million associated with certain of the
communities acquired was assumed by ATLANTIC. Additionally, ATLANTIC had net
borrowings on its line of credit during 1994 of $153.0 million.
1995 Investing and Financing Activities. In 1995, ATLANTIC acquired existing
communities aggregating 3,961 units and disposed of two communities
aggregating 596 units. Also in 1995, ATLANTIC began construction on 2,214
multifamily units. In the fourth quarter ATLANTIC completed construction on
its first two internally developed multifamily communities, a 270-unit
property in Charlotte, North Carolina and a 198-unit property in Birmingham,
Alabama. See the table of investment activity under "--Overview" above.
During 1995, ATLANTIC's net additional investment in real estate was $257.7
million bringing its total real estate investment at December 31, 1995 to
$888.9 million. Sales of Common Shares generated the largest source of capital
in 1995. ATLANTIC sold $205.8 million of Common Shares, net of Common Share
repurchases, through two private placements. In connection with the
acquisition of certain communities in 1995, ATLANTIC assumed $24.7 million in
existing debt. Additional borrowings on its line of credit during 1995
aggregated $37.0 million.
1996 Investing and Financing Activities. In 1996, ATLANTIC acquired
operating communities aggregating 3,556 units and disposed of four communities
aggregating 1,184 units. Also in 1996, ATLANTIC began construction on 2,815
multifamily units. In 1996, ATLANTIC completed construction on three
internally developed multifamily communities (1,046 units), bringing the total
of completed internally developed multifamily communities to five (1,514
units). See the table of investment activity under "--Overview" above.
During 1996, ATLANTIC's net additional investment in real estate was $268.3
million bringing its total real estate investment at December 31, 1996 to
$1.16 billion. Sales of Common Shares generated the largest source of capital
in 1996.
In 1996, ATLANTIC raised net proceeds of $119.1 million from a private
placement of Common Shares. The private placement, which began in 1995, raised
a total of $249.3 million, net of commissions and other expenses.
ATLANTIC's initial public offering of Common Shares was completed on October
18, 1996. The proceeds from the sale, net of the underwriters' commissions and
other expenses, were $110.0 million.
In connection with the acquisition of certain communities in 1996, ATLANTIC
assumed $17.9 million in existing debt. Additional borrowings on the line of
credit during 1996 aggregated $38.0 million.
First Quarter 1997 Investing and Financing Activities.
ATLANTIC's investment activities during the three-month period ended March
31, 1997, which consisted primarily of acquiring and developing multifamily
communities, used $69.4 million of cash, an increase of $27.8 million over the
three-month period ended March 31, 1996.
80
<PAGE>
ATLANTIC began construction on 668 multifamily units during the three-month
period ended March 31, 1997. ATLANTIC's net additional investment in real
estate at March 31, 1997 was $51.0 million bringing its total real estate
investment at cost to $1.21 billion. During the three-month period ended March
31, 1997, ATLANTIC funded $20.0 million under its funding commitment agreement
with Homestead.
ATLANTIC's financing activities provided net cash flow of $52.1 million for
the three-month period ended March 31, 1997 and $29.2 million for the three-
month period ended March 31, 1996. In 1997, ATLANTIC's financing activities
consisted primarily of borrowings on its line of credit of $67.3 million, net
of repayments. In 1996, borrowings on the line of credit of $36.0 million net
of repayments were the primary source of financing funds.
ATLANTIC completed an underwritten public offering of 4,000,000 Shares on
April 10, 1997 which generated $80.5 million of proceeds, net of commissions
and offering expenses and closed on the overallotment option on May 14, 1997,
raising additional net proceeds of $1.5 million from the sale of 77,200
Shares.
Homestead Transaction. On October 17, 1996, ATLANTIC sold its moderate-
priced, purpose-built, extended-stay lodging facilities known as Homestead
Village properties to Homestead. In the transaction, ATLANTIC sold one
operating property and 25 properties under construction or in planning (or the
rights to acquire such properties) and paid $16.6 million in cash (the
"Homestead Assets"). In addition, ATLANTIC entered into a funding commitment
agreement to provide secured financing of up to $111.1 million to Homestead
for purposes of completing the development and construction of the properties
sold in the transaction. The Homestead transaction was treated as a sale for
financial accounting purposes, but was treated as a contribution for tax
purposes.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the Homestead Assets and 2,818,517
warrants, each to purchase one share of Homestead common stock at $10.00 per
share, in exchange for entering into the funding commitment agreement. On
November 12, 1996, ATLANTIC distributed the Homestead common stock and
warrants to its shareholders of record on October 29, 1996. ATLANTIC
shareholders received 0.110875 shares of Homestead common stock and 0.074384
Homestead warrants per Share. ATLANTIC will receive up to $98.0 million of
convertible mortgage notes from Homestead in exchange for funding up to $111.1
million under the funding commitment agreement. The difference between the
amounts funded and the convertible mortgage notes received of $13.1 million
(assuming full funding of the funding commitment) represents a mortgage note
premium that will be amortized as a reduction to interest income over the term
of the convertible mortgage notes.
ATLANTIC realized a gain of $2.8 million, after deducting expenses
associated with the transaction, representing the excess of the value of the
Homestead common stock received over the recorded basis of the Homestead
Assets. The Homestead warrants received represent a funding commitment fee
which has been valued at $6.5 million. The conversion feature of the
convertible mortgage notes has been valued at $6.9 million (assuming full
funding of the funding commitment). These deferred credits will be amortized
as an increase to interest income over the term of the convertible mortgage
notes. ATLANTIC intends to fund this commitment through cash on hand,
borrowings on its line of credit and sales of securities.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible commencing March 31, 1997 at the option of the holder into
one share of Homestead common stock for every $11.50 of principal amount
outstanding. Upon full funding of ATLANTIC's convertible mortgage notes, its
conversion rights would represent a 15.35% ownership in Homestead (assuming no
further equity offerings by Homestead, conversion of all convertible mortgage
notes and exercise of all outstanding warrants). The effective yield on the
convertible mortgage notes, assuming conversion of all convertible mortgage
notes and exercise of all outstanding warrants, is estimated to be
approximately 8.46%, after giving effect to the mortgage note premium, the
funding commitment fee and the conversion value of the convertible mortgage
notes. At December 31, 1996, no funds had been advanced pursuant to the
funding commitment agreement and there were no convertible mortgage notes
outstanding.
81
<PAGE>
ATLANTIC advanced $52.0 million under the funding commitment agreement through
June 30, 1997 and $45.9 million of mortgage notes was outstanding on such
date.
ATLANTIC will deduct from net earnings the accretion of both the funding
commitment fee and the conversion value of the convertible mortgage notes in
calculating funds from operations. Therefore, the effective yield on the
convertible mortgage notes for purposes of calculating funds from operations
will be approximately 7.09% as compared to 8.46% for purposes of calculating
net earnings.
Line of Credit. ATLANTIC obtained a $200 million secured line of credit from
Morgan Guaranty Trust Company of New York ("MGT"), as agent for a group of
lenders, in June 1994. In June 1996, the line of credit was increased to $350
million. On December 18, 1996, ATLANTIC obtained a $350 million unsecured line
of credit agreement from MGT that replaced the previous secured line of
credit. Borrowings on the unsecured line of credit bear interest at prime or,
at ATLANTIC's option, LIBOR plus a margin ranging from 1.0% to 1.375% (1.375%
through July 2, 1997 and 1.125% thereafter 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 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 MGT and the other participating lenders. The
line of credit agreement contains cross-default provisions with respect to
defaults relating to up to in excess of $25.0 million of ATLANTIC's
outstanding debt.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit, effectively mitigating a portion of its variable interest rate
exposure. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed interest rate of 7.46% on the $100 million of
borrowings through December 17, 1996 and 7.335% thereafter. A swap agreement
with MGT took effect upon the expiration of the prior swap agreement on
February 5, 1997 and provides for an interest rate on $100 million of
borrowings of 7.325% through July 2, 1997 and 7.075% thereafter through
February 5, 1998. ATLANTIC paid $0.1 million and $0.3 million more in interest
than it received under the swap agreement during the three-month period ended
March 31, 1997 and the year ended December 31, 1996, respectively. 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.
All debt incurrences under the line of credit are subject to certain
covenants as more fully described in the loan agreement. Specifically,
distributions for the preceding four quarters, excluding the Homestead
Distribution, may not exceed 95% (97% for distributions made before December
31, 1996) of ATLANTIC's funds from operations (as defined in the credit
agreement) for the preceding four quarters. ATLANTIC is in compliance with all
such covenants.
As of June 30, 1997, $278.8 million of borrowings were outstanding under the
line of credit.
Mortgage Debt. At March 31, 1997, ATLANTIC had approximately $155.4 million
of mortgages payable consisting of approximately $34.0 million of fixed rate
conventional mortgage debt and approximately $121.4 million of mortgages that
secure ten tax-exempt bond issues. This long-term mortgage debt, which is
substantially fully amortizing, has a weighted-average interest rate of 6.97%,
and maturity dates ranging from September 1998 to March 2029, with an average
maturity of 24.2 years. This long-term mortgage debt provides ATLANTIC with
favorable and conservative financial leverage on its investment in communities
associated with such debt.
Nine of ATLANTIC's ten tax-exempt bond issues have variable interest rates.
All of the tax-exempt bond issues are included in a credit enhancement
agreement with FNMA. Under the agreement with FNMA, ATLANTIC makes monthly
principal payments, based upon a 30-year amortization, into a principal
reserve
82
<PAGE>
account. To mitigate the variable interest rate exposure associated with these
bond issues, ATLANTIC has entered into swap agreements. Under these swap
agreements, ATLANTIC pays and receives interest on the aggregate principal
amount of the underlying bonds outstanding, net of the amount held in the
principal reserve account. These swap agreements effectively result in
ATLANTIC paying interest at a fixed rate of 6.63% on these nine tax-exempt
bond issues.
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 mil-
lion June 1995 to June 2002 6.48% General Re Financial Products Corporation
64.6 mil-
lion June 1995 to June 2005 6.74 Morgan Guaranty Trust Company of New York
5.0 mil-
lion March 1996 to March 2006 6.21 Morgan Guaranty Trust Company of New York
15.5 mil-
lion August 1996 to August 2006 6.50 Morgan Stanley Derivative Products Inc.
----
Weighted-average interest rate 6.63%
====
</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.
To the extent the deposits in the principal reserve account with FNMA have
not been used to redeem any of the outstanding bonds, ATLANTIC pays interest
at the variable rates as provided by the mortgage agreements on that portion
of bonds outstanding which is equivalent to the balance in the principal
reserve fund ($1.4 million at March 31, 1997).
The credit enhancement agreement with FNMA is effectively cross-
collateralized with respect to the $207.5 million of communities pledged under
the agreement at March 31, 1997.
ATLANTIC's mortgages payable generally contain covenants common to this type
of borrowing. ATLANTIC was in compliance with all such covenants at March 31,
1997.
Scheduled Debt Maturities
As of March 31, 1997, approximate principal payments due during each of the
years in the five-year period ending December 31, 2001 and thereafter are as
follows (in thousands):
<TABLE>
<CAPTION>
MORTGAGES LINE OF
PAYABLE CREDIT TOTAL
--------- -------- --------
<S> <C> <C> <C>
1997.......................................... $ 1,165 $ -- $ 1,165
1998.......................................... 7,136 295,250 302,386
1999.......................................... 1,577 -- 1,577
2000.......................................... 3,554 -- 3,554
2001.......................................... 1,812 -- 1,812
Thereafter.................................... 140,174 -- 140,174
-------- -------- --------
$155,418 $295,250 $450,668
======== ======== ========
</TABLE>
ATLANTIC has balloon payments of $5,539,000 and $5,556,000 due in 2002 and
2003, respectively.
Commitments
At June 30, 1997, ATLANTIC had 5,487 units under construction with a total
budgeted development cost of $347.2 million of which $96.7 million was
unfunded. In addition, ATLANTIC owned multifamily developments in planning at
June 30, 1997 aggregating 1,480 units located in various target market cities
with a total budgeted development cost of $99.0 million. ATLANTIC's
multifamily developments under control at June
83
<PAGE>
30, 1997 aggregated 3,406 units with a total budgeted development cost of
$222.8 million. The foregoing developments are subject to a number of
conditions and ATLANTIC cannot predict with certainty that any of them will be
consummated.
At June 30, 1997, ATLANTIC had $5.4 million of budgeted capital expenditures
(major renovations, replacements or improvements with a substantial expected
economic life) for the remainder of 1997. At June 30, 1997, ATLANTIC had $59.1
million remaining to be funded under its funding commitment agreement with
Homestead.
ATLANTIC expects to finance construction, development and acquisition of
multifamily communities primarily with cash on hand, borrowings under its line
of credit and cash from future securities offerings. At June 30, 1997,
ATLANTIC had $278.8 million outstanding on its $350 million unsecured line of
credit. After it has achieved a substantial equity base, ATLANTIC intends to
arrange fully amortizing, fixed rate, 15-year to 25-year unsecured debt to
finance additional acquisitions and developments. ATLANTIC believes that its
current conservative ratio of long-term debt to total long-term undepreciated
book capitalization (which was 16.9% at March 31, 1997 on an historical basis
and 25.5% on a pro forma basis) provides considerable flexibility to prudently
increase its capital base by utilizing long-term debt as a financing tool in
the future. Long-term undepreciated book capitalization is defined as the sum
of long-term debt and shareholders' equity after adding back accumulated
depreciation.
Distributions
ATLANTIC's current distribution policy is to pay quarterly cash
distributions to shareholders based upon what it considers to be a reasonable
percentage of cash flow. Because depreciation is a non-cash expense, cash flow
typically will be greater than earnings from operations and net earnings.
Therefore, quarterly cash distributions will be higher than quarterly
earnings, resulting in a reduction to shareholders' equity.
Cash distributions paid on Common Shares in the three-month period ended
March 31, 1997 and the years ended December 31, 1996, 1995 and 1994 were $0.39
per Common Share, $1.65 per Common Share, $1.60 per Common Share and $1.20 per
Common Share, respectively. Additionally in 1996, ATLANTIC made the Homestead
Distribution, which was valued at $58.2 million.
ATLANTIC paid a quarterly cash distribution of $0.42 per Common Share in
each of the first three quarters of 1996. On November 12, 1996, the Homestead
Distribution was made to shareholders of record on October 29, 1996. On
December 16, 1996, in light of the Homestead transaction and ATLANTIC's
initial public offering, ATLANTIC paid a reduced fourth quarter cash
distribution of $0.39 per Common Share to shareholders of record on December
2, 1996.
ATLANTIC announces the following year's projected annual distribution level
after the Board of Directors' annual budget review and approval in December of
each year. At its December 19, 1996 meeting, the Board of Directors announced
a projected annual distribution level of $1.56 per Common Share for 1997 and
declared a distribution of $0.39 per Common Share for the first quarter of
1997, which was paid on February 19, 1997. On April 22, 1997, the Board of
Directors declared a distribution of $0.39 per Common Share which was paid on
May 27, 1997. On July 21, 1997, the Board of Directors declared a distribution
of $0.39 per Common Share for the third quarter of 1997 payable on August 26,
1997 to holders of record of Common Shares on August 12, 1997. The payment of
distributions is subject to the discretion of the Board of Directors and is
dependent upon the financial condition and operating results of ATLANTIC.
Funds from Operations
Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) from real estate
transactions, provisions for possible losses, extraordinary items and real
estate depreciation. On January 1, 1996, ATLANTIC adopted NAREIT's revised
definition of funds from operations. Under this more conservative definition,
loan cost amortization is not added back to net earnings in determining funds
from operations. For comparability, funds from operations for the periods
prior to January 1, 1996 give effect to the revised definition.
84
<PAGE>
In 1996, ATLANTIC sold its Homestead Assets to Homestead, as more fully
described above under "--Homestead Transaction." Management believes that
funds from operations for 1996 and 1995 should be adjusted to reflect the
effects of the Homestead transaction on results of operations in order to be
comparable. Accordingly, the table below also presents pro forma funds from
operations, which have been calculated as if the Homestead transaction had
occurred on January 1, 1995. ATLANTIC did not own any Homestead properties in
1994 and, therefore, 1994 funds from operations have not been adjusted.
Management believes that the pro forma funds from operations information
presented below provides a more meaningful comparison of 1996 and 1995;
however, the pro forma funds from operations information is unaudited, does
not give effect to or adjust for any other events (such as subsequent
acquisitions and dispositions of communities or subsequent sales of Common
Shares), and is not necessarily indicative of what actual funds from
operations would have been if the Homestead transaction had occurred on
January 1, 1995.
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net earnings................. $ 10,178 $ 6,650 $ 38,629 $ 19,639 $ 9,926
Add (Deduct):
Depreciation............... 6,132 4,804 20,824 15,925 8,770
Gain on disposition of real
estate.................... -- -- (6,732) -- --
Gain on sale of Homestead
Assets.................... -- -- (2,839) -- --
Provision for possible loss
on investments............ 200 -- 2,500 -- --
Amortization of discount on
conversion feature and
deferred commitment fee
related to the Homestead
Convertible Mortgages..... (20) -- -- -- --
Extraordinary item-loss on
early extinguishment of
debt...................... -- -- 3,940 -- --
-------- -------- -------- -------- --------
Funds from operations........ 16,490 11,454 56,322 35,564 18,696
-------- -------- -------- -------- --------
Add (deduct) pro forma
adjustments relating to the
sale of Homestead:
Reduction in rental
income(1)................. -- -- (424) -- --
Reduction in rental
expenses(1)............... -- -- 173 -- --
Increase in interest
expense(2)................ -- (850) (2,739) (3,448) --
Other, net................. -- 12 34 59 --
REIT Management fee
effect(3)................. -- 134 475 542 --
-------- -------- -------- -------- --------
Total pro forma
adjustments............. -- (704) (2,481) (2,847) --
-------- -------- -------- -------- --------
Pro forma funds from
operations.................. 16,490 10,750 53,841 32,717 18,696
Cash distributions paid...... (14,778) (11,667) (53,064) (35,119) (14,648)
-------- -------- -------- -------- --------
Excess (deficit) of pro forma
funds from operations over
cash distributions.......... $ 1,712 $ (917) $ 777 $ (2,402) $ 4,048
======== ======== ======== ======== ========
Weighted-average Shares
outstanding (as adjusted for
reverse Share split)........ 37,892 27,777 32,028 21,944 12,227
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Represents the reduction in rental income and rental expenses that would
have occurred had the Homestead property that commenced operations in 1996
been sold as of January 1, 1995.
(2) Represents the increase in interest expense due to (i) the reduction in
capitalized interest that would have resulted from the sale of the
Homestead Village properties under development and (ii) the increased
borrowings necessary to fund the cash payment to Homestead upon closing of
the Homestead transaction, as if these two items had occurred on January
1, 1995.
(3) Represents the decrease in REIT management fee that would have resulted
from the pro forma adjustments.
85
<PAGE>
Funds from operations represents net earnings computed in accordance with
GAAP, excluding gains (or losses) from real estate transactions, provisions
for possible losses, extraordinary items and real estate depreciation. Funds
from operations should not be considered as an alternative to net earnings or
any other GAAP measurement of performance as an indicator of ATLANTIC's
operating performance or as an alternative to cash flows from operating,
investing or financing activities as a measure of liquidity. ATLANTIC believes
that funds from operations is helpful to a reader as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides a
reader with an indication of the ability of ATLANTIC to incur and service
debt, to make capital expenditures and to fund other cash needs. Furthermore,
management believes that an understanding of funds from operations will
enhance the reader's comprehension of the impact of the Merger on ATLANTIC
which was a specific consideration of the Special Committee in recommending
approval of the Transaction to the Board of Directors. On January 1, 1996,
ATLANTIC adopted NAREIT's revised definition of funds from operations. Under
this more conservative definition, loan cost amortization is not added back to
net earnings in determining funds from operations. For comparability, funds
from operations for the periods prior to January 1, 1996 give effect to the
revised definition. The funds from operations measure presented by ATLANTIC,
while consistent with the NAREIT definition, will not be comparable to
similarly titled measures of other REITs which do not compute funds from
operations in a manner consistent with ATLANTIC. Funds from operations is not
intended to represent cash made available to shareholders. Cash distributions
paid to shareholders are presented in the table above.
REIT Management Agreement
Pursuant to the REIT Management Agreement, the REIT Manager provides
management services to ATLANTIC. All officers of ATLANTIC are employees of the
REIT Manager and ATLANTIC currently has no employees. The REIT Manager
provides both strategic and day-to-day management of ATLANTIC, including
research, investment analysis, acquisition, development, marketing,
disposition of assets, asset management, due diligence, capital markets, legal
and accounting services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent Directors of ATLANTIC (of which there were
none in the periods reported) and (iii) 33% of any interest paid by ATLANTIC
on convertible subordinated debentures (of which there were none in the
periods reported); and after deducting (i) regularly scheduled principal
payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which there were none in the periods reported) and
(iii) distributions actually paid with respect to any non-convertible
preferred stock (of which there were none in the periods reported). Cash flow
does not include (i) realized gains or losses from dispositions of
investments, (ii) interest income from cash equivalent investments and the
Homestead convertible mortgage notes and dividend and interest income from
Atlantic Development Services, (iii) provisions for possible losses on
investments and (iv) extraordinary items.
The REIT Manager also receives a fee of 0.20% per year on the average daily
balance of cash equivalent investments. The REIT management fee aggregated
$3.0 million for the three-month period ended March 31, 1997 and $10.4
million, $6.9 million and $3.7 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Total real estate operating, interest, general and administrative costs will
increase due to ATLANTIC's larger asset size, as well as unforeseen changes
that may occur. REIT management fees paid by ATLANTIC will increase if cash
flow of ATLANTIC, as defined in the REIT Management Agreement, increases,
including such increases that may relate to increases in ATLANTIC's assets.
ATLANTIC does not expect its other
86
<PAGE>
operating costs and expenses to increase except as a result of inflation,
market conditions or other factors over which the REIT Manager has no control.
Operating costs for particular items, however, may be increased if they are
expected to result in greater decreases in other expenses or increases in
revenues from ATLANTIC's assets.
ATLANTIC must reimburse the REIT Manager for third-party and out-of-pocket
expenses relating to travel, transaction costs and similar costs relating to
the acquisition, development or disposition of assets or the obtaining of
financing for ATLANTIC and its operations. The REIT Manager will pay all of
its own salary and other overhead expenses. ATLANTIC will not have any
employee expense; however, it will pay all of the third-party costs related to
its normal operations, including legal, accounting, travel, architectural,
engineering, shareholder relations, independent Director fees and similar
expenses, property management and similar fees paid on behalf of ATLANTIC, and
travel expenses incurred in seeking financing, community acquisitions,
community sales and similar activities on behalf of ATLANTIC and in attending
Board of Directors, committee and shareholder meetings. Under the REIT
Management Agreement, the REIT Manager or any of its affiliates are not
precluded from rendering services to other investors, including REITs, even if
such investors compete with ATLANTIC. The REIT Manager is owned by ATLANTIC's
largest shareholder and, consequently, the REIT Manager has no intention of
rendering services to investors who compete with ATLANTIC.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. Each of ATLANTIC and the REIT Manager may terminate the
REIT Management Agreement on 60 days' notice. Because of the year-to-year
nature of the agreement, its maximum effect on ATLANTIC's results of
operations cannot be predicted, other than that REIT Management fees will
generally increase or decrease in proportion to cash flow increases or
decreases.
If the Transaction is approved, the REIT Management Agreement and property
management agreement will be terminated. As a result, the employees of the
REIT Manager and Property Manager will become employees of ATLANTIC. Because
ATLANTIC, the REIT Manager and Property Manager are under common control, the
difference between the market value of the Common Shares issued to Security
Capital on the date the Merger is consummated and the approximately $1.1
million of net tangible assets of the REIT Manager and Property Manager being
acquired by ATLANTIC will be accounted for as a distribution to Security
Capital.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following policies are in effect for ATLANTIC and the REIT Manager.
These policies will continue in effect after the consummation of the
Transaction. To the extent these policies refer to the REIT Manager, they will
be changed to include ATLANTIC or eliminated, as appropriate.
The Board of Directors reserves the right to make exceptions to ATLANTIC's
policies described below for transactions when it believes that the
transaction is in the best long-term interests of ATLANTIC and its
shareholders. The Board of Directors may amend or revise ATLANTIC's policies
from time to time without a vote of the shareholders of ATLANTIC.
INVESTMENT POLICIES
Prospective community investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's
investment decisions are based upon the expected contribution of the community
to long-term cash flow growth on an unleveraged basis. The expected economic
contribution is based on an evaluation of a community's stabilized operations,
including an estimate of all cash revenues from leases and other revenue
sources, minus expenses incurred in operating the community (including real
estate taxes, insurance, maintenance, turnover costs (such as carpet and
appliance replacement), personnel costs and utility charges, but excluding
depreciation, debt service and amortization of loan costs) and a reserve for
capital expenditures.
87
<PAGE>
It is ATLANTIC's policy to generally limit its investments such that (i) no
more than 10% of its assets are invested in land held for development other
than land under development or where development is in planning, (ii) ATLANTIC
will not be treated as an investment company under the Investment Company Act
of 1940 and (iii) ATLANTIC will not invest in mortgage loans, other than
mortgage loans to third party owner/developers in connection with the
development of multifamily communities that are contractually required to be
sold to ATLANTIC upon completion or convertible mortgage loans to Homestead or
mortgage loans to entities in which ATLANTIC owns a substantial majority of
the economic interest and other than convertible mortgage loans where the
Board believes that such loans are in the best long-term interests of ATLANTIC
and its shareholders.
ATLANTIC's strategy includes the development of industry-leading, moderate
income multifamily communities designed for the largest renter groups. Long
term, ATLANTIC believes that development will contribute as much or more to
its earnings growth than acquisitions.
While the current policy of ATLANTIC is to make equity investments in
multifamily communities exclusively, ATLANTIC may invest in other real estate
interests consistent with its qualification as a REIT. A change in this policy
could occur, for example, if ATLANTIC concludes that it may benefit from the
cash flow or any appreciation in the value of the community arising through
convertible mortgage investment.
Subject to the gross income and asset tests necessary for REIT
qualification, ATLANTIC may also invest in securities of other entities
engaged in real estate activities or securities of other issuers. ATLANTIC
does not currently intend to invest in the securities of other issuers except
in connection with acquisitions of indirect interests in communities
(normally, general or limited partnership interests in special purpose
partnerships controlled by ATLANTIC and owning multifamily communities and
except for preferred stock of entities in which ATLANTIC has a substantial
majority of the economic interest).
FINANCING POLICIES
ATLANTIC does not intend to incur long-term, floating rate debt other than
in connection with property acquisitions in which the debt assumed is
impracticable to prepay or is tax-exempt debt. Because its assets are largely
long-term, ATLANTIC's debt is expected to be unsecured long-term, fixed rate,
fully amortizing debt, such as the Notes. ATLANTIC has an unsecured line of
credit for the purpose of facilitating investment in developments and
acquisitions as well as for working capital. ATLANTIC may also determine to
issue securities senior to the Common Shares, including preferred stock and
debt securities (either of which may be convertible into Common Shares or be
accompanied by warrants to purchase Common Shares), such as the Notes and the
Series A Preferred Shares. ATLANTIC'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 ATLANTIC may be used to pay distributions,
to provide working capital, to pay existing indebtedness or to finance
acquisitions, expansions or development of new multifamily communities.
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS
There are no provisions in the ATLANTIC Charter or Bylaws which either limit
transactions between ATLANTIC and its directors, the REIT Manager, or
affiliates thereof, or limit directors, the REIT Manager or affiliates thereof
from engaging for their own account in business activities of the type
conducted by ATLANTIC. However, ATLANTIC has adopted certain policies which
limit such transactions with or by such affiliated persons, as described
below.
ATLANTIC does not intend to engage in principal transactions with officers
and directors or to engage independent directors to provide services to
ATLANTIC. In addition, transactions with the REIT Manager and its affiliates
are significantly restricted and must be reviewed and approved by a majority
of independent directors. Transactions with the REIT Manager and the Property
Manager present a potential conflict of interest
88
<PAGE>
due to Security Capital's ownership of 51% of ATLANTIC's outstanding Common
Shares. In addition, future services provided pursuant to the Administrative
Services Agreement present a similar potential conflict of interest. See "The
Transaction--Administrative Services Agreement." ATLANTIC will not borrow from
or make loans to affiliates, other than mortgage loans to entities in which
ATLANTIC owns a substantial majority of the economic interest, convertible
mortgage loans to Homestead or convertible mortgage loans where the Board of
Directors believes that such loans are in the best long-term interests of
ATLANTIC and its shareholders. With a view to resolving potential conflicts of
interest and protecting the interests of ATLANTIC's shareholders against such
possible conflicts, the ATLANTIC Charter requires that a majority of the Board
of Directors be independent directors.
The REIT Manager has agreed in writing that it and Security Capital will not
engage in any principal transaction with ATLANTIC, including but not limited
to purchases, sales or leases of communities or borrowing or lending of funds,
except for transactions approved by a majority of the independent directors
not otherwise interested in such transaction as being fair and reasonable to
ATLANTIC and on terms and conditions not less favorable to ATLANTIC than those
available from unaffiliated third parties. The REIT Manager and ATLANTIC have
agreed to waive this prohibition as it relates to the Transaction. In addition
to the requirements described above, ATLANTIC will not engage in such
transactions unless the independent directors believe that any such
transaction is in the long-term best interests of ATLANTIC and its
shareholders. The sole activity of the REIT Manager is advising ATLANTIC.
Upon consummation of the Transaction, Security Capital will be restricted
from providing substantially the same services as those currently provided by
the REIT Manager and its Property Manager. See "The Transaction--Protection of
Business Agreement."
The REIT Management Agreement permits affiliates of the REIT Manager to
provide property management and other services to ATLANTIC for compensation.
The fees charged for such services must be comparable to fees that would be
charged by unaffiliated, qualified third parties. Any property management fees
are reviewed annually by the Board of Directors and must be approved by a
majority of the independent directors.
ATLANTIC does not intend to issue options or warrants to the REIT Manager or
its employees; however, in the event that the Transaction is approved,
ATLANTIC intends to adopt an employee incentive plan under which options may
be granted to employees, subject to Board of Directors and shareholder
approval. See "Long-Term Incentive Plan."
Under Maryland law (where ATLANTIC is incorporated), each director is
obligated to offer to ATLANTIC any opportunity (with certain limited
exceptions) which comes to him or her and which ATLANTIC could reasonably be
expected to have an interest in developing. In addition, under Maryland law, a
contract or other transaction between ATLANTIC and a director or between
ATLANTIC and another corporation or entity in which a director of ATLANTIC is
a director or has a material financial interest is not void or voidable solely
because of such interest or the presence of the director at the meeting at
which the contract or transaction is approved or the director's vote in favor
thereof, if (a) the contract or transaction is approved or ratified, after
disclosure of the common directorship or interest, by the affirmative vote of
a majority of disinterested directors, even if the disinterested directors
constitute less than a quorum, or by a majority of the votes cast by
disinterested stockholders or (b) the contract or transaction is fair and
reasonable to ATLANTIC.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
ATLANTIC may, but does not presently intend to, make investments other than
as previously described. All investments will be primarily related to
multifamily communities and the management and development thereof. The Board
of Directors has authority to reclassify unissued Common Shares into senior
securities, to offer Common Shares or other securities and, subject to certain
restrictions, to repurchase or otherwise reacquire Common Shares or any other
securities and may engage in such activities in the future. ATLANTIC's policy
is not to make loans to its officers or directors or to the REIT Manager;
however, in the event that the Transaction
89
<PAGE>
is approved, ATLANTIC may (i) adopt an employee incentive plan, under which
loans may be made to employees to purchase Common Shares, subject to Board of
Directors and shareholder approval, and (ii) make relocation and other loans
to employees, subject to Board of Directors approval. ATLANTIC may in the
future make loans to partnerships and joint ventures in which it participates
in order to meet working capital needs. ATLANTIC has not engaged in trading,
underwriting or agency distribution or sale of securities of other issuers and
does not intend to do so. ATLANTIC does not intend to engage in the purchase
or sale of investments (other than acquisition or disposition of communities
in accordance with the REIT rules and ATLANTIC's investment policies) and may
on a selected basis in the future offer securities in exchange for
communities. ATLANTIC intends to make annual and quarterly reports to
shareholders. The annual reports will contain audited financial statements.
At all times, ATLANTIC intends to make investments in such a manner as to be
consistent with the requirements of the Code for ATLANTIC to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board of Directors determines that it is no longer
in the best interests of ATLANTIC to qualify as a REIT.
PREFERRED SHARE AND NOTE OFFERINGS
In addition to the Concurrent Rights Offering, ATLANTIC has proposed to
offer the Series A Preferred Shares and Notes to the public, because the
proceeds from the Concurrent Rights Offering are not expected to be sufficient
to satisfy ATLANTIC's capital needs. The Concurrent Rights Offering is in no
way conditioned on or related to such other offerings nor is the Concurrent
Rights Offering conditioned upon the consummation of the Merger. The proceeds
from such other offerings will be used for the same purposes as the proceeds
from the Concurrent Rights Offering.
PREFERRED SHARE OFFERING
ATLANTIC may offer approximately $50 million (which may be increased or
decreased subject to market conditions) of its Series A Preferred Shares in
the Preferred Share Offering. Holders of the Series A Preferred Shares will be
entitled to receive cumulative preferential cash distributions at the rate
specified in the Articles Supplementary relating thereto. Such distributions
will accrue whether or not ATLANTIC has earnings, whether or not there are
funds legally available for the payment of such distributions and whether or
not such distributions are declared. ATLANTIC will be restricted from
declaring or paying distributions on, or redeeming, any securities ranking
junior to or on a parity with the Series A Preferred Shares unless full
cumulative distributions have been or are declared and paid or declared and
set apart for payment on the Series A Preferred Shares for all past and then
current distribution periods. Holders of Series A Preferred Shares will also
be entitled to receive preferential liquidating distributions in the amount of
the liquidation preference specified in the Articles Supplementary relating
thereto, plus an amount equal to all distributions accrued and unpaid thereon.
The Series A Preferred Shares will be redeemable after a specified date by
ATLANTIC for cash at the redemption price specified in the Articles
Supplementary relating thereto, plus all accrued and unpaid distributions. In
addition, the Series A Preferred Shares will be redeemable by ATLANTIC in
order to preserve ATLANTIC's status as a REIT.
The Holders of Series A Preferred Shares will have no voting rights, unless
distributions required to be paid on the Series A Preferred Shares have not
been paid for a specified time, in which case such holders will be entitled to
elect additional Directors to the Board. In addition, the holders of the
Series A Preferred Shares will be entitled to vote on proposals to (i) amend
the Charter, (ii) enter into a share exchange, consolidate with or merge into
another entity, or permit another entity to consolidate with or merge into
ATLANTIC or (iii) authorize, reclassify, create or increase the authorized
amount of any senior class of securities.
The Series A Preferred Shares will not be convertible into or exchangeable
for any other property or securities of ATLANTIC.
90
<PAGE>
NOTE OFFERING
At or about the same time as the Preferred Share Offering, ATLANTIC may
offer approximately $150 million (which may be increased or decreased subject
to market conditions) of the Notes in the Note Offering. The Notes will be
direct, senior unsecured obligations of ATLANTIC and will rank equally with
all other unsecured and unsubordinated indebtedness of ATLANTIC from time to
time outstanding. The Notes will bear interest at stated rates, payable
semiannually in arrears. Installments of equal principal amounts will be paid
in each year on the Notes beginning in a specified year, so that the Notes
will amortize beginning in such year.
The Notes will be redeemable at any time at the option of ATLANTIC, in whole
or in part, at a redemption price equal to the sum of (i) the principal amount
of the Notes being redeemed plus accrued interest thereon to the redemption
date and (ii) the make-whole amount, if any.
The Notes will be issued under an Indenture between ATLANTIC and the State
Street Bank and Trust Company, as Trustee. The Indenture will contain certain
covenants, including covenants which restrict the amount of additional
indebtedness which ATLANTIC and its subsidiaries may incur.
INDEPENDENT AUDITORS AND EXPERTS
The financial statements and related schedule of ATLANTIC included in this
Proxy Statement and Prospectus and elsewhere in the Registration Statement of
which this Proxy Statement and Prospectus forms a part have been audited by
Ernst & Young LLP, independent auditors, 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.
With respect to the unaudited condensed interim financial information for
the three-month periods ended March 31, 1997 and March 31, 1996, included
herein, Ernst & Young LLP have reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report states that they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted considering the limited nature of the review procedures applied.
The independent auditors are not subject to the liability provisions of
Section 11 of the Act for their report on the unaudited interim financial
information because that report is not a "report" or a "part" of the
Registration Statement prepared or certified by the auditors within the
meaning of Sections 7 and 11 of the Act.
EXPENSES OF SOLICITATION
ATLANTIC will pay the expenses in connection with the filing, printing and
distribution of this Proxy Statement and Security Capital will pay the
expenses in connection with the filing, printing and distribution of the
Security Capital Prospectus. The costs of solicitation of proxies from
ATLANTIC shareholders will be borne by ATLANTIC. ATLANTIC will reimburse
brokers, fiduciaries, custodians and other nominees for reasonable out-of-
pocket expenses incurred in sending this Proxy Statement and Prospectus and
other proxy materials to, and obtaining instructions relating to such
materials from, beneficial owners of stock. ATLANTIC shareholder proxies may
be solicited by directors or officers of ATLANTIC in person, by letter or by
telephone or telegram. In addition, ATLANTIC has retained Georgeson & Company,
New York, New York, to assist in the solicitation of proxies. It is estimated
that its fees for services to ATLANTIC will not exceed $10,000 in the
aggregate plus expenses.
ATLANTIC will also reimburse custodians, nominees and fiduciaries for
forwarding proxies and proxy materials to the beneficial owners of their stock
in accordance with regulations of the Commission and the NYSE.
SHAREHOLDER PROPOSALS
Any proposal by a shareholder intended to be presented at the 1998 annual
meeting of shareholders must be received by ATLANTIC at its principal
executive offices located at Six Piedmont Center, Atlanta, Georgia 30305 not
later than December 25, 1997 for inclusion in ATLANTIC's proxy statement and
form of proxy relating to ATLANTIC's 1998 annual meeting of shareholders.
91
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL:
Independent Accountants' Review Report.................................. F-2
Condensed Balance Sheets as of March 31, 1997 and December 31, 1996..... F-3
Condensed Statements of Earnings for the three-month periods ended March
31, 1997 and 1996...................................................... F-4
Condensed Statements of Cash Flows for the three-month periods ended
March 31, 1997 and 1996................................................ F-5
Notes to Condensed Financial Statements................................. F-6
Report of Independent Auditors.......................................... F-13
Balance Sheets as of December 31, 1996 and 1995......................... F-14
Statements of Earnings for the years ended December 31, 1996, 1995 and
1994................................................................... F-15
Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996.................................................... F-16
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................... F-17
Notes to Financial Statements........................................... F-18
Schedule III--Real Estate and Accumulated Depreciation.................. F-32
Note to Schedule III.................................................... F-37
PRO FORMA (UNAUDITED):
Summary of Pro Forma adjustments........................................ F-38
Pro Forma Condensed Balance Sheet as of March 31, 1997.................. F-40
Pro Forma Condensed Statement of Earnings for the three-month period
ended March 31, 1997................................................... F-41
Pro Forma Condensed Statement of Earnings for the year ended December
31, 1996............................................................... F-42
Notes to Pro Forma Condensed Financial Statements....................... F-43
COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES
PURSUANT TO RULE 3-14:
Report of Independent Auditors.......................................... F-49
Group C Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-50
Notes to Group C Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-51
Report of Independent Auditors.......................................... F-52
Group D Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-53
Notes to Group D Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-54
Report of Independent Auditors.......................................... F-56
Group E Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-57
Notes to Group E Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-58
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have reviewed the accompanying condensed balance sheet of Security
Capital Atlantic Incorporated as of March 31, 1997 and the related condensed
statements of earnings and statements of cash flows for the three-month
periods ended March 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial statements 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, which will be
performed for the full year, with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements 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 Atlantic Incorporated 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 February 3, 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.
Ernst & Young LLP
Dallas, Texas
April 24, 1997, except for Note 6,
as to which the date is May 1, 1997.
F-2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Real estate........................................... $1,208,229 $1,157,235
Less accumulated depreciation......................... 47,297 41,166
---------- ----------
1,160,932 1,116,069
Homestead Convertible Mortgages....................... 25,891 --
---------- ----------
Net investments................................... 1,186,823 1,116,069
Cash and cash equivalents--unrestricted............... 3,953 4,339
Cash and cash equivalents--restricted tax-deferred
exchange proceeds.................................... -- 1,672
Other assets.......................................... 13,455 12,985
---------- ----------
Total assets...................................... $1,204,231 $1,135,065
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ 295,250 $ 228,000
Mortgages payable................................... 155,418 155,790
Distributions payable............................... -- 14,778
Accounts payable.................................... 18,189 20,076
Accrued expenses and other liabilities.............. 20,654 17,779
---------- ----------
Total liabilities................................. 489,511 436,423
---------- ----------
Shareholders' equity:
Common shares (250,000,000 authorized, 37,891,580
issued and outstanding at March 31, 1997 and
December 31, 1996)................................. 379 379
Additional paid-in capital.......................... 747,640 747,640
Unrealized gains on Homestead Convertible Mortgages. 5,900 --
Distributions in excess of net earnings............. (39,199) (49,377)
---------- ----------
Total shareholders' equity........................ 714,720 698,642
---------- ----------
Total liabilities and shareholders' equity ....... $1,204,231 $1,135,065
========== ==========
</TABLE>
See accompanying notes to the condensed financial statements.
F-3
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH
PERIODS
ENDED MARCH 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Revenues:
Rental income................................................ $39,715 $30,809
Homestead Convertible Mortgages interest income.............. 185 --
Other interest income........................................ 57 72
------- -------
39,957 30,881
------- -------
Expenses:
Rental expenses.............................................. 9,974 8,495
Real estate taxes............................................ 3,849 3,104
Property management fees:
Paid to affiliate.......................................... 1,280 920
Paid to third parties...................................... 232 217
Depreciation................................................. 6,132 4,804
Interest..................................................... 4,761 4,342
REIT management fee paid to affiliate........................ 3,029 2,123
General and administrative................................... 265 187
Provision for possible loss on investments................... 200 --
Other........................................................ 57 39
------- -------
29,779 24,231
------- -------
Net earnings................................................... $10,178 $ 6,650
======= =======
Weighted-average shares outstanding............................ 37,892 27,777
======= =======
Net earnings per share......................................... $ 0.27 $ 0.24
======= =======
Distributions paid per share................................... $ 0.39 $ 0.42
======= =======
</TABLE>
See accompanying notes to the condensed financial statements.
F-4
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings........................................... $ 10,178 $ 6,650
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization........................ 6,205 5,236
Provision for possible loss on investments........... 200 --
Decrease in accounts payable......................... (2,056) (444)
Increase in accrued expenses and other liabilities... 2,884 2,076
Increase in other assets............................. (498) (1,188)
--------- ---------
Net cash flow provided by operating activities..... 16,913 12,330
--------- ---------
Investing activities:
Real estate investments................................ (51,026) (41,520)
Tax-deferred exchange proceeds held in escrow.......... 1,672 --
Fundings on Homestead Convertible Mortgages............ (20,000) --
--------- ---------
Net cash flow used by investing activities......... (69,354) (41,520)
--------- ---------
Financing activities:
Proceeds from sale of shares........................... -- 430
Proceeds from line of credit........................... 75,000 42,000
Payments on line of credit............................. (7,750) (6,000)
Proceeds from mortgage debt............................ -- 5,000
Distributions paid..................................... (14,778) (11,667)
Debt issuance costs incurred........................... (45) (281)
Regularly scheduled mortgage principal payments........ (372) (233)
--------- ---------
Net cash flow provided by financing activities..... 52,055 29,249
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (386) 59
Cash and cash equivalents, beginning of period........... 4,339 6,494
--------- ---------
Cash and cash equivalents, end of period................. $ 3,953 $ 6,553
========= =========
Non-cash investing activities:
Unrealized gains on Homestead convertible mortgages.... $ 5,900 $ --
</TABLE>
See accompanying notes to the condensed financial statements.
F-5
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of March 31, 1997 and for the three-month periods ended March
31, 1997 and 1996 are unaudited and certain information and footnote
disclosures normally included in financial statements have been omitted. While
management of ATLANTIC believes that the disclosures presented are adequate,
these interim financial statements should be read in conjunction with the
financial statements and notes included in ATLANTIC's 1996 Annual Report on
Form 10-K.
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 ATLANTIC's financial
statements for the interim periods presented. The results of operations for
the three-month periods ended March 31, 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.
NOTE 2 REAL ESTATE
Real Estate
ATLANTIC's real estate, which consists entirely of multifamily communities,
at cost, was as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
----------------- --------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating communities:
Acquired........................ $ 880,634 17,727 $ 878,029 17,727
Developed....................... 75,711 1,514 74,741 1,514
---------- ------ ---------- ------
956,345 19,241 952,770 19,241
Communities under construction(1). 238,176 5,395 194,587 4,727
Communities in planning(1):
Owned........................... 11,625 1,172(2) 7,795 868(2)
Under control(3)................ -- 2,332(2) -- 2,228(2)
---------- ------ ---------- ------
11,625 3,504 7,795 3,096
Land held for future development.. 2,083 -- 2,083 --
---------- ------ ---------- ------
Total......................... $1,208,229 28,140(4) $1,157,235(4) 27,064
========== ====== ========== ======
</TABLE>
- --------
(1) At March 31, 1997, ATLANTIC had unfunded commitments for communities under
construction of $97.4 million, for a total completed construction cost of
$335.6 million. Costs for communities in planning shown above are
primarily for land acquisitions.
(2)Unit information is based on management's estimates and is unaudited and
unreviewed.
(3) ATLANTIC's investment at March 31, 1997 and December 31, 1996 in land in
planning and under control for future development was $1.2 million and
$1.4 million, respectively, and is reflected in the "Other Assets" caption
of ATLANTIC's balance sheets.
(4) Of ATLANTIC's real estate, at cost, communities located in Atlanta,
Georgia aggregated 30.1% and 30.7% at March 31, 1997 and December 31,
1996, respectively.
F-6
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The change in real estate, at cost, for the three-month period ended March
31, 1997 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997.................................... $1,157,235
Acquisition and renovation expenditures....................... 2,397
Development expenditures, including land acquisitions......... 48,279
Recurring capital expenditures................................ 518
Provision for possible loss on investments.................... (200)
----------
Balance at March 31, 1997..................................... $1,208,229
==========
</TABLE>
Gains and Losses from Dispositions or Impairments of Real Estate
ATLANTIC's real estate investments have been made with a view to effective
long-term operation and ownership. Based upon ATLANTIC's market research and
in an effort to optimize its portfolio composition, ATLANTIC may from time to
time seek to dispose of assets that no longer meet ATLANTIC's investment
criteria and redeploy the proceeds therefrom, primarily through tax-deferred
exchanges, into assets with better prospects for growth. ATLANTIC did not
dispose of any communities in the three-month period ended March 31, 1997. As
discussed below, one community was disposed of subsequent to March 31, 1997.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. At March
31, 1997, such investments are carried at cost, which is not in excess of fair
market value. ATLANTIC recognized a provision for possible loss of $200,000
during the three-month period ended March 31, 1997 and $2,500,000 during 1996
associated with a community that was being held for sale. ATLANTIC disposed of
this community in April 1997. The sales price approximated ATLANTIC's carrying
value at March 31, 1997. This community accounted for $224,000 and $236,000 of
net operating income for the three-month periods ended March 31, 1997 and
1996, respectively.
NOTE 3 HOMESTEAD CONVERTIBLE MORTGAGES
General
To provide funds for the completion of construction of the Homestead Village
assets sold by ATLANTIC in October 1996, ATLANTIC entered into a funding
commitment agreement ("Funding Agreement") which provides for aggregate
fundings of $111.1 million in exchange for convertible mortgages ("Homestead
Convertible Mortgages"). During the three-month period ended March 31, 1997
ATLANTIC funded $20.0 million.
The Homestead Convertible Mortgages (i) bear interest at 9% per annum which
is due in interest only payments on a semi-annual basis, (ii) are due October
2006, (iii) are not callable until 2001, and (iv) beginning March 31, 1997,
are convertible at ATLANTIC's option into one share of common stock of
Homestead Village Incorporated ("Homestead") for every $11.50 of principal
outstanding (approximately 8,522,000 shares upon full funding). The individual
Homestead Village development projects serve as collateral individually and in
the aggregate under cross-collateral provisions. The Homestead Convertible
Mortgages represent approximately 70% of the estimated value of the projects
upon completion.
Carrying Value
ATLANTIC will receive $98.0 million of Homestead Convertible Mortgages
assuming full funding under the Funding Agreement of $111.1 million, resulting
in the recognition of an original issue premium which will be amortized over
the term of the Homestead Convertible Mortgages. The value attributed to the
conversion
F-7
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
feature of the Homestead Convertible Mortgages issued ($6,900,000 assuming
full funding) has been recognized along with an offsetting discount in the
Homestead Convertible Mortgages balance. This discount will be amortized over
the term of the Homestead Convertible Mortgages. The carrying value of the
Homestead Convertible Mortgages has been further adjusted to fair value. The
fair value adjustment of $5,900,000 is recognized as an unrealized gain in
shareholders' equity. The amount of the adjustment is based upon the
conversion value of the Homestead Convertible Mortgages and is calculated
using the trading price of Homestead common stock at March 31, 1997 of
$16.875.
At March 31, 1997 the carrying value of the Homestead Convertible Mortgages
consisted of the following components (in thousands):
<TABLE>
<S> <C>
Face amount...................................................... $17,644
Original issue premium........................................... 2,356
-------
Amount funded.................................................... 20,000
Amortization of original issue premium........................... (20)
Initial value of conversion feature.............................. 1,243
Unamortized discount on conversion feature....................... (1,232)
Fair value adjustment............................................ 5,900
-------
Carrying value................................................. $25,891
=======
</TABLE>
Deferred Revenue
ATLANTIC received a commitment fee in the form of warrants to purchase
shares of Homestead common stock in return for entering into the Funding
Agreement. The warrants, which were distributed to ATLANTIC's shareholders,
were valued at $6,500,000. The commitment fee has been recognized as deferred
revenue in the liability section of ATLANTIC's balance sheet and is being
amortized over the term of the Homestead Convertible Mortgages.
Income Recognized
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9.0% per annum, (ii) the
amortization of the original issue premium which reduces income, (iii) the
amortization of the discount on the conversion feature which increases income,
and, (iv) the amortization of the deferred commitment fee which increases
income. ATLANTIC uses the effective interest method to calculate the
amortization of all items associated with the Homestead Convertible Mortgages.
The effective interest rate on the funded amount is approximately 8.46% per
annum.
NOTE 4 LINE OF CREDIT AND MORTGAGES PAYABLE
Variable Interest Rate Swap Agreements
ATLANTIC has effectively eliminated its variable interest rate debt exposure
on all of its variable interest rate mortgages and $100 million of borrowings
on its line of credit by entering into swap agreements. Under the swap
agreements ATLANTIC pays a fixed rate of interest to a swap counterparty
pursuant to one agreement and receives a variable rate of interest from a swap
counterparty pursuant to another agreement. The amounts received from the
variable rate agreement are structured such that these amounts will closely
approximate the amount of variable interest due on the underlying line of
credit or mortgage note borrowings. The difference
F-8
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
between the variable amount received and the fixed amount paid represents
either the cost or the benefit of the interest rate swap agreement and is
recorded as an increase or decrease to the variable interest paid on the
underlying debt instrument.
Line of Credit
On December 18, 1996, ATLANTIC entered into a $350 million unsecured
revolving line of credit agreement with Morgan Guaranty Trust Company of New
York, as agent for a group of lenders ("MGT"). Borrowings on the unsecured
line of credit bear interest at prime, or at ATLANTIC's option, LIBOR plus a
margin ranging from 1.0% to 1.375% (currently 1.375%) depending on ATLANTIC's
credit rating. ATLANTIC's objective is to achieve an investment-grade debt
rating in 1997. ATLANTIC currently pays a commitment fee on the average
unfunded line of credit balance of 0.1875%. If ATLANTIC achieves an
investment-grade debt rating, the commitment fee on the average unfunded line
of credit balance will range 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 MGT and the other
participating lenders.
All debt incurrences under the unsecured line of credit are subject to
certain covenants. Specifically, distributions for the preceding four
quarters, excluding the non-cash distribution related to the transaction with
Homestead in October 1996, may not exceed 95% of ATLANTIC's funds from
operations (as defined in the credit agreement) for the preceding four
quarters. ATLANTIC is in compliance with all such covenants.
ATLANTIC has a swap agreement with MGT covering $100 million of borrowings
under the line of credit, effectively eliminating a portion of its variable
interest rate exposure associated with the line of credit. Under this one-year
agreement which became effective on February 5, 1997, ATLANTIC pays a fixed
rate of interest of 7.325% on the $100 million of borrowings. The interest
rate ATLANTIC will pay will be reduced if ATLANTIC achieves an investment-
grade debt rating and will range from 6.95% to 7.2% depending on the rating
achieved. ATLANTIC had a similar swap agreement in place from February 5, 1996
through February 4, 1997. Under that agreement, ATLANTIC paid a fixed rate of
interest on the $100 million of borrowings of 7.46% through December 17, 1996
and 7.335% thereafter. ATLANTIC paid $77,000 and $110,000 more in interest
than it received under the swap agreement during the three-month periods ended
March 31, 1997 and 1996, respectively. 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.
F-9
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable consisted of the following at March 31, 1997 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
INTEREST MATURITY PERIODIC PRINCIPAL
COMMUNITY RATE DATE PAYMENT TERMS BALANCE
- --------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge............... 7.000% 09/10/98(1) fully amortizing $ 5,839
Country Place Village I..... 7.750% 11/01/00 (2) 1,995
Country Oaks................ 7.655% 07/01/02 (3) 5,918
Cameron at Hickory Grove.... 8.000% 07/10/03 (4) 5,967
Cameron Villas I............ 8.750% 04/01/24 fully amortizing 6,327
Cameron on the Cahaba II.... 7.125% 03/01/29 fully amortizing 8,005
--------
34,051
--------
Tax-exempt fixed rate or
variable rate subject to swap
agreements(5):
Cameron Station............. 6.000% 05/01/07 interest only 14,500
Azalea Park................. (6) 06/01/25 interest only 15,500
Cameron Brook............... (6) 06/01/25 interest only 19,500
Cameron Cove................ (6) 06/01/25 interest only 8,500
Clairmont Crest............. (6) 06/01/25 interest only 11,600
Forestwood.................. (6) 06/01/25 interest only 11,485
Foxbridge on the Bay........ (6) 06/01/25 interest only 10,400
The Greens.................. (6) 06/01/25 interest only 10,400
Parrot's Landing I.......... (6) 06/01/25 interest only 15,835
WintersCreek................ (6) 06/01/25 interest only 5,000
Less amounts held in
principal reserve fund(7).. (1,353)
--------
121,367
--------
$155,418
--------
Total annual weighted-
average interest rate.... 6.97%
========
</TABLE>
- --------
(1) This loan is callable at the option of the mortgage lender on September
10, 1998 and at subsequent five-year intervals through September 10, 2013.
(2) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
(3) Interest and financial payments due monthly; balloon payment of $5,539,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(5) These communities, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets, liabilities
and business operations.
(6) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA") discussed below. Through these swap agreements,
ATLANTIC has effectively eliminated its variable interest rate exposure
associated with its tax-exempt bond issues.
(7) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the tax-exempt bond issues. This credit enhancement agreement requires
ATLANTIC to make monthly payments on each mortgage into a principle
reserve account based on a 30-year amortization.
F-10
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF FIXED
MORTGAGES 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 New York
5.0 million March 1996 to March 2006 6.21% Morgan Guaranty Trust Company of New York
15.5 million August 1996 to August 2006 6.50% Morgan Stanley Derivative Products Inc.
-----
Weighted-average interest rate 6.63%
=====
</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 $493,000 and $428,000 more in interest during the three-month
periods ended March 31, 1997 and 1996, respectively than it 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 (an amount equal
to the amount of the principal reserve fund) 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 March 31, 1997 of
$51,019,000 and $207,462,000 serves as collateral for the conventional
mortgages payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable for the three-month period ended March 31,
1997 is as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997...................................... $155,790
Regularly scheduled principal payments.......................... (372)
--------
Balance at March 31, 1997....................................... $155,418
========
</TABLE>
ATLANTIC is in compliance with all debt covenants required by the mortgage
agreements.
Interest Expense
Interest paid in cash on all outstanding debt for the three-month period
ended March 31, 1997 was $7,516,000, including $2,553,000 of interest
capitalized during construction. Interest paid in cash on all outstanding debt
for the three-month period ended March 31, 1996 was $5,948,000, including
$2,036,000 of interest capitalized during construction.
Amortization of loan costs included in interest expense for the three-month
periods ended March 31, 1997 and 1996 was $72,000 and $432,000, respectively.
NOTE 5 SHAREHOLDERS' EQUITY
Capital Offerings
On April 10, 1997 ATLANTIC completed an underwritten public offering of
4,000,000 common shares, par value $.01, ("Shares") at a price of $21.50 per
Share. The proceeds from the sale of these Shares, net of
F-11
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
underwriters' commissions and other expenses, were approximately $80.5
million. The proceeds were used to repay borrowings under ATLANTIC's $350
million line of credit.
Distributions
ATLANTIC paid a quarterly distribution of $0.39 per Share on February 19,
1997. On April 22, 1997 the Board declared a distribution of $0.39 per Share
for the second quarter of 1997. The distribution is payable on May 27, 1997 to
shareholders of record on May 12, 1997.
Earnings Per Share
In the fourth quarter of 1997, ATLANTIC will adopt Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which changes the
method used to compute earnings per share. The impact of SFAS No. 128 on the
calculation of ATLANTIC's earnings per share is not expected to be material.
NOTE 6 REIT MANAGER AND PROPERTY MANAGER ACQUISITION PROPOSAL
ATLANTIC has a REIT management agreement with Security Capital (Atlantic)
Incorporated (the "REIT Manager"), to provide REIT management services to
ATLANTIC. The REIT Manager is a wholly-owned subsidiary of Security Capital
Group Incorporated ("Security Capital"), which owned 56.9% of ATLANTIC's
Shares at March 31, 1997 (51.4% after the completion of ATLANTIC's public
offering in April 1997). The REIT management agreement is renewable annually,
subject to a determination by ATLANTIC's independent directors that the REIT
Manager's performance has been satisfactory and that the compensation payable
to the REIT Manager is fair.
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") currently
manages approximately 88% of ATLANTIC's multifamily properties. Security
Capital owns 100% of SCG Realty Services' voting shares. Rates for services
performed by SCG Realty Services are reviewed annually by a third party and
are subject to approval by ATLANTIC's independent Directors and are at rates
prevailing in the markets in which ATLANTIC operates.
On May 1, 1997, Security Capital filed a registration statement with the
Securities and Exchange Commission, containing ATLANTIC's preliminary proxy
statement and Security Capital's preliminary prospectus (relating to warrants
to purchase Class B common stock of Security Capital) relating to a proposed
merger transaction whereby ATLANTIC would acquire the operations and
businesses of its REIT Manager and SCG Realty Services in exchange for Shares
valued at approximately $54.6 million. The $54.6 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
the independent members of ATLANTIC's Board (the "Special Committee"). The
number of Shares issuable to Security Capital will depend on the average
market price of the Shares over the five-day period prior to the record date,
subject to such average not being more than $25.8633 or less than $20.6367.
Because ATLANTIC, the REIT Manager and SCG Realty Services are under common
control, the difference between the market value of the Shares issued to
Security Capital on the date the merger transaction is consummated and the
approximately $1.1 million of net tangible assets of the REIT Manager and SCG
Realty Services being acquired by ATLANTIC will be accounted for as a
distribution to Security Capital. As a result of the transaction, ATLANTIC
would become an internally managed REIT and Security Capital would remain
ATLANTIC's largest shareholder. ATLANTIC's Board recently 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 holders of the outstanding Shares. ATLANTIC's proxy statement, after
review and clearance by the Securities and Exchange Commission, will be mailed
to ATLANTIC's shareholders prior to the shareholder vote.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and ShareholdersSECURITY CAPITAL ATLANTIC INCORPORATED
We have audited the accompanying 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. 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.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule of Real
Estate and Accumulated Depreciation is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken
as a whole.
Ernst & Young LLP
Dallas, TexasFebruary 3, 1997
F-13
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
ASSETS
------
Real estate.............................................. $1,157,235 $888,928
Less accumulated depreciation............................ 41,166 23,561
---------- --------
Net investments in real estate......................... 1,116,069 865,367
Cash and cash equivalents--unrestricted.................. 4,339 6,494
Cash and cash equivalents--restricted tax-deferred
exchange proceeds....................................... 1,672 --
Other assets............................................. 12,985 13,963
---------- --------
Total assets........................................... $1,135,065 $885,824
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Line of credit......................................... $ 228,000 $190,000
Mortgages payable...................................... 155,790 118,524
Distributions payable.................................. 14,778 --
Accounts payable....................................... 20,076 11,030
Accrued expenses and other liabilities................. 17,779 9,332
---------- --------
Total liabilities.................................... 436,423 328,886
---------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 37,891,580
issued and outstanding at December 31, 1996 and
27,762,817 issued and outstanding at December 31,
1995)................................................. 379 278
Additional paid-in capital............................. 747,640 576,824
Distributions in excess of net earnings................ (49,377) (20,164)
---------- --------
Total shareholders' equity........................... 698,642 556,938
---------- --------
Total liabilities and shareholders' equity........... $1,135,065 $885,824
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
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...................................... $137,729 $103,634 $55,071
Interest income.................................... 427 245 149
-------- -------- -------
138,156 103,879 55,220
-------- -------- -------
Expenses:
Rental expenses.................................... 36,808 27,814 15,260
Real estate taxes.................................. 12,293 9,570 5,595
Property management fees:
Paid to affiliate................................ 4,208 3,475 1,536
Paid to third parties............................ 971 591 661
Depreciation....................................... 20,824 15,925 8,770
Interest........................................... 16,181 19,042 9,240
REIT management fee paid to affiliate.............. 10,445 6,923 3,671
General and administrative......................... 673 646 266
Provision for possible loss on investments......... 2,500 -- --
Other.............................................. 255 254 295
-------- -------- -------
105,158 84,240 45,294
-------- -------- -------
Earnings from operations............................. 32,998 19,639 9,926
Gain on disposition of real estate................. 6,732 -- --
Gain on sale of Homestead Assets................... 2,839 -- --
-------- -------- -------
Earnings before extraordinary item................... 42,569 19,639 9,926
Extraordinary item--loss on early extinguishment of
debt.............................................. 3,940 -- --
-------- -------- -------
Net earnings......................................... $ 38,629 $ 19,639 $ 9,926
======== ======== =======
Weighted-average shares outstanding.................. 32,028 21,944 12,227
======== ======== =======
Per share amounts:
Earnings per share before extraordinary item....... $ 1.33 $ 0.89 $ 0.81
======== ======== =======
Net earnings per share............................. $ 1.21 $ 0.89 $ 0.81
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON DISTRIBUTIONS
SHARES ADDITIONAL IN EXCESS
AT PAR PAID-IN OF NET
VALUE CAPITAL EARNINGS TOTAL
------ ---------- ------------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1993........ $ 16 $ 31,618 $ 38 $ 31,672
Net earnings....................... -- -- 9,926 9,926
Distributions paid................. -- -- (14,648) (14,648)
Shares issued--private offerings... 170 339,510 -- 339,680
---- -------- -------- --------
Balances at December 31, 1994........ 186 371,128 (4,684) 366,630
Net earnings....................... -- -- 19,639 19,639
Distributions paid................. -- -- (35,119) (35,119)
Shares issued--private offerings... 130 289,578 -- 289,708
Shares repurchased................. (38) (83,882) -- (83,920)
---- -------- -------- --------
Balances at December 31, 1995........ 278 576,824 (20,164) 556,938
Net earnings....................... -- -- 38,629 38,629
Distributions paid................. -- -- (53,064) (53,064)
Distributions--Homestead........... -- (58,228) -- (58,228)
Distributions accrued.............. -- -- (14,778) (14,778)
Shares issued--private offerings... 52 119,125 -- 119,177
Shares issued--initial public
offering.......................... 49 109,919 -- 109,968
---- -------- -------- --------
Balances at December 31, 1996........ $379 $747,640 $(49,377) $698,642
==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings................................ $ 38,629 $ 19,639 $ 9,926
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization............. 22,492 17,496 9,480
Provision for possible loss on
investments.............................. 2,500 -- --
Gain on disposition of real estate........ (6,732) -- --
Gain on sale of Homestead Assets.......... (2,839) -- --
Extraordinary item-loss on early
extinguishment of debt................... 3,940 -- --
Increase (decrease) in accounts payable... (374) 937 1,909
Increase in accrued expenses and other
liabilities.............................. 1,993 3,053 6,141
Increase in other assets.................. (5,253) (1,393) (3,892)
--------- --------- ---------
Net cash flow provided by operating
activities................................ 54,356 39,732 23,564
--------- --------- ---------
Investing activities:
Real estate investments..................... (331,440) (259,008) (390,077)
Proceeds from disposition of real estate.... 63,544 23,859 --
Cash payment to Homestead................... (16,595) -- --
Tax-deferred exchange proceeds held in es-
crow....................................... (1,672) -- --
Other....................................... (1,255) -- --
--------- --------- ---------
Net cash flow used by investing activities.. (287,418) (235,149) (390,077)
--------- --------- ---------
Financing activities:
Proceeds from sale of shares................ 229,145 289,708 239,680
Repurchase of shares........................ -- (83,920) --
Proceeds from line of credit................ 246,000 270,000 166,000
Payments on line of credit.................. (208,000) (233,000) (13,000)
Proceeds from mortgage debt................. 20,500 -- --
Distributions paid.......................... (53,064) (35,119) (14,648)
Debt issuance costs incurred................ (2,573) (5,019) (5,204)
Regularly scheduled mortgage principal
payments................................... (1,101) (623) (190)
Mortgage principal payments at maturity..... -- (6,378) --
--------- --------- ---------
Net cash flow provided by financing
activities................................. 230,907 195,649 372,638
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (2,155) 232 6,125
Cash and cash equivalents, beginning of
year....................................... 6,494 6,262 137
--------- --------- ---------
Cash and cash equivalents, end of year...... $ 4,339 $ 6,494 $ 6,262
========= ========= =========
</TABLE>
See Note 9 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Security Capital Atlantic Incorporated ("ATLANTIC") is an equity real estate
investment trust organized as a corporation under the laws of the State of
Maryland, which owns, acquires, develops and operates income-producing
multifamily communities in the southeastern United States.
Principles of Financial Presentation
The accounts of ATLANTIC and its wholly owned subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates 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 reported period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
ATLANTIC 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 are capitalized. Costs incurred in connection with the pursuit of
unsuccessful acquisitions are expensed at the time the pursuit is abandoned.
Repairs and maintenance, including carpet and appliance replacements, are
expensed as incurred. Renovations and improvements are capitalized and
depreciated over their estimated useful lives.
Depreciation is computed over the economic useful lives of depreciable
property on a straight-line basis. Communities are depreciated principally
over the following periods:
<TABLE>
<S> <C>
Buildings and improvements...................... 20-40 years
Furnishings and other........................... 2-10 years
</TABLE>
Make-Ready and Repairs and Maintenance
Make-ready expenses (expenses incurred in preparing a vacant multifamily
unit for the next resident) and repairs and maintenance, other than
acquisition-related renovation costs identified during ATLANTIC's pre-
acquisition due diligence, are expensed as incurred. ATLANTIC expenses carpet
and appliance repairs and replacements once all planned acquisition-related
renovation expenses for such items have been incurred.
F-18
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest
Periodically, ATLANTIC enters into swap agreements to manage its variable
interest rate exposure. Swap agreements are used to exchange interest rate
payment streams based on a notional principal amount. Under the swap
agreements, ATLANTIC pays a fixed rate of interest to a swap counterparty
pursuant to one agreement and receives a variable rate of interest from a swap
counterparty pursuant to another agreement. The amounts received from the
variable rate agreement are structured such that the amount received will
closely approximate the amount of variable interest due on a portion of the
underlying line of credit or mortgage note borrowings. The difference between
the variable amount received and the fixed amount paid represents either the
cost or the benefit of the interest rate swap agreement and is recorded as an
increase or decrease to the variable interest paid on the underlying debt
instrument.
During 1996, 1995 and 1994, the total interest paid in cash on all
outstanding debt was $24,677,000, $20,609,000 and $8,412,000, respectively.
ATLANTIC capitalizes interest as part of the cost of real estate projects
under development. Interest capitalized during 1996, 1995 and 1994 aggregated
$10,250,000, $4,404,000 and $793,000, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of shares of common stock,
par value $.01 per share (the "Shares"), are deducted from shareholders'
equity. Costs incurred in connection with the incurrence or renewal of debt
are capitalized, included with other assets and amortized over the term of the
related loan or renewal term. Amortization of deferred financing costs
included in interest expense for 1996, 1995 and 1994 totaled $1,663,000,
$1,568,000 and $707,000, respectively.
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting.
Gains on sales of real estate are recorded when criteria required by Statement
of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate,
have been met. A provision for possible loss is made when collection of
receivables is considered doubtful.
Rental Expenses
Rental expenses include utilities, repairs and maintenance, make-ready costs
(including carpet and appliance replacement), property insurance, marketing,
landscaping, on-site personnel and other administrative costs.
Federal Income Taxes
ATLANTIC has made an election to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. ATLANTIC believes it
qualifies as a real estate investment trust. Accordingly, no provisions have
been made for federal income taxes in the accompanying financial statements.
Per Share Data
Per share data is computed based on the weighted average number of Shares
outstanding during the period. The Share and per Share amounts included in the
financial statements have been restated to reflect the reverse Share split
discussed in Note 6.
F-19
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain of the 1995 and 1994 amounts have been reclassified to conform to
the 1996 presentation.
NOTE 2 HOMESTEAD TRANSACTION
On October 17, 1996, ATLANTIC sold its moderate-priced, purpose-built,
extended-stay lodging facilities known as Homestead Village(R) properties to
Homestead Village Incorporated ("Homestead"). In the transaction, ATLANTIC
sold one operating property and 25 properties under construction or in
planning (or the rights to acquire such properties) and paid $16.6 million in
cash (the "Homestead Assets"). In addition, ATLANTIC entered into a funding
commitment agreement to provide secured financing of up to $111.1 million to
Homestead for purposes of completing the development and construction of the
properties sold in the transaction. The Homestead transaction was treated as a
sale for financial accounting purposes, but was treated as a contribution for
tax purposes.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the Homestead Assets and 2,818,517 warrants
to purchase one share of Homestead common stock at $10 per share in exchange
for entering into the funding commitment agreement. On November 12, 1996,
ATLANTIC distributed the Homestead common stock and warrants to its
shareholders of record on October 29, 1996 (the "Homestead Distribution").
ATLANTIC shareholders received 0.110875 shares of Homestead common stock and
0.074384 Homestead warrants per Share. ATLANTIC will receive up to $98.0
million of convertible mortgage notes from Homestead in exchange for funding
up to $111.1 million under the funding commitment agreement. The difference
between the amounts funded and the convertible mortgage notes received of
$13.1 million (assuming full funding of the funding commitment) represents a
mortgage note premium that will be amortized as a reduction to interest income
over the term of the convertible mortgage notes.
ATLANTIC realized a gain of $2.8 million, after deducting expenses
associated with the transaction, representing the excess value of the
Homestead common stock received over the recorded basis of the Homestead
Assets. The Homestead warrants received represent a funding commitment fee
which has been valued at $6.5 million. The conversion feature of the
convertible mortgage notes has been valued at $6.9 million (assuming full
funding of the funding commitment). These deferred credits will be amortized
as an increase to interest income over the term of the convertible mortgage
notes.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible commencing March 31, 1997 at the option of the holder into
one share of Homestead common stock for every $11.50 of principal amount
outstanding. Upon full funding of ATLANTIC's convertible mortgage notes, its
conversion rights would represent a 15.35% ownership in Homestead (assuming no
further equity offerings by Homestead, conversion of all convertible mortgage
notes and exercise of all outstanding warrants). The effective yield on the
convertible mortgage notes, assuming conversion of all convertible mortgage
notes and exercise of all outstanding warrants, is estimated to be 8.46%,
after giving effect to the mortgage note premium, the funding commitment fee
and the conversion value of the convertible mortgage notes. At December 31,
1996, no funds had been advanced pursuant to the funding commitment agreement
and there were no convertible mortgage notes outstanding. ATLANTIC advanced
$6.0 million under the funding commitment agreement in January 1997.
F-20
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 REAL ESTATE
Investment in Real Estate
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995
-------------------- -------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities:
Acquired.................... $ 878,029 17,727 $757,986 15,355
Developed................... 74,741 1,514 23,097 468
---------- ------ -------- ------
952,770 19,241 781,083 15,823
Developments under
construction................. 194,587 4,727 94,094 2,958
Developments in planning:
Owned....................... 7,795 868(1) 9,830 1,258(1)
Under control(2)............ -- 2,228(1) -- 922(1)
---------- ------ -------- ------
7,795 3,096 9,830 2,180
Land held for future
development.................. 2,083 -- 1,294 --
---------- ------ -------- ------
Total multifamily(3)...... 1,157,235 27,064 886,301 20,961
---------- ------ -------- ------
Homestead Village(R)
properties(4).................. -- -- 2,627 2,515
---------- ------ -------- ------
Total..................... $1,157,235(5) 27,064 $888,928(5) 23,476
========== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based on management's estimates and is unaudited.
(2) ATLANTIC's investment at December 31, 1996 and 1995 for multifamily
developments under control was $1.4 million and $0.6 million,
respectively, and is reflected in the "Other assets" caption of ATLANTIC's
balance sheets.
(3) At December 31, 1996, ATLANTIC had unfunded commitments for multifamily
developments under construction of $95.9 million, for a total completed
construction cost of $290.5 million. Cost for multifamily developments in
planning shown above are primarily for land acquisitions.
(4) ATLANTIC sold all of its Homestead Village(R) properties to Homestead on
October 17, 1996. The Homestead transaction is discussed in Note 2.
(5) Of ATLANTIC's investment in real estate, at cost, communities located in
Atlanta, Georgia aggregated 30.7% and 36.4% at December 31, 1996 and 1995,
respectively.
F-21
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
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>
Beginning balances.............................. $ 888,928 $631,260 $ 31,005
Acquisitions and renovation expenditures........ 179,752 187,267 571,288
Development expenditures, including land
acquisitions................................... 179,783 101,335 28,967
Recurring capital expenditures.................. 2,783 -- --
Provision for possible loss..................... (2,500) -- --
Dispositions.................................... (59,988) (30,934) --
Sale of Homestead Assets........................ (31,523) -- --
---------- -------- --------
Ending balances................................. $1,157,235 $888,928 $631,260
========== ======== ========
</TABLE>
Third Party Owner/Developers
To enhance its flexibility in developing and acquiring multifamily
communities, ATLANTIC has and will enter into presale agreements to acquire
communities developed by third-party owner/developers where the developments
meet ATLANTIC's investment criteria. ATLANTIC has and will fund such
developments through development loans to these owner/developers. In addition,
to provide greater flexibility for the use of land acquired for development
and to dispose of excess parcels, ATLANTIC plans to make mortgage loans to
Atlantic Development Services Incorporated ("Atlantic Development Services")
to purchase land for development. ATLANTIC owns all of the preferred stock of
Atlantic Development Services, which entitles ATLANTIC to substantially all of
the net operating cash flow (95%) of Atlantic Development Services. All of the
common stock of Atlantic Development Services is owned by an unaffiliated
trust. 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 ATLANTIC to third-party
owner/developers and Atlantic Development Services aggregated $15,413,000 and
none, respectively. The activities of Atlantic Development Services and third-
party owner/developers are consolidated with ATLANTIC's activities and all
intercompany transactions have been eliminated in consolidation.
Gains and Losses from Dispositions or Impairments of Real Estate
ATLANTIC acquires and develops communities with a view to effective long-
term operation and ownership. Each year, REIT Management generates operating
and capital plans based on an ongoing active review of ATLANTIC's portfolio.
Based upon ATLANTIC's market research and in an effort to optimize its
portfolio composition, ATLANTIC may from time to time dispose of assets that
no longer meet its long-term investment objectives and redeploy the proceeds,
preferably through tax-deferred exchanges, into assets with better prospects
for growth.
As a result of this asset optimization strategy, ATLANTIC disposed of four
operating communities aggregating 1,184 units in 1996. A gain was recognized
on each disposition with the total gain aggregating $6,732,000. These four
communities accounted for $3,648,000 and $5,174,000 of net operating income
during 1996 and 1995, respectively. Each disposition has been included in a
tax-deferred exchange. At December 31, 1996, ATLANTIC held a portion of the
proceeds from one of these dispositions aggregating $1,672,000 in an interest-
bearing escrow account. These funds were used in the acquisition of a land
parcel in January 1997, completing the tax-deferred exchange.
ATLANTIC disposed of two communities in 1995. The proceeds from these
dispositions were not materially different from the book value of the assets
on the date of disposition. These two communities accounted for $2,409,000 of
net operating income during 1995.
F-22
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 ATLANTIC 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. ATLANTIC did not recognize any losses on the date it adopted
SFAS No. 121.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
December 31, 1996, such investments are carried at cost, which is not in
excess of fair market value and no provisions for possible losses have been
made. ATLANTIC recognized a provision for possible loss of $2,500,000 in 1996
associated with a community that is being held for sale. The carrying value of
this community at December 31, 1996 was $8,842,000. This community is not
being depreciated during the period in which it is being held for sale.
ATLANTIC expects the disposition of this community to occur in 1997. This
community accounted for $959,000, $1,023,000 and $501,000 of net operating
income for 1996, 1995 and 1994, respectively. This income is included in
ATLANTIC's earnings from operations in these years.
NOTE 4 LINE OF CREDIT AND MORTGAGES PAYABLE
Line of Credit
On December 18, 1996, ATLANTIC obtained a $350 million unsecured line of
credit from Morgan Guaranty Trust Company of New York ("MGT"), as agent for a
group of lenders, that replaced the previous $350 million secured line of
credit. Borrowings on the unsecured line of credit 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's objective is to achieve an investment-
grade debt rating in 1997. ATLANTIC currently pays a commitment fee on the
average unfunded line of credit balance of 0.1875%. If ATLANTIC achieves an
investment-grade debt rating, the commitment fee on the average unfunded line
of credit balance will range 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 MGT and the other
participating lenders.
In 1996, ATLANTIC expensed all previously unamortized costs associated with
the secured line of credit that was extinguished in 1996. These costs
aggregated $3,940,000 and are reflected as an extraordinary item in ATLANTIC's
1996 statement of earnings.
All debt incurrences under the unsecured line of credit are subject to
certain covenants. Specifically, distributions for the preceding four
quarters, excluding the Homestead Distribution, may not exceed 95% (97% for
distributions made before December 31, 1996) of ATLANTIC's funds from
operations (as defined in the loan agreement) for the preceding four quarters.
ATLANTIC is in compliance with all such covenants.
A summary of ATLANTIC's line of credit borrowings is as follows (dollar
amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Total line of credit.... $350,000 $300,000 $225,000
Borrowings outstanding
at December 31......... 228,000 190,000 153,000
Weighted-average daily
borrowings............. 204,265 178,318 65,556
Maximum borrowings
outstanding at any
month end.............. 234,000 252,000 153,000
Weighted-average daily
interest rate.......... 7.39% 7.92% 7.34%
Weighted-average
interest rate at
December 31............ 7.24% 7.73% 8.17%
</TABLE>
F-23
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit, effectively mitigating a portion of its variable interest rate
exposure. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed rate of interest of 7.46% on the $100 million of
borrowings through December 17, 1996 and 7.335% thereafter. Upon expiration of
the existing swap agreement on February 5, 1997, a swap agreement with MGT
will take effect. The new agreement will provide for a fixed rate of 7.325% on
$100 million of borrowings through February 5, 1998. The interest rate
ATLANTIC will pay under the new agreement will be reduced if ATLANTIC achieves
an investment-grade debt rating and will range from 6.95% to 7.2%, depending
on the rating achieved. ATLANTIC paid $332,000 more in interest than it
received under the swap agreement during 1996. 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.
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
COMMUNITY RATE DATE TERMS BALANCE
--------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge.............. 7.000% 09/18/98(1) fully amortizing $ 5,888
Country Place Village I.... 7.750 11/01/00 (2) 2,004
Country Oaks............... 7.655 07/01/02 (3) 5,933
Cameron at Hickory Grove... 8.000 07/10/03 (4) 5,979
Cameron Villas I........... 8.750 04/01/24 fully amortizing 6,343
Cameron on the Cahaba II... 7.125 03/01/29 fully amortizing 8,021
--------
34,168
--------
Tax exempt fixed rate or
variable rate subject to
swap agreements(5):
Cameron Station............ 6.000% 05/01/07 interest only 14,500
Azalea Park................ (6) 06/01/25 interest only 15,500
Cameron Brook.............. (6) 06/01/25 interest only 19,500
Clairmont Crest............ (6) 06/01/25 interest only 11,600
Forestwood................. (6) 06/01/25 interest only 11,485
Foxbridge on the Bay....... (6) 06/01/25 interest only 10,400
The Greens................. (6) 06/01/25 interest only 10,400
Parrot's Landing I......... (6) 06/01/25 interest only 15,835
Sun Pointe Cove............ (6) 06/01/25 interest only 8,500
WintersCreek............... (6) 06/01/25 interest only 5,000
Less amounts held in
principal reserve
fund(7)................... (1,098)
--------
121,622
--------
$155,790
========
Total annual weighted-
average interest rate..... 6.95%
========
</TABLE>
- --------
(1) This loan is callable at the option of the mortgage lender on September
10, 1998 and at subsequent five-year intervals through September 10, 2013.
(2) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
F-24
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(5) These communities, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(6) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA") discussed below. Through these swap agreements,
ATLANTIC has effectively mitigated its variable interest rate exposure.
(7) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the tax-exempt bond issues. This credit enhancement agreement requires
ATLANTIC to make monthly payments on each mortgage, based on a 30-year
amortization, into a principal reserve account.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNTS FIXED
OF INTEREST
BONDS TERM 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 New York
5.0
million March 1996 to March 2006 6.18 Morgan Guaranty Trust Company of New York
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 it 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
mortgages payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balances at January 1............................ $118,524 $107,347 $ --
Mortgages assumed................................ 17,867 24,678 107,537
Mortgage proceeds................................ 20,500 -- --
Regularly scheduled principal payments........... (1,101) (623) (190)
Reduction upon disposition of multifamily
community....................................... -- (6,500) --
Principal payments at maturity................... -- (6,378) --
-------- -------- --------
Balances at December 31.......................... $155,790 $118,524 $107,347
======== ======== ========
</TABLE>
F-25
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Approximate principal payments due on mortgages 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................................................................... 7,136
1999................................................................... 1,577
2000................................................................... 3,554
2001................................................................... 1,812
Thereafter............................................................. 140,174
--------
$155,790
========
</TABLE>
NOTE 5 DISTRIBUTIONS
ATLANTIC made total cash distributions of $1.65 per Share in 1996, $1.60 per
Share in 1995 and $1.20 per Share in 1994. On December 19, 1996, ATLANTIC's
Board of Directors (the "Board") declared a distribution of $0.39 per Share
for the first quarter of 1997. The distribution is payable on February 19,
1997.
In addition, on November 12, 1996, ATLANTIC distributed 0.110875 shares of
Homestead common stock and warrants to purchase 0.074384 shares of Homestead
common stock per Share in the Homestead Distribution to each shareholder of
record on October 29, 1996. The Homestead Distribution was valued at $58.2
million based on the estimated fair value of the net assets sold to Homestead.
For federal income tax purposes, the following summarizes the taxability of
cash distributions paid for 1994 and 1995 and the estimated taxability for
1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Per Share:
Ordinary income....................................... $ 0.78 $ 0.92 $ 0.92
Return of capital..................................... 0.87 0.68 0.28
------- ------- -------
Total............................................... $ 1.65 $ 1.60 $ 1.20
======= ======= =======
</TABLE>
The securities distributed to each ATLANTIC shareholder in the Homestead
Distribution were valued at $1.91 per Share for federal income tax purposes,
of which $0.90 was taxable as ordinary income and $1.01 was treated as a
return of capital. ATLANTIC's tax return for the year ended December 31, 1996
has not been filed, and the taxability information for 1996 is based on the
best available data. ATLANTIC's tax returns for prior years have not been
examined by the Internal Revenue Service and, therefore, the taxability of
distributions and dividends is subject to change.
NOTE 6 SHAREHOLDERS' EQUITY
Shares Authorized
At December 31, 1996, 250,000,000 Shares were authorized. The Board may
classify or reclassify any unissued shares of ATLANTIC's stock from time to
time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications
and terms or conditions of redemption of such shares. No such shares have been
reclassified, except as described under "Purchase Rights" below, and no
reclassified shares are issued or outstanding.
F-26
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reverse Share Split
On September 10, 1996, the shareholders of ATLANTIC authorized a one-for-two
reverse split of ATLANTIC's Shares. A transfer from the common shares account
to additional paid-in capital was made to reflect the reduced number of Shares
outstanding after the split. All references in the accompanying financial
statements to the number of Shares and per Share amounts have been restated to
reflect the reverse Share split.
Ownership Restrictions and Significant Shareholder
ATLANTIC's Charter restricts beneficial ownership (or ownership generally
attributed to a person under the REIT tax rules) of ATLANTIC's outstanding
shares of stock by a single person, or persons acting as a group, to 9.8% of
ATLANTIC's outstanding shares of stock. The purpose of this provision is to
assist in protecting and preserving ATLANTIC's REIT status and to protect the
interest 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 ATLANTIC to qualify as a REIT
under the Internal Revenue Code of 1986, as amended, not more than 50% in
value of its outstanding shares of stock may be owned by five or fewer
individuals at any time during the last half of ATLANTIC's taxable year. The
provision permits five persons to individually acquire up to a maximum of 9.8%
each of the outstanding shares of stock, or an aggregate of 49% of the
outstanding shares and, thus, assists the Board in protecting and preserving
ATLANTIC's REIT status for tax purposes.
Shares of stock owned by a person or group of persons in excess of these
limits are subject to redemption by ATLANTIC. The provision does not apply
where a majority of the Board, in its sole absolute discretion, waives such
limit after determining that the status of ATLANTIC as a REIT for federal
income tax purposes will not be jeopardized or the disqualification of
ATLANTIC as a REIT is advantageous to the shareholders.
The Board has exempted Security Capital Group Incorporated ("Security
Capital Group"), an affiliate of the REIT Manager (see Note 7), from the
ownership restrictions described above. Security Capital Group owned 56.9% of
the outstanding Shares at December 31, 1996. For tax purposes, Security
Capital Group's ownership is attributed to its shareholders.
Capital Offerings
On October 18, 1996, ATLANTIC completed an initial public offering of
4,940,000 Shares at a price of $24.00 per Share (before adjusting for the
Homestead Distribution described in Notes 2 and 5). The Shares, excluding the
416,666 Shares sold to Security Capital Group, were sold through an
underwritten offering. The proceeds from the sale of these 4,940,000 Shares,
net of underwriters' commission and other expenses, were approximately $110.0
million. The proceeds were used to repay borrowings under ATLANTIC's $350
million line of credit.
From inception through May 1996, ATLANTIC raised capital through various
private offerings. ATLANTIC sold a total of 31,701,580 Shares during this
period at prices ranging from $20 to $23.136 per Share. In addition, ATLANTIC
exchanged 5,000,000 Shares at a price of $20 per Share as partial
consideration for the acquisition of a pool of communities in May 1994. The
acquisition price was negotiated prior to the seller becoming a related party.
To facilitate ATLANTIC's transactions with the seller, Security Capital Group
granted the seller certain rights to require Security Capital Group to
purchase the 5,000,000 Shares owned by the seller at pre-agreed prices. In
consideration for Security Capital Group purchasing Shares through its private
offerings, ATLANTIC assumed Security Capital Group's obligation with respect
to 3,750,000 Shares. ATLANTIC repurchased these Shares directly from the
seller. The remaining 1,250,000 Shares were acquired directly from the seller
by Security Capital Group.
F-27
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Option Plan
On March 12, 1996, ATLANTIC adopted the Security Capital Atlantic
Incorporated Share Option Plan for Outside Directors (the "Outside Directors
Plan"). There are 100,000 Shares reserved for issuance upon exercise of
options granted under the Outside Directors Plan. The Outside Directors Plan
provides that each member of the Board who is not an employee of ATLANTIC or
the REIT Manager on the date of each annual meeting of ATLANTIC's shareholders
will receive an option to purchase 1,000 Shares at an exercise price equal to
the fair market value of the Shares on such date. The options will be granted
on the date of the annual meeting of shareholders for the years 1997 through
and including 2006. The options granted are for a term of five years and are
exercisable in whole or in part. At December 31, 1996, 3,000 options had been
granted at an exercise price of $24.00 per Share, none of which have been
exercised.
Purchase Rights
On March 12, 1996, the Board declared and paid a dividend of one preferred
share purchase right ("Purchase Right") for each Share outstanding at the
close of business on March 12, 1996 to the holders of ATLANTIC's Shares on
that date. Holders of additional Shares issued after March 12, 1996 and prior
to the expiration of the rights on March 12, 2006 will be entitled to one
Purchase Right for each additional Share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC two one-hundredths of a share of non-redeemable Series
A Junior Participating Preferred Stock of ATLANTIC, par value $0.01 per share
(the "Participating Preferred Shares"), at a price of $40 per one one-
hundredth of a Participating Preferred Share, subject to adjustment. ATLANTIC
has designated two one-hundredths of the total Shares outstanding at any point
in time as Participating Preferred Shares. Purchase Rights are exercisable
when a person or group of persons (other than certain affiliates of ATLANTIC)
acquire beneficial ownership of 20% or more of the outstanding Shares,
commence or announce a tender offer or exchange offer which would result in
the beneficial ownership by a person or group of persons (other than certain
affiliates of ATLANTIC) of 25% or more of the outstanding Shares or file or
announce 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 or group of persons (other than certain affiliates of
ATLANTIC) of 25% or more of the outstanding Shares. Under certain
circumstances, each Purchase Right entitles the holder to purchase at the
Purchase Right's then current exercise price, a number of Shares having a
market value of twice the Purchase Right's exercise price. The acquisition of
ATLANTIC pursuant to certain mergers or other business transactions would
entitle each holder to purchase, at the Purchase Right's then current exercise
price, a number of the acquiring company's common shares having a market value
at that time equal to twice the Purchase Right's exercise price. The Purchase
Rights held by certain 20% shareholders (other than certain affiliates of
ATLANTIC) would not be exercisable. As of December 31, 1996, ATLANTIC had no
Participating Preferred Shares outstanding and the events required to exercise
the Purchase Rights had not occurred. Therefore, the Purchase Rights dividend
had no value and was not recorded in the financial statements.
NOTE 7 REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
REIT Management Agreement
ATLANTIC has a REIT management agreement (the "REIT Management Agreement")
with Security Capital (Atlantic) Incorporated (the "REIT Manager") to provide
management services to ATLANTIC. The REIT Manager is a subsidiary of Security
Capital Group (see Note 6). All officers of ATLANTIC are employees
F-28
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the REIT Manager and ATLANTIC currently has no employees. The REIT Manager
provides both strategic and day-to-day management of ATLANTIC, including
research, investment analysis, acquisition, development, marketing,
disposition of assets, asset management, due diligence, capital markets, legal
and accounting services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow, as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent Directors of ATLANTIC (of which there were
none in the periods reported) and (iii) 33% of any interest paid by ATLANTIC
on convertible subordinated debentures (of which there were none in the
periods reported); and after deducting (i) regularly scheduled principal
payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which there were none in the periods reported) and
(iii) distributions actually paid with respect to any non-convertible
preferred stock (of which there were none in the periods reported). Cash flow
does not include: (i) realized gains or losses from dispositions of
investments, (ii) interest income from cash equivalent investments and the
Homestead convertible mortgage notes and dividend and interest income from
Atlantic Development Services, (iii) provisions for possible losses on
investments and (iv) extraordinary items.
The REIT Manager also receives a fee of 0.20% per year on the average daily
balance of cash equivalent investments. ATLANTIC must also reimburse the REIT
Manager for third-party and out-of-pocket expenses relating to travel,
transaction costs and similar costs relating to the acquisition, development
or disposition of assets or the obtaining of financing for ATLANTIC and its
operations. The REIT Manager will pay all of its own salary and other overhead
expenses. ATLANTIC will not have any employee expense; however, it will pay
all of the third-party costs related to its normal operations, including
legal, accounting, travel, architectural, engineering, shareholder relations,
independent Director fees and similar expenses, property management and
similar fees paid on behalf of ATLANTIC, and travel expenses incurred in
seeking financing, community acquisitions, community dispositions and similar
activities on behalf of ATLANTIC and in attending ATLANTIC Board, committee
and shareholder meetings.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. Each of ATLANTIC and the REIT Manager may terminate the
REIT Management Agreement on 60 days' notice. Because of the year-to-year
nature of the agreement, its maximum effect on ATLANTIC's results of
operations cannot be predicted, other than that REIT management fees will
generally increase or decrease in proportion to cash flow increases or
decreases.
Property Management Agreement
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") provides
property management services to ATLANTIC. At January 31, 1997, SCG Realty
Services managed approximately 87% of ATLANTIC's multifamily communities.
Security Capital Group owns 100% of SCG Realty Services' voting shares.
The property management agreement, like the REIT Management Agreement, is
renewable annually and subject to a determination by the independent Directors
that SCG Realty Services' performance has been satisfactory and that the
compensation payable to SCG Realty Services is at rates prevailing in the
markets in which ATLANTIC operates. ATLANTIC may terminate the property
management agreement on 30 days' notice.
F-29
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8 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
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1996:
Rental income.............. $30,809 $32,876 $35,959 $38,085 $137,729
======= ======= ======= ======= ========
Earnings before
extraordinary item........ $ 6,650 $ 9,747 $11,131 $15,041 $ 42,569
======= ======= ======= ======= ========
Net earnings............... $ 6,650 $ 9,747 $11,131 $11,101 $ 38,629
======= ======= ======= ======= ========
Earnings per Share before
extraordinary item........ $ 0.24 $ 0.32 $ 0.34 $ 0.41 $ 1.33
======= ======= ======= ======= ========
Net earnings per Share..... $ 0.24 $ 0.32 $ 0.34 $ 0.30 $ 1.21
======= ======= ======= ======= ========
Weighted-average Shares.... 27,777 30,393 32,952 36,925 32,028
======= ======= ======= ======= ========
1995:
Rental income.............. $22,952 $24,330 $26,969 $29,383 $103,634
======= ======= ======= ======= ========
Net earnings............... $ 4,175 $ 4,956 $ 5,333 $ 5,175 $ 19,639
======= ======= ======= ======= ========
Net earnings per Share..... $ 0.22 $ 0.23 $ 0.23 $ 0.21 $ 0.89
======= ======= ======= ======= ========
Weighted-average Shares.... 18,567 21,642 23,340 24,153 21,944
======= ======= ======= ======= ========
</TABLE>
The total of the four quarterly amounts for net earnings per Share may not
equal the total for the year. These differences result from the use of a
weighted average to compute the average number of Shares outstanding.
NOTE 9 SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31,
1996, 1995 and 1994 are as follows:
(a) As discussed in Note 2, in 1996, ATLANTIC received Homestead common
stock valued at $51,717,000 upon the sale of the Homestead Assets (assets
with a net book value of $31,028,000 and cash of $16,595,000). A gain of
$2,839,000, net of expenses of $1,255,000, was recognized on the
transaction.
(b) As discussed in Note 2, in 1996, ATLANTIC received warrants to
purchase Homestead common stock valued at $6,511,000 in exchange for
entering into a funding commitment agreement. The value of the warrants has
been recognized as deferred revenue.
(c) ATLANTIC made a $58,228,000 non-cash distribution to its shareholders
in November 1996 consisting of the Homestead common stock and warrants.
(d) In December 1996, ATLANTIC declared a distribution for the first
quarter of 1997 in the amount of $14,778,000.
(e) In connection with the acquisition of communities, ATLANTIC assumed
mortgage debt in the amount of $17,867,000, $24,678,000 and $107,537,000 in
1996, 1995 and 1994, respectively.
(f) In 1994, ATLANTIC issued $100,000,000 of Shares in partial
consideration for the purchase of a pool of communities.
(g) ATLANTIC sold a community in 1995 that secured $6,500,000 of mortgage
debt.
F-30
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10 COMMITMENTS AND CONTINGENCIES
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the claims and
litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each community prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
communities that is likely to have a material adverse effect on its business,
financial position or results of operations.
NOTE 11 FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, other assets, accrued
expenses and other liabilities 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 rate fluctuates based on published market
rates. In the opinion of management, the interest rates associated with the
mortgages payable approximates 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.
NOTE 12 PROPOSED TRANSACTION
On January 22, 1997, ATLANTIC received a proposal from Security Capital
Group to exchange the REIT Manager and SCG Realty Services for Shares. As a
result of the proposed transaction, ATLANTIC would become an internally
managed REIT, and Security Capital Group would remain ATLANTIC's largest
shareholder. The Board has formed a special committee comprised of independent
Directors to review the proposed transaction. The proposed transaction is
subject to approval by the special committee, the Board and ATLANTIC's
shareholders.
F-31
<PAGE>
SCHEDULE III
SECURITY CAPITAL ATLANTIC
INCORPORATED
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITION(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>
(see notes following table)
F-32
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
----------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (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 --
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
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Park Place at
Turtle Run...... 1989 1996
Parrot's Landing
I............... 1986 1994
The Pointe at
Bayberry Lake... 1988 1996
Spencer Run..... 1987 1994
Sun Pointe
Cove............ 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Greenville, South
Carolina:
Cameron Court... 1991 1996
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron Century
Center.......... 1988 1996
Cameron at Kirby
Parkway......... 1985 1994
Country Oaks.... 1985 1996
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cameron Villas
I............... 1982 1994
Cameron Villas
II.............. 1981 1995
Kingston
Village......... 1982 1995
The Wellington.. 1988 1994
Raleigh, North
Carolina:
Cameron Lake.... 1985 1996
Cameron Ridge... 1985 1996
Cameron Square.. 1987 1994
Emerald Forest.. 1986 1996
Richmond,
Virginia:
Camden at
Wellesley....... 1989 1994
Potomac Hunt.... 1987 1994
</TABLE>
(see notes following table)
F-33
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
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>
(see notes following table)
F-34
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
--------------------- CAPITALIZED -------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N 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 COMMUNITIESL 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>
(see notes following table)
F-35
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONCLUDED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
---------------------- CAPITALIZED ---------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION
MUTIFAMILY COMMUNITIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (c) DEPRECIATION YEAR
- ----------------------- -------- -------- ------------- ------------- -------- ------------- ---------- ------------ ------------
<S> <C> <C> <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........... $155,790 $177,608 $726,004 $253,623 $180,207 $977,028 $1,157,235 $41,166
======== ======== ======== ======== ======== ======== ========== =======
<CAPTION>
YEAR
MUTIFAMILY COMMUNITIES ACQUIRED
- ----------------------- --------
<S> <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...........
</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.
F-36
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
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 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.. 179,752 187,267 571,288
Development expenditures, including land
acquisitions............................. 179,783 101,335 28,967
Recurring capital expenditures............ 2,783 -- --
Provision for possible loss............... (2,500) -- --
Dispositions.............................. (59,988) (30,934) --
Sale of Homestead Assets.................. (31,523) -- --
---------- -------- --------
Ending balances........................... $1,157,235 $888,928 $631,260
========== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
ACCUMULATED DEPRECIATION 1996 1995 1994
------------------------ ---------- -------- --------
<S> <C> <C> <C>
Beginning balances........................ $ 23,561 $ 8,798 $ 28
Depreciation for the period............... 20,824 15,925 8,770
Accumulated depreciation of real estate
disposed of.............................. (3,219) (1,162) --
---------- -------- --------
Ending balances........................... $ 41,166 $ 23,561 $ 8,798
========== ======== ========
</TABLE>
F-37
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying pro forma condensed financial statements for ATLANTIC
reflect the Merger pursuant to which ATLANTIC will acquire its REIT Manager
and Property Manager currently owned by Security Capital, in exchange for
ATLANTIC Common Shares. The Merger, if approved by a majority of ATLANTIC's
shareholders, will result in ATLANTIC becoming an internally managed REIT. The
Merger does not meet the significance tests of the Securities and Exchange
Commission that require pro forma financial statements and financial
statements of the acquired companies. However, pro forma condensed financial
statements have been included because management believes that presenting the
pro forma effects of the Merger will help shareholders evaluate and understand
the Merger.
The pro forma condensed financial statements have been prepared based on
certain pro forma adjustments to the historical financial statements of
ATLANTIC. The pro forma financial statements do not reflect the concurrent
rights offering as ATLANTIC is not able to estimate what portion, if any, of
the rights distributed to shareholders will ultimately be exercised.
The accompanying pro forma condensed balance sheet as of March 31, 1997 has
been prepared as if the Merger had been completed as of the balance sheet date
and also reflects: (i) the sale of $86.0 million of Common Shares on April 10,
1997 (4,000,000 Common Shares at $21.50 per Common Share), net of estimated
costs of issuance of $5.5 million, as if the Common Shares had been sold as of
March 31, 1997; (ii) the proposed Note Offering with aggregate gross proceeds
of $150.0 million, net of estimated costs of issuance of $4.3 million as if
the Notes had been issued as of March 31, 1997; and (iii) the proposed
Preferred Share Offering with gross proceeds of $50.0 million, net of
estimated costs of issuance of $2.0 million as if the Series A Preferred
Shares had been issued as of March 31, 1997. For pro forma purposes, the
proceeds from the sale of Common Shares, the Note Offering and the Preferred
Share Offering have been assumed to be used to repay borrowings on ATLANTIC's
$350 million line of credit.
The accompanying pro forma condensed statement of earnings for the three-
month period ended March 31, 1997 and the year ended December 31, 1996 have
been prepared as if the Merger had occurred on January 1, 1996 and also
reflects: (i) the sale of ATLANTIC's Homestead Village(R) properties to
Homestead and subsequent distribution of the Homestead common stock and
warrants to ATLANTIC's shareholders as if the transaction had been consummated
on January 1, 1996; (ii) the acquisition and disposition by ATLANTIC of all
communities acquired or disposed of from December 31, 1995 through March 31,
1997 as if these communities had been acquired or disposed of as of January 1,
1996; (iii) the assumption of mortgage debt associated with the acquisition of
the communities acquired from December 31, 1995 through March 31, 1997 as if
this mortgage debt had been assumed as of January 1, 1996; (iv) the sale of
Common Shares through private placement subsequent to December 31, 1995,
necessary to fund pro forma acquisitions as if the Common Shares had been sold
as of January 1, 1996; (v) the sale of Common Shares in ATLANTIC's initial
public offering in October 1996, net of costs of issuance, necessary to fund
pro forma acquisitions as if the Common Shares had been sold as of January 1,
1996; and (vi) the sale of $86.0 million of Common Shares on April 10, 1997
(4,000,000 Common Shares at $21.50 per Common Share), net of estimated costs
of issuance of $5.5 million as if the Common Shares had been sold as of
January 1, 1996; (vii) the proposed Note Offering with aggregate gross
proceeds of $150.0 million, net of estimated costs of issuance of $4.3 million
as if the Notes had been issued as of January 1, 1996; and (viii) the proposed
Preferred Share Offering with gross proceeds of $50.0 million, net of
estimated costs of issuance of $2.0 million as if the Series A Preferred
Shares had been issued as of January 31, 1996. For pro forma purposes, the
proceeds from the sale of Common Shares on April 10, 1997, the Note Offering
and the Preferred Share Offering have been assumed to be used to repay pro
forma borrowings on ATLANTIC's line of credit.
F-38
<PAGE>
The accompanying pro forma condensed statement of earnings for the three-
month period ended March 31, 1997 and the year ended December 31, 1996 does
not give effect to the fully stabilized results of operations related to
ATLANTIC communities under construction or in planning and owned at March 31,
1997 with a total budgeted completion cost of $410.2 million or 1996 and first
quarter 1997 development completions with a total budgeted cost of $56.4
million. Management believes there will be sufficient depth of management and
personnel such that additional assets can be acquired, developed and managed
without a significant increase in personnel or other costs. As a result,
management of ATLANTIC believes that the accretion in net earnings and funds
from operations from the Merger reflected in the pro forma condensed
statements of earnings is not indicative of the full accretion that is
expected to occur under an internally managed structure.
The pro forma condensed financial statements do not reflect the funding of
ATLANTIC's unfunded obligation of approximately $91.1 million at March 31,
1997 under a funding commitment agreement with Homestead or receipt of the
related convertible mortgage notes of approximately $98.0 million, as this
funding is related to future development costs of the properties sold to
Homestead.
The pro forma condensed financial statements do not purport to be indicative
the financial position or results of operations which would actually have been
obtained had the transactions described above been completed on the dates
indicated or which may be obtained in the future. The pro forma condensed
financial statements should be read in conjunction with the historical
financial statements of ATLANTIC included elsewhere herein. In management's
opinion all material adjustments necessary to reflect the effects of these
transactions have been made.
F-39
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED
SERIES A
PROPOSED PREFERRED
ATLANTIC SHARE THE NOTES SHARES
HISTORICAL ISSUANCE(A) SUBTOTAL MERGER SUBTOTAL ISSUANCE(B) ISSUANCE(C) PRO FORMA
---------- ----------- ---------- ------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Real estate............. $1,208,229 $ -- $1,208,229 $ -- $1,208,229 $ -- $ -- $1,208,229
Less accumulated
depreciation.......... 47,297 -- 47,297 -- 47,297 -- -- 47,297
---------- -------- ---------- ------ ---------- --------- -------- ----------
1,160,932 -- 1,160,932 -- 1,160,932 -- -- 1,160,932
Homestead Convertible
Mortgages.............. 25,891 -- 25,891 -- 25,891 -- -- 25,891
---------- -------- ---------- ------ ---------- --------- -------- ----------
Net investments........ 1,186,823 -- 1,186,823 -- 1,186,823 -- -- 1,186,823
Cash and cash
equivalents............ 3,953 -- 3,953 24 (d) 3,977 -- -- 3,977
Due from Security
Capital................ -- -- -- 625 (e) 625 -- -- 625
Other fixed assets...... -- -- -- 1,102 (f) 1,102 -- -- 1,102
Accounts receivable and
other assets........... 13,455 -- 13,455 413 (d) 13,868 4,250 -- 18,118
---------- -------- ---------- ------ ---------- --------- -------- ----------
Total assets......... $1,204,231 $ -- $1,204,231 $2,164 $1,206,395 $ 4,250 $ -- $1,210,645
========== ======== ========== ====== ========== ========= ======== ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Line of credit......... $ 295,250 $(80,480) $ 214,770 $ -- $ 214,770 $(145,750) $(48,000) $ 21,020
Long-term debt......... -- -- -- -- -- 150,000 -- 150,000
Mortgages payable...... 155,418 -- 155,418 -- 155,418 -- -- 155,418
Accounts payable....... 18,189 -- 18,189 1,062 (d) 19,251 -- -- 19,251
Accrued expenses and
other liabilities..... 20,654 -- 20,654 700 (g) 21,354 -- -- 21,354
---------- -------- ---------- ------ ---------- --------- -------- ----------
Total liabilities.... 489,511 (80,480) 409,031 1,762 410,793 4,250 (48,000) 367,043
---------- -------- ---------- ------ ---------- --------- -------- ----------
Shareholders' equity:
Series A Preferred
Shares (2,000,000
shares at a stated
liquidation
preference of $25.00
per share)............ -- -- -- -- -- -- 50,000 50,000
Common shares
(250,000,000
authorized,
37,891,580 issued
historical and
44,240,580 pro
forma)................ 379 40 419 23 (h) 442 -- -- 442
Additional paid-in
capital............... 747,640 80,440 828,080 379 (i) 828,459 -- (2,000) 826,459
Unrealized gains on
Homestead Convertible
Mortgages............. 5,900 -- 5,900 -- 5,900 -- -- 5,900
Distributions in
excess of net
earnings.............. (39,199) -- (39,199) -- (39,199) -- -- (39,199)
---------- -------- ---------- ------ ---------- --------- -------- ----------
Total shareholders'
equity.............. 714,720 80,480 795,200 402 795,602 -- 48,000 843,602
---------- -------- ---------- ------ ---------- --------- -------- ----------
Total liabilities and
shareholders'
equity.............. $1,204,231 $ -- $1,204,231 $2,164 $1,206,395 $ 4,250 $ -- $1,210,645
========== ======== ========== ====== ========== ========= ======== ==========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-40
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED STATEMENT OF EARNINGS
THREE-MONTH PERIOD ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED
SERIES A
PROPOSED PREFERRED
ATLANTIC SHARE THE NOTES SHARES PRO
HISTORICAL ISSUANCE(A) SUBTOTAL MERGER SUBTOTAL ISSUANCE(B) ISSUANCE(C) FORMA
---------- ----------- -------- ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income.......... $ 39,715 $ -- $ 39,715 $ -- $ 39,715 $ -- $ -- $ 39,715
Homestead Convertible
Mortgages interest
income................ 185 -- 185 -- 185 -- -- 185
Other interest income.. 57 -- 57 -- 57 -- -- 57
-------- ------- -------- ------- -------- ------- ------- --------
39,957 -- 39,957 -- 39,957 -- -- 39,957
-------- ------- -------- ------- -------- ------- ------- --------
Expenses:
Rental expenses........ 13,823 -- 13,823 1,540 (j) 15,363 -- -- 15,363
Property management
fees:
Paid to affiliate...... 1,280 -- 1,280 (1,280)(k) -- -- -- --
Paid to third parties.. 232 -- 232 232 -- -- 232
Depreciation........... 6,132 -- 6,132 71 (l) 6,203 -- -- 6,203
Interest:
Mortgage............... 2,650 -- 2,650 -- 2,650 -- -- 2,650
Line of credit and
long-term debt........ 2,111 (1,429)(m) 682 -- 682 413 (n) (852)(o) 243
REIT management fees
paid to affiliate..... 3,029 229 (m) 3,258 (3,258)(k) -- -- -- --
General and
administrative........ 265 -- 265 1,486 (p) 1,751 -- -- 1,751
Provision for possible
loss on investments... 200 -- 200 -- 200 -- -- 200
Other.................. 57 -- 57 -- 57 -- -- 57
-------- ------- -------- ------- -------- ------- ------- --------
29,779 (1,200) 28,579 (1,441) 27,138 413 (852) 26,699
-------- ------- -------- ------- -------- ------- ------- --------
Net earnings from
operations............. $10,178 $ 1,200 $ 11,378 $ 1,441 (q) $ 12,819 $ (413) $ 852 $ 13,258
Less Series A Preferred
Share dividends....... -- -- -- -- -- -- 1,125 (r) 1,125
-------- ------- -------- ------- -------- ------- ------- --------
Net earnings
attributable to Common
Shares................ $ 10,178 $ 1,200 $ 11,378 $ 1,441 $ 12,819 $ (413) $ (273) $ 12,133
======== ======= ======== ======= ======== ======= ======= ========
Weighted average Common
Shares outstanding..... 37,892 4,000 (s) 41,892 2,349 (t) 44,241 -- -- 44,241
======== ======= ======== ======= ======== ======= ======= ========
Net earnings
attributable to Common
Shares per Common
Share.................. $ 0.27 $ -- $ 0.27 $ 0.02 $ 0.29 $ (0.01) $ (0.01) $ 0.27
======== ======= ======== ======= ======== ======= ======= ========
Reconciliation of net
earnings attributable
to Common Shares to
funds from operations:
Net earnings
attributable to Common
Shares................ $ 10,178 $ 1,200 $ 11,378 $ 1,441 $ 12,819 $ (413) $ (273) $ 12,133
Add (Deduct):
Real estate
depreciation ......... 6,132 -- 6,132 -- 6,132 -- -- 6,132
Provision for possible
loss on investments... 200 -- 200 -- 200 -- -- 200
Amortization of
discount on conversion
feature and deferred
commitment fee related
to Homestead
Convertible Mortgages. (20) -- (20) -- (20) -- -- (20)
-------- ------- -------- ------- -------- ------- ------- --------
Funds from operations
(u)................... $ 16,490 $ 1,200 $ 17,690 $ 1,441 $ 19,131 $ (413) $ (273) $ 18,445
======== ======= ======== ======= ======== ======= ======= ========
Weighted average Common
Shares outstanding..... 37,892 4,000 41,892 2,349 44,241 -- -- 44,241
======== ======= ======== ======= ======== ======= ======= ========
Cash Flow Summary:
Net cash provided
(used) by operating
activities............ $ 16,913 $ 1,200 $ 18,113 $ 1,252 $ 19,365 $ (413) $ 852 $ 19,804
Net cash used by
investing activities.. (69,354) -- (69,354) (1,132) (70,486) -- -- (70,486)
Net cash provided
(used) by financing
activities............ $ 52,055 $ -- $ 52,055 $ (197) $ 51,858 $ -- $(1,125) $ 50,733
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-41
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITIONS PROPOSED
ATLANTIC HOMESTEAD DISPOSITIONS & THE NOTES
HISTORICAL TRANSACTION(V) SUBTOTAL SHARE ISSUANCE SUBTOTAL MERGER SUBTOTAL ISSUANCE (B)
---------- -------------- -------- -------------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income... $137,729 $ (424) $137,305 $11,056 (w) $148,361 $ -- $ 148,361 $ --
Interest income. 427 (21) 406 -- 406 -- 406 --
-------- ------- -------- ------- -------- ------- --------- -------
138,156 (445) 137,711 11,056 148,767 -- 148,767 --
-------- ------- -------- ------- -------- ------- --------- -------
Expenses:
Rental expenses. 49,101 (173) 48,928 4,279 (w) 53,207 5,662 (x) 58,869 --
Property
management fees:
Paid to affiliate. 4,208 -- 4,208 404 (w) 4,612 (4,612)(k) -- --
Paid to third
parties......... 971 -- 971 -- 971 -- 971 --
Depreciation.... 20,824 (43) 20,781 1,753 (y) 22,534 213 (z) 22,747 --
Interest:
Mortgage........ 9,484 -- 9,484 785 (aa) 10,269 -- 10,269 --
Line of credit
and long-term
debt............ 6,697 2,739 9,436 (5,168)(bb) 4,268 -- 4,268 1,229 (cc)
REIT management
fee paid to
affiliate....... 10,445 (475) 9,970 1,682 (ee) 11,652 (11,652)(k) -- --
General and
administrative.. 673 (32) 641 -- 641 5,282 (ff) 5,923 --
Provision for
possible loss on
investments..... 2,500 -- 2,500 -- 2,500 -- 2,500 --
Other........... 255 (23) 232 -- 232 -- 232 --
-------- ------- -------- ------- -------- ------- --------- -------
105,158 1,993 107,151 3,735 110,886 (5,107) 105,779 1,229
-------- ------- -------- ------- -------- ------- --------- -------
Net earnings from
operations
excluding gains
on dispositions
and extraordinary
item............. $ 32,998 $(2,438) $ 30,560 $ 7,321 $ 37,881 $ 5,107 (q) $ 42,988 $(1,229)
Less Series A
Preferred Share
dividends........ -- -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- --------- -------
Net earnings
attributable to
Common Shares... $ 32,998 $(2,438) $ 30,560 $ 7,321 $ 37,881 $ 5,107 $ 42,988 $(1,229)
======== ======= ======== ======= ======== ======= ========= =======
Weighted average
Common Shares
outstanding...... 32,028 -- 32,028 5,869 (hh) 37,897 2,349 (t) 40,246 --
======== ======= ======== ======= ======== ======= ========= =======
Net earnings
attributable to
Common Shares per
Common Share
excluding gains
on dispositions
and extraordinary
item............. $ 1.03 $ (0.08) $ 0.95 $ 0.05 $ 1.00 $ 0.07 $ 1.07 $ (0.03)
======== ======= ======== ======= ======== ======= ========= =======
Reconciliation of
net earnings
attributable to
Common Shares
excluding gains
on dispositions
and extraordinary
item to funds
from operations:
Net earnings
attributable to
Common Shares
excluding gains
on dispositions
and
extraordinary
item............ $ 32,998 $(2,438) $ 30,560 $ 7,321 $ 37,881 $ 5,107 $ 42,988 $(1,229)
Add (Deduct):
Real estate
depreciation.... 20,824 (43) 20,781 1,753 22,534 -- 22,534 --
Provision for
possible loss on
investments..... 2,500 -- 2,500 -- 2,500 -- 2,500 --
-------- ------- -------- ------- -------- ------- --------- -------
Funds from
operations (u).. $ 56,322 $(2,481) $ 53,841 $ 9,074 $ 62,915 $ 5,107 $ 68,022 $(1,229)
======== ======= ======== ======= ======== ======= ========= =======
Weighted average
Common Shares
outstanding...... 32,028 -- 32,028 5,869 37,897 2,349 40,246 --
======== ======= ======== ======= ======== ======= ========= =======
Cash Flow
Summary:
Net cash
provided (used)
by operating
activities...... $ 54,356 $(2,481) $ 51,875 $ 9,074 $ 60,949 $ 6,418 $ 67,367 $(1,229)
Net cash used by
investing
activities...... (287,418) -- (287,418) -- (287,418) (4,058) (291,476) --
Net cash
provided (used)
by financing
activities...... $230,907 $ -- $230,907 $ -- $230,907 $ (381) $ 230,526 $ --
<CAPTION>
PROPOSED
SERIES A
PREFERRED
SHARES PRO
ISSUANCE (C) FORMA
--------------- ---------
<S> <C> <C>
Revenues:
Rental income... $ -- $148,361
Interest income. -- 406
--------------- ---------
-- 148,767
--------------- ---------
Expenses:
Rental expenses. -- 58,869
Property
management fees:
Paid to affiliate. -- --
Paid to third
parties......... -- 971
Depreciation.... -- 22,747
Interest:
Mortgage........ -- 10,269
Line of credit
and long-term
debt............ (3,547)(dd) 1,950
REIT management
fee paid to
affiliate....... -- --
General and
administrative.. -- 5,923
Provision for
possible loss on
investments..... -- 2,500
Other........... -- 232
--------------- ---------
(3,547) 103,461
--------------- ---------
Net earnings from
operations
excluding gains
on dispositions
and extraordinary
item............. $ 3,547 $ 45,306
Less Series A
Preferred Share
dividends........ 4,500 (gg) 4,500
--------------- ---------
Net earnings
attributable to
Common Shares... $ (953) $ 40,806
=============== =========
Weighted average
Common Shares
outstanding...... -- 40,246
=============== =========
Net earnings
attributable to
Common Shares per
Common Share
excluding gains
on dispositions
and extraordinary
item............. $ (0.03) $ 1.01
=============== =========
Reconciliation of
net earnings
attributable to
Common Shares
excluding gains
on dispositions
and extraordinary
item to funds
from operations:
Net earnings
attributable to
Common Shares
excluding gains
on dispositions
and
extraordinary
item............ $ (953) $ 40,806
Add (Deduct):
Real estate
depreciation.... -- 22,534
Provision for
possible loss on
investments..... -- 2,500
--------------- ---------
Funds from
operations (u).. $ (953) $ 65,840
=============== =========
Weighted average
Common Shares
outstanding...... -- 40,246
=============== =========
Cash Flow
Summary:
Net cash
provided (used)
by operating
activities...... $ 3,547 $ 69,685
Net cash used by
investing
activities...... -- (291,476)
Net cash
provided (used)
by financing
activities...... $(4,500) $226,026
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-42
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(a) Reflects the sale of 4,000,000 Common Shares at a price of $21.50 per
Common Share which occurred on April 10, 1997. The total proceeds of $86.0
million, net of estimated costs of issuance of $5.5 million, results in $80.5
million of cash available which, for pro forma purposes, have been assumed to
be used to repay borrowings on ATLANTIC's $350 million unsecured line of
credit.
(b) Reflects the proposed sale of $100.0 million of % Notes and $50.0
million of % Notes, net of estimated costs of issuance of $4.3 million,
resulting in $145.7 million of cash available which, for pro forma purposes,
has been assumed to be used to repay borrowings on ATLANTIC's $350 million
unsecured line of credit.
(c) Reflects the proposed sale of 2,000,000 shares of Series A Preferred
Shares at a price of $25.00 per share. The total proceeds of $50.0 million,
net of estimated costs of issuance of $2.0 million, results in $48.0 million
of cash available which, for pro forma purposes, has been assumed to be used
to repay borrowings on ATLANTIC's $350 million unsecured line of credit. For
pro forma purposes, the issuance price and the redemption price are assumed to
be the same.
(d) Reflects the historical operating assets and liabilities of the REIT
Manager and Property Manager for which Security Capital will reimburse
ATLANTIC as more fully discussed in note (e).
(e) In accordance with the terms of the Merger Agreement, reflects the
amount due to ATLANTIC from Security Capital as reimbursement for the net
historical operating liabilities (as discussed in note (d)) acquired from the
REIT Manager and Property Manager as of March 31, 1997.
(f) Reflects the historical cost of fixed assets (primarily computer
equipment and software) of the REIT Manager and the Property Manager that are
being acquired by ATLANTIC. Assets and liabilities, consisting primarily of
intercompany and related accounts, which are not being acquired in the Merger
have not been reflected as they will have no impact on the financial position
of ATLANTIC.
(g) Reflects estimated costs of completing the Merger which are reflected in
shareholders' equity. See note (i).
(h) Reflects the par value of Common Shares issued as consideration for the
purchase of the net tangible assets of the REIT Manager and Property Manager.
For pro forma purposes, 2,349,000 Common Shares were calculated using the
market value of Common Shares issued on the date of the Merger, which for pro
forma purposes is assumed to be $54.6 million, and an assumed market value per
Common Share price of $23.25.
(i) Reflects: (i) the additional paid-in capital related to the Common
Shares issued to Security Capital and (ii) the distribution to Security
Capital which is calculated as the difference between the market value of
Common Shares issued on the date of the Merger plus the costs associated with
the Merger and the approximately $1.1 million of net tangible assets of the
REIT Manager and Property Manager being acquired by ATLANTIC. Because the
management companies being acquired do not qualify as "businesses" for
purposes of applying APB Opinion No. 16, "Business Combinations" and because
the transaction is occurring between entities under common control this
difference has been accounted for as a distribution to Security Capital.
<TABLE>
<S> <C> <C> <C>
Additional paid-in
capital associated with
Common Shares issued
($54,609,000 less par
value of $23,000)...... $54,586,000
Assumed market value of
Common Shares issued... $54,609,000
Costs associated with
the Merger............. 700,000
Net tangible assets
acquired............... (1,102,000)
-----------
54,207,000
-----------
Net adjustment to
additional paid-in
capital................ $ 379,000
===========
</TABLE>
F-43
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(j) Reflects the historical operating expenses of the Property Manager,
including charges for administrative services provided by Security Capital,
which were directly related to providing services to ATLANTIC for the three-
month period ended March 31, 1997. See note (p) for further discussion.
(k) Reflects the elimination of ATLANTIC's expenses related to REIT
management fees and property management fees. The corresponding fee revenue
recognized by the REIT Manager and the Property Manager have not been
reflected as they would be eliminated.
(l) Reflects the historical depreciation expense of the REIT Manager and the
Property Manager ($60,000) directly related to fixed assets being acquired in
the Merger for the three-month period ended March 31, 1997, as adjusted for
the estimated increase that would result from the capitalization of
acquisition and development costs ($11,000) discussed in note (p). These
capitalized costs will be depreciated utilizing the same lives and methods
currently utilized by ATLANTIC.
(m) Reflects the reduction to interest expense and related increase in the
REIT management fee resulting from the pro forma repayments on the line of
credit due to the Common Share issuance on April 10, 1997. The interest
reduction is calculated using the historical line of credit weighted average
daily interest rate of 7.1% for the three-month period ended March 31, 1997.
(n) Reflects the net change in interest expense as a result of the Note
Offering for the three-month period ended March 31, 1997 as follows:
<TABLE>
<S> <C>
Increase in interest expense related to
the Notes............................... $ 3,000
Decrease in interest expense associated
with the pro forma repayments on the
line of credit.......................... (2,587)
-------
Net change............................. $ 413
=======
</TABLE>
The interest expense on the Notes is calculated at an assumed effective rate
of 8.0% (including the amortization of associated deferred loan costs). The
reduction in interest expense associated with the line of credit is calculated
using the historical line of credit weighted average interest rate of 7.1%.
(o) Reflects the reduction in interest expense resulting from the pro forma
repayments on the line of credit due to the proposed Preferred Share Offering
calculated using the historical line of credit weighted average interest rate
of 7.1% for the three-month period ended March 31, 1997.
(p) Reflects the historical general and administrative costs of the REIT
Manager ($2,488,000) which were associated with providing services to ATLANTIC
for the three-month period ended March 31, 1997, reduced for
the pro forma adjustment to capitalize qualifying direct and incremental costs
relating primarily to the acquisition and development of real estate
investments ($1,002,000) that would have been capitalized by ATLANTIC under
GAAP, had the Merger occurred on January 1, 1996. Under the current management
structure, ATLANTIC pays a REIT management fee which is based upon 16% of cash
flow, as defined. The entire fee is expensed in accordance with GAAP since the
underlying costs of service are not directly incurred by ATLANTIC and the fees
do not represent a reimbursement of such costs. Upon consummation of the
Merger, all such costs will be incurred directly by ATLANTIC and to the extent
that they are qualifying costs, they will be capitalized in accordance with
GAAP.
In connection with the Merger, it is expected that ATLANTIC will enter into
a proposed Administrative Services Agreement (ASA) with Security Capital.
Under the ASA, Security Capital will provide ATLANTIC with administrative
services such as payroll, accounts payable, cash management, risk management,
internal audit, tax and legal administration, systems development and systems
support. Such services are currently
F-44
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
provided by Security Capital to ATLANTIC through the REIT Manager and the
Property Manager. The fees payable to Security Capital will be equal to
Security Capital's cost of providing such services, plus 20%. Based upon a
review of the terms of the ASA, it was determined that the costs that would
have been incurred under the ASA for the three-month period ended March 31,
1997 and the year ended December 31, 1996 would not differ materially from the
actual costs charged to the REIT Manager and the Property Manager by Security
Capital during these periods and therefore no pro forma adjustment are
required.
(q) No income tax adjustment is reflected in the accompanying pro forma
condensed statements of earnings as the operations of the REIT Manager and the
Property Manager will be merged into a qualified REIT subsidiary which, under
federal income tax laws, would not be subject to income taxes.
(r) Reflects the dividend related to the Series A Preferred Shares
calculated at an assumed dividend rate of 9.0% for the three-month period
ended March 31, 1997.
(s) Reflects the issuance of 4,000,000 Common Shares on April 10, 1997 as if
the Common Shares had been issued as of March 31, 1997.
(t) Reflects the increase in weighted average Common Shares outstanding that
would result from the issuance of Common Shares as consideration for the
purchase of the net tangible assets of the REIT Manager and the Property
Manager as if the purchase had occurred on January 1, 1996. The number of
Common Shares shown is based on the market value of Common Shares issued on
the date of the Merger, which for pro forma purposes is assumed to be $54.6
million, and an assumed market value per Common Share price of $23.25.
(u) Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) from real estate
transactions, provisions for possible losses, extraordinary items, real estate
depreciation and amortization of goodwill. Funds from operations should not be
considered as an alternative to net earnings or any other GAAP measurement of
performance as an indicator of ATLANTIC's operating performance or as an
alternative to cash flows from operating, investing or financing activities as
a measure of liquidity. ATLANTIC believes that funds from operations is
helpful to a reader as a measure of performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides a reader with an indication of the ability
of ATLANTIC to incur and service debt, to make capital expenditures and to
fund other cash needs. Furthermore, management believes that an understanding
of funds from operations will enhance the reader's comprehension of the impact
of the Merger to ATLANTIC which was a specific consideration of ATLANTIC's
Special Committee which is comprised of the independent members of ATLANTIC's
Board of Directors (the "Board") and was formed for purposes of making a
recommendation to the Board. Furthermore, the funds from operations measure
presented by ATLANTIC may not be comparable to similarly titled measures of
other REITS. Funds from operations is not intended to represent cash available
to Shareholders.
(v) Reflects the sale of ATLANTIC's Homestead Village(R) properties to
Homestead as if the transaction had taken place on January 1, 1996 as follows:
(i) the elimination of the historical results of operations of ATLANTIC's
Homestead Village(R) properties from January 1, 1996 to the date of sale
(October 17, 1996), (ii) the recognition of additional interest expense and a
corresponding reduction in the REIT management fee resulting from the
additional borrowings that would have been necessary in 1996 to complete the
Homestead transaction and (iii) the recognition of the historical interest
expense that was capitalized on the properties sold to Homestead and the
corresponding reduction in the REIT management fee.
F-45
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(w) All of ATLANTIC's acquisitions subsequent to December 31, 1995 were
acquired from unaffiliated third parties. These acquisitions are described
below:
<TABLE>
<CAPTION>
OCCUPANCY
ACQUISITION ACQUISITION AT DATE OF
COMMUNITY DATE LOCATION COST (IN 000'S) UNITS PRODUCT TYPE ACQUISITION
--------- ----------- -------- --------------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cameron at Hickory Grove
(formerly Esprit)...... 4/10/96 Charlotte, NC $ 8,000 202 Moderate 93.6%
Cameron Court (formerly
Paces Court)........... 4/22/96 Greenville, SC 11,007 234 Middle 91.0
Park Place at Turtle Run
(formerly Park Place).. 4/22/96 Ft. Lauderdale, FL 14,355 350 Moderate 91.7
The Pointe at Bayberry
Lake................... 5/29/96 Ft. Lauderdale, FL 16,650 308 Moderate 90.9
Cameron Pointe.......... 5/30/96 Atlanta, GA 14,450 214 Middle 96.3
Country Oaks............ 9/5/96 Memphis, TN 8,250 200 Moderate 98.0
West Springfield
Terrace................ 9/30/96 Washington, DC 16,100 244 Moderate 94.7
Cameron Ridge (formerly
Lincoln Ridge)......... 10/17/96 Raleigh, NC 10,000 228 Middle 99.6
Cameron Century Center
(formerly Arbors of
Century Center)........ 10/18/96 Memphis, TN 15,800 420 Moderate 90.7
Balmoral Village........ 10/22/96 Atlanta, GA 19,125 312 Middle 95.5
Cameron Lake (formerly
Summer Lake)........... 11/12/96 Raleigh, NC 9,225 196 Moderate 84.1
Emerald Forest.......... 12/19/96 Raleigh, NC 14,625 320 Moderate 85.6
Cameron Bayshore (for-
merly Chesapeake)...... 12/20/96 Tampa, FL 10,700 328 Moderate 97.0
</TABLE>
This adjustment reflects historical gross income and rental expenses for all
communities acquired subsequent to December 31, 1995 for the period from
January 1, 1996 to the respective dates of acquisition (results of operations
after the date of acquisition are included in ATLANTIC's historical operating
results). It also reflects the removal from ATLANTIC's historical balances of
gross income and rental expenses for all communities disposed of subsequent to
December 31, 1995 for the period from January 1, 1996 to the respective dates
of disposition. The historical gross income and rental expenses relating to
the period prior to ATLANTIC's acquisition of the communities exclude amounts
which would not be comparable to the proposed future operations of the
communities such as certain interest income and income taxes.
The following tables summarize the historical income and expense amounts
shown on the pro forma statement of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL RENTAL
INCOME EXPENSES(1)
------- -----------
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996:
Group C Communities................................ $ 5,805 $ 2,481
Group D Communities................................ 6,180 2,505
Group E Communities................................ 11,645 4,753
Other communities acquired in 1996................. 3,683 1,534
------- -------
Totals for the year.............................. 27,313 11,273
Less: Post acquisition amounts already included in
ATLANTIC's historical balances................ (9,690) (3,616)
Less: Dispositions................................. (6,567) (2,920)
------- -------
Net adjustment to ATLANTIC's historical balances. $11,056 $ 4,737 (2)
======= =======
</TABLE>
F-46
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) Includes property management fees and real estate taxes.
(2) Rental expenses are further adjusted by ($54) to reflect the difference
for the year ended December 31, 1996 between historical property
management fee expense and ATLANTIC's pro forma property management fee
expense.
The following analysis reconciles the audited information for the Group C
Communities, the Group D Communities and the Group E Communities to the
amounts contained in the pro forma statement of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL RENTAL
INCOME EXPENSES (1)
------- ------------
<S> <C> <C>
Group C Communities: Audited results of
operations for the year ended December 31, 1995. $ 5,876 $3,043
Adjustment to reflect the results of operations
of Group C Communities for 1996............... (71)(2) (562)(2)
------- ------
Total 1996 Group C........................... $ 5,805 $2,481
======= ======
Group D Communities: Audited results of
operations for the year ended December 31, 1995. $ 6,173 $2,576
Adjustment to reflect the results of operations
of Group D Communities for 1996............... 7(2) (71)(2)
------- ------
Total 1996 Group D........................... $ 6,180 $2,505
======= ======
Group E Communities: Audited results of
operations for the year ended December 31, 1995. $11,347 $4,990
Adjustment to reflect the results of operations
of Group E Communities for 1996............... 298(2) (237)(2)
------- ------
Total 1996 Group E........................... $11,645 $4,753
======= ======
</TABLE>
- --------
(1) Includes property management fees and real estate taxes.
(2) Represents incremental income and expense adjustments necessary to
reconcile the 1995 audited results with the 1996 actual results.
(x) Reflects the historical operating expenses of the Property Manager
($5,257,000), including charges for administrative services provided by
Security Capital (See note (p)) which were directly related to providing
services to ATLANTIC for the year ended December 31, 1996, as adjusted for the
estimated increase to historical operating expenses of the Property Manager
($405,000) resulting from the pro forma acquisitions, net of dispositions,
discussed in note (w).
(y) Reflects (i) the removal of depreciation expense recognized on
communities disposed of subsequent to December 31, 1995 which is included in
ATLANTIC's historical balances ($735,000) and (ii) the addition of
depreciation expense from January 1, 1996 through the acquisition date for all
communities acquired subsequent to December 31, 1995 ($2,488,000)
(depreciation expense after the date of acquisition is included in ATLANTIC's
historical operating results). This depreciation adjustment is based on
ATLANTIC's purchase cost assuming asset lives of ten to 40 years. Depreciation
is computed using a straight-line method.
(z) Reflects the historical depreciation expense of the REIT Manager and the
Property Manager ($193,000) directly related to fixed assets being acquired in
the Merger for the year ended December 31, 1996, as adjusted for the estimated
increase that would result from the capitalization of acquisition and
development-related costs
F-47
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
($20,000) discussed in note (ff). These capitalized costs will be depreciated
utilizing the same lives and methods currently utilized by ATLANTIC.
(aa) Reflects pro forma interest expense for the year ended December 31,
1996 on the three mortgage notes assumed in connection with acquisitions in
1996. The interest rates on the mortgage notes varies from 7.0% to 8.0%.
(bb) Represents the reduction to interest expense resulting from the pro
forma repayments on the line of credit due to the Common Share issuance on
April 10, 1997. The interest reduction is calculated using the historical line
of credit weighted-average daily interest rate of 7.39% for 1996.
(cc) Reflects the net change in interest expense as a result of the Note
Offering for the year ended December 31, 1996 as follows:
<TABLE>
<S> <C>
Increase in interest expense related to the Notes.............. $ 12,000
Decrease in interest expense associated with the pro forma
repayments on the line of credit.............................. (10,771)
--------
Net change................................................... $ 1,229
========
</TABLE>
The interest expense on the Notes is calculated at an assumed effective rate
of 8.0% (including the amortization of associated deferred loan costs). The
reduction in interest expense associated with the line of credit is calculated
using the historical line of credit weighted average interest rate of 7.39%.
(dd) Reflects the reduction in interest expense resulting from the pro forma
repayments on the line of credit due to the proposed Preferred Share Offering
calculated using the historical line of credit weighted average interest rate
of 7.39% for the year ended December 31, 1996.
(ee) Reflects the additional REIT management fee that would have been
incurred in the year ended December 31, 1996, had the pro forma acquisitions
and dispositions and the pro forma repayments on the line of credit all
occurred as of January 1, 1996.
(ff) Reflects the historical general and administrative costs of the REIT
Manager ($9,383,000), including charges for administrative services provided
by Security Capital, which were associated with providing services to ATLANTIC
for the year ended December 1996, reduced for the pro forma adjustment to
capitalize qualifying direct and incremental costs relating primarily to the
acquisition and development of real estate investments ($4,101,000) that would
have been capitalized by ATLANTIC under GAAP, had the Merger occurred on
January 1, 1996. See note (p) for further discussion.
Historical general and administrative costs of the REIT Manager relating to
the operations of Homestead Village properties which were contributed to
Homestead (as discussed in note (v)), have not been reflected as they would
not impact the ongoing operations of ATLANTIC.
(gg) Reflects the dividends related to the Series A Preferred Shares
calculated at an assumed dividend rate of 9.0% for the year ended December 31,
1996.
(hh) The number of Common Shares used in the calculation of the pro forma
per Common Share data was based on the weighted-average number of Common
Shares outstanding during the period, adjusted to give effect to Common Shares
assumed to have been issued on January 1, 1996 as necessary to complete the
pro forma acquisitions and to make the pro forma repayments on the line of
credit.
F-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group C
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group C Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group C Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group C
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group C Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
April 26, 1996
F-49
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP C COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Gross income:
Rental...................................................... $5,760,923
Other....................................................... 114,949
----------
Total gross income........................................ 5,875,872
----------
Direct operating expenses:
Utilities and other operating expenses...................... 1,279,237
Real estate taxes........................................... 615,907
Repairs and maintenance..................................... 783,851
Management fees............................................. 228,903
Advertising................................................. 88,289
Insurance................................................... 47,163
----------
Total direct operating expenses........................... 3,043,350
----------
Excess of gross income over direct operating expenses......... $2,832,522
==========
</TABLE>
See accompanying notes.
F-50
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP C COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995,
relates to the operations of the following Group C Communities which were
acquired from unaffiliated parties by Security Capital Atlantic Incorporated
("ATLANTIC") between January 1, 1996 and April 29, 1996:
<TABLE>
<CAPTION>
ACQUISITION DATE COMMUNITY NAME LOCATION ACQUISITION COST
---------------- -------------- -------------------------- ----------------
(IN 000S)
<C> <S> <C> <C>
April 10, 1996 Cameron at Charlotte, North Carolina $ 8,000
Hickory
Grove
(formerly
Esprit)
April 22, 1996 Park Place Ft. Lauderdale, Florida 14,355
at Turtle
Run
(formerly
Park
Place)
April 22, 1996 Cameron Greenville, South Carolina 11,007
Court
(formerly
Paces
Court)
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group C Communities for
the year ended December 31, 1995, as certain costs such as depreciation,
amortization, certain mortgage interest, professional fees and other costs not
considered comparable to the future operations of the Group C Communities have
been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
3. RELATED PARTY TRANSACTIONS
Management fees of $228,903 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
During 1995, the Cameron at Hickory Grove Apartments secured an 8.75%,
interest-only mortgage note with a balance of $6,660,000. ATLANTIC assumed
this mortgage note on April 10, 1996 in connection with the acquisition of the
community. Substantial modifications in the terms of the note were made prior
to the assumption by ATLANTIC. Therefore, on a continuing basis, the interest
expense incurred will differ from the amounts incurred prior to ATLANTIC's
assumption of the debt. Accordingly, no interest expense is recognized in the
accompanying combined Historical Summary.
F-51
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group D
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group D Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group D Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group D
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group D Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
August 13, 1996
F-52
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH THE
EARLIER OF JUNE 30, 1996 OR DATE OF ACQUISITION
<TABLE>
<CAPTION>
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Gross income:
Rental................................................. $5,927,498 $2,530,039
Other.................................................. 245,113 95,154
---------- ----------
Total gross income................................... 6,172,611 2,625,193
---------- ----------
Direct operating expenses:
Utilities and other operating expenses................. 1,252,442 595,707
Real estate taxes...................................... 557,446 278,615
Repairs and maintenance................................ 336,297 78,735
Management fees........................................ 266,917 106,175
Advertising............................................ 65,935 35,320
Insurance.............................................. 97,417 58,141
---------- ----------
Total direct operating expenses...................... 2,576,454 1,152,693
---------- ----------
Excess of gross income over direct operating expenses.... $3,596,157 $1,472,500
========== ==========
</TABLE>
See accompanying notes.
F-53
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH THE
EARLIER OF JUNE 30, 1996 OR DATE OF ACQUISITION (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995 and
the period from January 1, 1996 through the earlier of June 30, 1996 or the
date Security Capital Atlantic Incorporated ("ATLANTIC") acquired the
community (the "Date of Acquisition") relates to the operations of the
following Group D Communities which have been or are likely to be acquired
from unaffiliated parties by ATLANTIC between May 29, 1996 and September 30,
1996:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
DATE COMMUNITY NAME LOCATION COST
----------- -------------- -------- -----------
(IN 000'S)
<S> <C> <C> <C>
May 29, 1996 The Pointe at Bayberry Lake Ft. Lauderdale, Florida $16,650
May 30, 1996 Cameron Pointe (formerly Calibre Pointe) Atlanta, Georgia 14,450
-- (1) Country Oaks Memphis, Tennessee -- (1)
</TABLE>
- --------
(1) Community is under contract
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group D Communities for
the year ended December 31, 1995 and the period from January 1, 1996 through
the earlier of June 30, 1996 or the Date of Acquisition, as certain costs such
as depreciation, amortization, certain mortgage interest, professional fees
and other costs not considered comparable to the future operations of the
Group D Communities have been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-54
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONCLUDED)
Unaudited Interim Historical Summary
The combined Historical Summary for the period from January 1, 1996 through
the earlier of June 30, 1996 or the Date of Acquisition is unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
such combined Historical Summary have been included. The results of operations
for the period are not necessarily indicative of the Group D Communities'
future results of operations.
3. RELATED PARTY TRANSACTIONS
Management fees of $266,917 and $106,175 were paid to affiliates of the
prior owners under property management contracts in 1995 and 1996,
respectively.
4. DEBT ASSUMPTION
In June 1995, the Country Oaks Apartments secured a mortgage note in the
amount of $6,010,000. The note provides for monthly payments of $42,663,
including principal and interest at 7.655% through July 2002, at which time
all outstanding principal and interest will be due. ATLANTIC will assume this
note in connection with the acquisition of the community.
F-55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group E
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group E Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary 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 combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the basis of accounting used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined Historical Summary. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group E Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group E
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group E Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
January 31, 1997
F-56
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND
THE PERIOD FROM JANUARY 1, 1996 THROUGH THE DATE OF ACQUISITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
Gross income:
Rental.................................................... $10,774 $9,022
Other..................................................... 573 554
------- ------
Total gross income...................................... 11,347 9,576
------- ------
Direct operating expenses:
Utilities and other operating expenses.................... 1,674 1,351
Real estate taxes......................................... 956 848
Repairs and maintenance................................... 1,470 1,198
Management fees........................................... 468 378
Interest on certain obligations assumed................... 437 341
Advertising............................................... 207 148
Insurance................................................. 215 176
------- ------
Total direct operating expenses......................... 5,427 4,440
------- ------
Excess of gross income over direct operating expenses....... $ 5,920 $5,136
======= ======
</TABLE>
See accompanying notes.
F-57
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND
THE PERIOD FROM JANUARY 1, 1996 THROUGH THE DATE OF ACQUISITION (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995 and
the period from January 1, 1996 through the date Security Capital Atlantic
Incorporated ("ATLANTIC") acquired the community (the "Date of Acquisition"),
relates to the operations of the following Group E Communities which were
acquired from unaffiliated parties by ATLANTIC between September 30, 1996 and
December 20, 1996:
<TABLE>
<CAPTION>
ACQUISITION
PRICE
DATE COMMUNITY NAME LOCATION (IN 000'S)
---- -------------- -------- -----------
<C> <S> <C> <C>
September 30, 1996 West Springfield Terrace Washington, D.C. $16,100
October 17, 1996 Cameron Ridge (formerly Lin- Raleigh, NC 10,000
coln Ridge)
October 18, 1996 Cameron Century Center Memphis, TN 15,800
(formerly Arbors at Century
Center)
October 22, 1996 Balmoral Village Atlanta, GA 19,125
December 20, 1996 Cameron Bayshore Tampa, FL 10,700
(formerly Chesapeake)
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement of Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group E Communities for
the year ended December 31, 1995 and the period from January 1, 1996 through
the Date of Acquisition, as certain costs such as depreciation, amortization,
certain mortgage interest, professional fees and other costs not considered
comparable to the future operations of the Group E Communities have been
excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consists of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
F-58
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
Unaudited Interim Historical Summary
The combined Historical Summary for the period from January 1, 1996 through
the Date of Acquisition is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such combined Historical
Summary have been included. The results of operations for the period are not
necessarily indicative of the Group E Communities' future results of
operations.
3. RELATED PARTY TRANSACTIONS
Management fees of $73,000 and $73,000 in 1995 and 1996, respectively, and
allocated accounting costs of $53,000 and $49,000 in 1995 and 1996,
respectively, were paid to affiliates of the prior owners under property
management contracts.
4. DEBT ASSUMPTION
ATLANTIC assumed outstanding debt in connection with the acquisition of the
Lincoln Ridge Apartments. A 7% mortgage note with an outstanding balance of
$5,920,186 at October 17, 1996 (the date of acquisition) was assumed by
ATLANTIC. The note, which is collateralized by the community, matures on
September 10, 2013, subject to the lender's call options in 1998, 2003 or
2008. The mortgage note requires monthly principal and interest payments of
$50,660 until September 1998, at which time the interest rate will be based on
the prime rate or, at ATLANTIC's option, may be fixed at a rate based on the
current Treasury rate. Beginning in September, 1998, the note requires monthly
payments of interest and monthly principal payments beginning at $15,206,
increasing by approximately 9% annually.
The mortgage note had an outstanding balance of $6,071,000 at December 31,
1995. ATLANTIC's assumption of this mortgage note did not provide for any
modification to the original terms of the note through September 1998;
therefore, interest expense incurred prior to ATLANTIC's assumption is
representative of future interest expense. Accordingly, interest expense of
$437,000 and $341,000 for 1995 and 1996, respectively, is recognized in the
combined Historical Summary.
F-59
<PAGE>
PROSPECTUS
LOGO
WARRANTS TO PURCHASE
$250,000,000 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 $250 million of 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 $46.9 million of Warrants, holders of
PTR Common Shares and PTR Preferred Shares will receive an aggregate of
approximately $102 million of Warrants and holders of SCI Common Shares, SCI
Preferred Shares and Units will receive an aggregate of approximately $101
million of Warrants.
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 would become internally managed real estate investment
trusts ("REITs"). The aggregate number of Warrants that will be issued to
Securityholders of any particular REIT will be determined by dividing $46.9
million, $102 million and $101 million, in the case of ATLANTIC, PTR and SCI,
respectively, by the exercise price of the Warrants. The actual number of
Warrants that will be issued to any particular Securityholder will depend on
both the price at which the Class B Shares are trading, and 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 the record date determined by the Board of Directors of
Security Capital (the "Warrant Issuance Record Date"). The exercise price of
the Warrants will be based on the closing price of the Class B Shares on the
day prior to the date the Warrants are issued (the "Warrant Issuance Date"),
and the Warrants will have a term of one year.
The Class B Shares and the Warrants have been approved for listing on the
New York Stock Exchange (the "NYSE") under the symbols "SCZ.B" and "SCZ WS",
respectively, subject to official notice of issuance. 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 August 6, 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.......................... 46
Selected Financial Information...... 59
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 61
Relationships with Operating
Companies.......................... 75
Certain Relationships and
Transactions....................... 86
Principal Shareholders.............. 89
Description of Capital Stock........ 92
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Provisions of Maryland Law
and of Security Capital's Charter
and Bylaws........................ 99
Shares Available for Future Sale... 102
Policies with Respect to Certain
Activities........................ 103
Certain Federal Income Tax
Consequences...................... 104
Certain United States Federal Tax
Considerations for Non-U.S.
Holders of Class B Shares......... 106
ERISA Matters...................... 108
Experts............................ 110
Legal Matters...................... 110
Available Information.............. 111
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.
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. Concurrently with the Warrant Issuance,
Security Capital is conducting an initial public offering of $250 million in
aggregate amount of its Class B shares (the "Offering"). There can be no
assurance that the Offering will occur. Unless otherwise indicated, the
information contained in this Prospectus assumes approval by the shareholders
of ATLANTIC, PTR and SCI (each as defined below) of the proposed merger
transactions described below (see "Business--The Proposed Mergers"), but does
not give effect to the Offering.
SECURITY CAPITAL GROUP INCORPORATED
Security Capital is a real estate research, investment and management
company. Management has assembled a superior team of operating and investment
professionals to implement the firm's strategy. Prior to the 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 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 ("Security Capital
USREALTY") and Homestead Village Incorporated ("Homestead"), each of which is
now publicly traded. Through June 30, 1997, Security Capital has invested an
aggregate of approximately $2.0 billion in the common shares of PTR, SCI,
ATLANTIC, Security Capital USREALTY and Homestead and warrants of Homestead.
Those securities had an aggregate market value of approximately $3.0 billion
(based on the closing price of those securities on the principal exchange on
which such securities are listed on June 30, 1997). As of June 30, 1997,
Security Capital owned approximately 35% of PTR, 51% of ATLANTIC, 66% of
Homestead, 44% of SCI and 32% of Security Capital 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 June
30, 1997, these five publicly traded real estate companies had a
3
<PAGE>
collective equity market capitalization (assuming full conversion or exercise
of convertible securities, options and warrants) of approximately $8.5 billion.
Security Capital USREALTY has made strategic investments in three publicly
traded companies, CarrAmerica Realty Corporation ("CarrAmerica"), Storage USA,
Inc. ("Storage USA") and Regency Realty Corporation ("REGENCY"), and one
private company, Pacific Retail Trust ("PACIFIC RETAIL"), which had a
collective equity market capitalization of approximately $4.2 billion as of
June 30, 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 and Security Capital Employee REIT Fund, in which Security
Capital has initially committed to invest $200 million, $50 million and $100
million, respectively, and several other new business initiatives which are in
various stages of research and development. Security Capital USREALTY also has
several new business initiatives expected to be operational by the end of 1997.
See "Business--Future Strategy." Security Capital believes that an important
component of its future growth will come from new business initiatives and the
implementation of new business strategies, although there can be no assurance
that current new business initiatives will be continued or prove successful.
SECURITY CAPITAL
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 32% $1,989
Security Capital Atlantic
Incorporated 51% 1,005
Homestead Village Incorporated (3) 30% 1,008
Security Capital Industrial Trust 38% 2,436
Security Capital USREALTY 32% 2,021
------
Total $8,459
======
CarrAmerica Realty Corporation
(4)(5) 38% $1,863
Storage USA, Inc. (4)(5) 34% 1,137
Regency Realty Corporation (4)(5) 39% 604
Pacific Retail Trust (4)(5) 69% 614
------
Total $4,218
======
</TABLE>
- --------
(1) Ownership and market capitalization are as of June 30, 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 June 30, 1997, Security Capital's percentage ownerships in its
investees, based on common shares outstanding on such date, were 35% of PTR,
51% of ATLANTIC, 66% of Homestead, 44% of SCI and 32% of Security Capital
USREALTY. Equity market capitalization, as of June 30, 1997, based on common
shares outstanding was $1.8 billion for PTR, $1.0 billion for ATLANTIC, $421
million for Homestead, $2.1 billion for SCI, and $2.0 billion for Security
Capital USREALTY.
(3) Ownership of Homestead assumes that all convertible mortgages have been
funded and converted into shares of Homestead common stock and that all
warrants to purchase shares of Homestead common stock have been exercised.
Ownership of Homestead does not include any ownership Security Capital may
obtain in Homestead
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 Security Capital USREALTY through its
subsidiary and is not directly advised by Security Capital. The ownership
percentage reflected is that of Security Capital USREALTY.
(5) As of June 30, 1997, Security Capital USREALTY's percentage ownerships in
its investees, based on common shares outstanding on such date, were 42% of
CarrAmerica, 37% of Storage USA, 37% of REGENCY and 68% 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 PROPOSED MERGER TRANSACTIONS
Security Capital, through its affiliates, currently provides real estate
investment trust ("REIT") management and property management services to each
of ATLANTIC, PTR and SCI. In December 1996, management of Security Capital
proposed to its Board that Security Capital exchange its REIT management
companies and property management companies for common shares of ATLANTIC, PTR
and SCI, respectively. In January 1997, based upon the direction of the Board
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 (collectively, the "Merger Agreements"),
pursuant to which Security Capital will cause its affiliates providing REIT
management and property management services to each of ATLANTIC, PTR and SCI to
be merged into newly formed subsidiaries of such respective entities (the
"Mergers") with the result that all personnel employed in the REIT management
and property management businesses would become officers and employees of
ATLANTIC, PTR and SCI, respectively. In exchange for the transfer of those
businesses, Security Capital will receive $54,608,549 of ATLANTIC's shares of
common stock, $75,838,457 of PTR's common shares of beneficial interest and
$81,870,626 of SCI's common shares of beneficial interest. Each Merger is
subject to approval of the shareholders of each of ATLANTIC, PTR and SCI,
respectively, and to various customary closing conditions.
THE RIGHTS OFFERINGS
In order to allow the common shareholders of ATLANTIC, PTR and SCI,
respectively, to maintain (and to the extent a shareholder oversubscribes 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 is conducting a rights offering
entitling its common shareholders (other than Security Capital) to purchase
additional common shares. Shareholders are entitled to subscribe for common
shares not purchased by other common shareholders pursuant to an
oversubscription privilege. The rights offering price for each company is at a
discount to the price at which common shares in each of ATLANTIC, PTR and SCI
will be issued to Security Capital pursuant to 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 are as follows:
<TABLE>
<CAPTION>
ATLANTIC PTR SCI
-------- -------- -------
<S> <C> <C> <C>
Exercise Price in Rights Offering.................... $22.375 $21.8125 $21.00
Price to Security Capital in Merger.................. $23.675 $23.0125 $22.175
NYSE Closing Price on August 5, 1997................. $24.00 $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.
5
<PAGE>
THE WARRANT ISSUANCE
As part of the transactions contemplated by the Merger Agreements, Security
Capital will issue warrants to purchase an aggregate of $250 million 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 are being 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 number of Class B Shares subject to
the Warrants will be based on the market price of the Class B Shares on a date
within approximately 60 days following the closing of the Mergers. The exercise
price of the Warrants will be based on the market price of the Class B Shares
on the Warrant Issuance Date, and the Warrants will have a term of one year. In
the event that there is no market price for the Class B Shares, the exercise
price of the Warrants will be the fair market value of the Class B Shares as
determined in good faith by the Board. See "Risk Factors--No Prior Market for
Class B Shares or Warrants."
THE OFFERING
Security Capital filed a registration statement with the Securities and
Exchange Commission on April 29, 1997, relating to the offering of $250 million
in aggregate amount of Class B Shares ($287.5 million if the underwriters'
overallotment option is exercised in full). It is currently expected that the
Offering will occur in the third quarter of 1997, although there can be no
assurance that the Offering will occur.
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 three months ended March 31, 1997, for the
three months ended March 31, 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>
THREE MONTHS ENDED MARCH 31, 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...... $ 39,035 $ 14,963 $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues......... 50,667 30,809 145,907 103,634 55,071 10,916 1,592 -
Services Division
revenues (2)........... 22,970 15,408 77,512 49,404 - - - -
Total revenues.......... 114,031 61,539 398,122 200,534 156,855 17,503 3,534 467
Rental expenses......... 19,957 12,635 58,259 40,534 23,052 1,428 292 -
Services Division
expenses(2)............ 21,324 16,819 79,296 56,317 - - - -
General, administrative
and other (2).......... 11,701 5,654 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). 26,665 22,291 93,912 78,785 29,647 1,616 180 -
Line of credit........ 1,412 2,240 6,256 5,977 6,424 1,808 960 88
Majority-owned
subsidiaries (4)...... 4,761 4,342 17,056 19,042 8,057 362 - -
-------------- -------------- --------- --------- --------- --------- --------- ---------
Total interest expense. 32,838 28,873 117,224 103,804 44,128 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares (5)............. $ 3,349 $ (9,854) $ 32,067 $(201,634) $ (7,685) $ 5,155 $ 1,014 $ 141
<CAPTION>
THREE MONTHS ENDED MARCH 31, 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.............. $ 18.75 - $ 56.25 - - - - -
Net earnings (loss)
attributable to
Class A Shares......... $ 2.53 $ (9.91) $ 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..... 1,322,054 994,789 1,133,711 896,681 458,945 131,776 46,913 35,565
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -------------------------------------------------------------
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.. $1,512,391 $1,438,937 $ 930,043 $ 230,756 $ 161,270 $ 68,160 $ 24,911
Real estate, net of
accumulated
depreciation (1)....... 1,463,173 1,365,373 865,367 2,005,957 478,630 41,577 -
Total assets............ 3,222,715 2,929,284 1,855,056 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3)... 1,036,712 940,197 718,611 514,383 48,970 6,532 -
Majority-owned
subsidiaries (4)...... 273,163 257,099 118,524 301,787 47,988 - -
Minority interests...... 401,134 394,537 159,339 554,752 157,545 4,884 -
Total shareholders'
equity................. $1,018,809 $ 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, the ATLANTIC Proxy Statement, the PTR Proxy Statement or the
SCI Proxy Statement, 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-quarter year period ended March 31, 1997, Security Capital's book
value per common share (after payment of convertible debt interest and
preferred stock dividends) increased at a compounded average growth rate of
7.92% 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
in varying stages of research and development, and Security Capital USREALTY
also has several new business initiatives that are expected to be operational
by the end of 1997. These new business initiatives, to the extent they are
developed into new businesses, 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, Anthony R.
Manno, Jr., Todd W. Mansfield, Caroline S. McBride, Daniel F. Miranda, Mary
Lou Rogers, Donald E. Suter and Paul E. Szurek. 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.
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
8
<PAGE>
and to pay principal and interest on debt, including borrowings under the
revolving line of credit of SC Realty Incorporated ("SC Realty"), a wholly
owned subsidiary of Security Capital which holds the Company's shares of PTR,
SCI, ATLANTIC, Security Capital USREALTY and Homestead and warrants to
purchase shares of Homestead. This revolving line of credit is secured by such
securities and is guaranteed by Security Capital. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Investing and
Financing Activities--Line of Credit." Although many of the Company's
operating companies are REITs, others are not and the Company's ability to
obtain dividends, fees or other funds from such operating companies depends on
the economic performance of such operating companies, the prior claims of
creditors or holders of preferred 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 March 31,
1997, Security Capital had approximately $1.3 billion of consolidated
outstanding long-term indebtedness (of which $273 million represented
indebtedness of Security Capital's consolidated operating companies) and $295
million of consolidated outstanding short-term indebtedness (all of which
represented indebtedness of Security Capital's consolidated operating
companies). Of the $1.3 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 $273
million (all of which would be indebtedness of Security Capital's consolidated
operating companies). Security Capital does not guarantee the debt of any of
its consolidated or unconsolidated operating companies. In addition, Security
Capital's operating companies have a substantial amount of indebtedness and,
in certain cases, have issued preferred stock to third parties.
In 1993, Security Capital 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 $188.5 million as of July 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Investing and Financing Activities--Line of Credit."
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
9
<PAGE>
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 March 31, 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 requirements for operating and investing activities for the next
twelve months. Security Capital intends to finance its long-term business
activities (including investments in new business initiatives) through the
proceeds of the Offering, borrowings under an expanded line of credit and the
exercise of the Warrants. 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 March 31, 1997, Security Capital had an accumulated deficit of
$202.4 million. Although Security Capital had net earnings for 1996 and the
first quarter 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 Security Capital 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.
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 July 15,
1997, directors and executive officers of Security Capital as a group
beneficially own 96,134 Class A Shares, representing approximately 7.11% of
those shares, and also own options to purchase additional Class A Shares. At
that same date, such directors and officers as a group beneficially own 39,578
common shares of ATLANTIC (less than 1%), 382,804 shares of Homestead common
stock (1.37%), 785,506 common shares of
10
<PAGE>
PTR (less than 1%), 689,285 common shares of SCI (less than 1%), and 3,050,330
common shares of Security Capital USREALTY (2.23%). See "Principal
Shareholders." William D. Sanders is Chairman and Chief Executive Officer of
Security Capital and non-executive chairman of Security Capital 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 Security Capital
USREALTY under agreements between Security Capital 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 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
11
<PAGE>
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 or Class B Shares by any single shareholder
except Security Capital 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 Security Capital USREALTY and other affiliates
of Security Capital) acquires 20% or more of the voting power of the voting
equity securities of Security Capital or announces a tender offer for 25% or
more of the voting power of the voting equity securities of Security Capital.
Under certain circumstances, each Purchase Right entitles the holder to
purchase, at the Purchase Right's then current exercise price, a number of
Class A Shares or Class B Shares, as the case may be, having a market value of
twice the Purchase Right's exercise price. The acquisition of Security Capital
pursuant to certain mergers or other business transactions would entitle each
holder to purchase, at the Purchase Right's then current exercise price, a
number of the acquiring company's common shares having a market value at that
time equal to twice the Purchase Right's exercise price. The Purchase Rights
held by the triggering 20% shareholders (other than Security Capital USREALTY
or other affiliates of Security Capital) would not be exercisable.
The Purchase Rights may have the effect of delaying, 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."
12
<PAGE>
Classified Board; Preferred Stock; Advance Notice Provisions
The Board has been divided into three classes of directors. The terms of the
classes will expire in 1998, 1999 and 2000, respectively. As the term of a
class expires, directors for that class will be elected for a three-year term
and the directors in the other two classes will continue in office. See
"Certain Provisions of Maryland Law and of Security Capital's Charter and
Bylaws--Classification of the Board."
Security Capital's amended and restated articles of incorporation (the
"Charter") authorizes the Board to reclassify any unissued shares of Security
Capital's stock from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. See
"Description of Capital Stock--General" and "--Preferred Stock."
For nominations or other business to be properly brought before an annual
meeting of shareholders by a shareholder, Security Capital's amended and
restated bylaws (the "Bylaws") require such shareholder to deliver a notice to
the Secretary, absent specified circumstances, not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting setting forth: (i) as to each person whom the shareholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
the election of directors pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); (ii) as to any other
business that the shareholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest
in such business of such shareholder and of the beneficial owner, if any, on
whose behalf the proposal is made; and (iii) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such shareholder as it appears
on Security Capital's books and of such beneficial owner and (y) the number of
Shares which are owned beneficially and of record by such shareholder and such
beneficial owner, if any.
The classified Board, the issuance of preferred stock and the advance notice
provisions discussed in the preceding paragraphs each could have the effect of
delaying, 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 June 30, 1997, Security Capital owned approximately 35% of
PTR, 51% of ATLANTIC, 66% of Homestead, 44% of SCI and 32% of Security Capital
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 materially adversely affected if it were required to register
as an investment company under the Investment Company Act.
CERTAIN TAX RISKS RELATING TO STATUS OF SECURITY CAPITAL USREALTY
Security Capital USREALTY was organized in 1995 principally to own
significant strategic positions in leading value-added real estate operating
companies based in the United States. The Company has been advised by Security
Capital USREALTY that Security Capital USREALTY is not currently, and intends
to operate so as
13
<PAGE>
not to become, a Passive Foreign Investment Company ("PFIC") or subject to the
accumulated earnings tax for United States income tax purposes.
Characterization of Security Capital USREALTY as a PFIC could potentially
subject the Company to income tax on its pro rata share of the undistributed
income of Security Capital USREALTY. In addition, application of the
accumulated earnings tax to Security Capital USREALTY could potentially
subject Security Capital USREALTY to a 39.6% tax rate on its "accumulated
taxable income" for United States income tax purposes.
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 July 31, 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 July
31, 1997 which may change, such as the relative fair market value of Security
Capital's assets and investments made by Security Capital as of July 31, 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 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.
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
14
<PAGE>
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.
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
15
<PAGE>
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
Prior to the Offering, there has been no public market for the Class B
Shares or the Warrants. There can be no assurance that an active trading
market will develop for the Class B Shares or the Warrants. 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. In addition, the initial public
offering price may not accurately reflect the market price of the Class B
Shares.
16
<PAGE>
If the Offering does not occur, the holders of Warrants will own securities
for which the underlying Class B Shares are not publicly traded. This may
cause the Warrants to be illiquid. If the Offering does not occur, the Company
will determine the exercise price for the underlying Class B Shares based on
the Board's determination of the fair market value of the Class B Shares.
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. After consummation of the Mergers, Security Capital is
expected to issue Warrants to purchase a total of $250 million of Class B
Shares (the number of such shares will be based on the price of the Class B
Shares on a date to be established following completion of the Offering),
which underlying Class B Shares may be sold by non-affiliates in the public
markets without limitation. Upon completion of the Offering, Security Capital
is expected to have an additional $250 million of Class B Shares outstanding.
All such shares may be sold by non-affiliates in the public markets without
limitation. In addition, upon completion of the Offering, Security Capital
expects to have 1,327,150 Class A Shares outstanding, which will be
convertible beginning January 1, 1998 into a total of 66,357,500 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 June 30, 1997,
Security Capital also had outstanding (i) approximately $715 million principal
amount of its 2014 Convertible Debentures, convertible into an aggregate of
683,790 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 130,615
Class A Shares and approximately $45 million principal amount of 2014
Convertible Debentures (convertible into 43,849 Class A Shares) under Security
Capital's employee benefit plans. All such Class A Shares, and the Class B
Shares into which they may be converted, may be sold in the public markets in
the future pursuant to registration rights or available exemptions from
registration. 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 July 31, 1997, SC Realty, a wholly owned subsidiary of Security Capital,
had $188.5 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 July 31, 1997 was 7.1763%. 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 July 31, 1997, the
aggregate market value of the securities pledged pursuant to the line of
credit was approximately $3.1 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 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 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 "--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 June 30, 1997, Security Capital has invested an aggregate of
approximately $2.0 billion in the common shares of PTR, SCI, ATLANTIC,
Security Capital USREALTY and Homestead and in the warrants of Homestead.
Those securities had an aggregate market value of approximately $3.0 billion
(based on the closing price of those securities on the principal exchange on
which the securities are listed on June 30, 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 Investment Research Group ("IRG")
manages or advises capital invested in real estate securities funds with an
intermediate-term investment focus. The Strategic Group ("SG") provides
overall business strategy and investment oversight to the companies in which
Security Capital has direct and indirect ownership positions, either directly
or through consulting agreements. The Financial Services Group ("FSG")
provides administrative and capital markets services to Security Capital's
client companies.
SECURITY CAPITAL OPERATING ORGANIZATION CHART
---------------------------
SECURITY CAPITAL GROUP
INCORPORATED
REAL ESTATE RESEARCH,
INVESTMENT AND MANAGEMENT
---------------------------------------------------------------
| | | |
- ----------------- ----------------- -------------------- ------------------
REAL ESTATE INVESTMENT STRATEGIC GROUP FINANCIAL
RESEARCH GROUP RESEARCH GROUP (SG) SERVICES GROUP
(RERG) (IRG) (FSG)
BUSINESS STRATEGY
REAL ESTATE REAL ESTATE AND ADMINISTRATIVE
RESEARCH SECURITIES CAPITAL AND CAPITAL
MANAGEMENT DEPLOYMENT MARKETS SERVICES
(Intermediate OVERSIGHT
Term)
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 (2)
Security Capital
Security Capital Industrial Trust
Preferred Growth
Incorporated (2) Strategic Hotel
Capital
Incorporated (2)
SCG Box X-3 (2)(3)
Security Capital
U.S. Realty (1)
CarrAmerica
Realty
Corporation (4)
Storage USA,
Inc. (4)
Regency Realty
Corporation (4)
Pacific Retail
Trust (4)
Parking Services
International
Incorporated--
national
parking
operator (2)(4)
Urban Growth
Property Trust
--national
urban property
(2)(4)
City Center
Retail Trust
--urban
- -------- retail (2)(4)
(1) The European management and Board of Directors of Security Capital
USREALTY receive operating and investment advice from Security Capital (EU)
Management S.A., which subcontracts certain research and advisory activities
from its affiliates IRG and SG.
(2) Italics represents new business initiatives.
(3) SCG Box X-3 is in the early stages of research and development. Security
Capital's policy is to announce new business initiatives following extensive
research and development and after Security Capital has committed to make
investments in excess of $25 million in the new business.
(4) This company is an investee of Security Capital USREALTY through its
subsidiary and is not directly advised by SG.
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>
- ------------------ ----------------------------------------------------------
------------
INVESTMENT SECURITY
RESEARCH GROUP CAPITAL
(IRG) ------------
|
REAL ESTATE ----------------------------------------------
SECURITIES | | | |
MANAGEMENT --------- --------- --------- ---------
(INTERMEDIATE IRG
TERM) --------- --------- --------- ---------
Brussels-Chicago
- ------------------ ----------------------------------------------------------
Security Capital Investment Research Group (IRG)
IRG manages or advises capital invested in focused funds that seek to
maximize total return over an intermediate time horizon of up to 42 months.
IRG's principal focus is on publicly traded real estate companies that it
believes should outperform the market due to factors such as an emerging new
strategy or opportunity, imminent changes in supply and demand that would
affect asset performance, market inefficiencies that result in mispriced
securities or consolidation opportunities. IRG, through its focused funds,
will also commit capital to private start-up companies that have significant
prospects for sustained growth, that can utilize both strategic and operating
consulting and capital, and that have the prospect of becoming public
companies. IRG will generally take ownership positions ranging from .5% to
4.99% of the equity securities of its investees, except with respect to
Security Capital Preferred Growth Incorporated ("SC-PG"), in which case IRG
may take larger ownership positions.
IRG currently provides investment research and advice to Security Capital
(EU) Management S.A., the advisor to Security Capital USREALTY, in connection
with certain investments in publicly traded companies. In addition, IRG
currently manages Security Capital Employee REIT Fund ("SC-ERF") and SC-PG.
. Security Capital U.S. Realty: Special Opportunity Investments Portfolio.
Security Capital USREALTY identifies publicly traded companies with solid
growth prospects and invests, through a wholly owned subsidiary, to realize
attractive total returns through dividends and share price appreciation. As of
June 30, 1997, the Security Capital USREALTY Special Opportunity Investments
Portfolio had a fair market value of $332 million. For the period from
December 31, 1995 to June 30, 1997, the Security Capital USREALTY Special
Opportunity Investment Portfolio achieved an average annual total return of
approximately 42.9%, as measured in the manner required by the Securities and
Exchange Commission (the "Commission") for U.S. mutual funds, after the
deduction of fees and expenses. The average annual total return has been
calculated based on the following principal assumptions: (i) investments were
made on the dates Security Capital USREALTY Special Opportunity Investments
Portfolio made its investments, (ii) dividends or other distributions, if any,
were immediately reinvested and (iii) the per share value of the investments
on June 30, 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 June 30, 1997, Security Capital had
invested $102.5 million in SC-ERF (which includes $2.5 million reinvested
through the dividend reinvestment plan).
. Security Capital Preferred Growth Incorporated (SC-PG). SC-PG is a private
real estate company formed in January 1997. SC-PG's objective is to make
intermediate-term investments in undervalued, high-potential real estate
operating companies primarily through convertible securities. These companies
would typically be in the second through fourth quartile of performance among
real estate operating companies. SC-PG seeks to provide these companies with
an opportunity for repositioning 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 June 30, 1997, SC-PG has received commitments to purchase
approximately $324.8 million of its common stock including Security Capital's
commitment of $50 million.
22
<PAGE>
STRATEGIC GROUP
(SG) SECURITY
CAPITAL
BUSINESS STRATEGY
AND
-------------------------------------------
CAPITAL
DEPLOYMENT
OVERSIGHT
Brussels-Chicago-
London- SG
Luxembourg-New
York- Santa Fe
Security Capital Strategic Group (SG)
SG provides overall business strategy and investment oversight (either
directly or through advisory agreements) to companies in which Security
Capital has a direct or indirect ownership position. Security Capital plans to
pursue investments in private companies that have highly focused business
strategies that management believes have prospects for sustained growth and
may become publicly traded. Security Capital expects to benefit as these
companies experience growth in cash flows and increases in share prices
consistent with similar direct investments that Security Capital has made
since 1991 in PTR, SCI, ATLANTIC, Homestead and Security Capital USREALTY and
indirect investments made by Security Capital USREALTY. No assurance can be
given that Security Capital will achieve similar results on future strategic
investments.
<TABLE>
<CAPTION>
DIRECT/INDIRECT EQUITY MARKET
CLIENTS OWNERSHIP (1)(2) CAPITALIZATION (1)
------- ---------------- ------------------
(in millions)
<S> <C> <C>
Security Capital Pacific Trust....... 32% $1,989
Security Capital Atlantic
Incorporated........................ 51% $1,005
Homestead Village Incorporated (3)... 30% $1,008
Security Capital Industrial Trust.... 38% $2,436
Security Capital USREALTY (4)........ 32% $2,021
CarrAmerica Realty Corporation (5).. 38% $1,863
Storage USA, Inc. (5)............... 34% $1,137
Regency Realty Corporation (5)...... 39% $ 604
Pacific Retail Trust (5)............ 69% $ 614
</TABLE>
- --------
(1) Ownership and market capitalization are as of June 30, 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 June 30, 1997, Security Capital's percentage ownerships in its
investees, based on common shares outstanding on such date, were 35% of
PTR, 51% of ATLANTIC, 66% of Homestead, 44% of SCI and 32% of Security
Capital USREALTY. Equity market capitalization, as of June 30, 1997,
based on common shares outstanding was $1.8 billion for PTR, $1.0 billion
for ATLANTIC, $421 million for Homestead, $2.1 billion for SCI and $2.0
billion for Security Capital USREALTY.
(3) Ownership of Homestead assumes that all convertible mortgages have been
funded and converted into shares of Homestead common stock and that all
warrants to purchase shares of Homestead common stock have been
exercised. Ownership of Homestead does not include any ownership Security
Capital may obtain in Homestead upon conversion of convertible mortgages
owned by PTR and ATLANTIC through funding commitment agreements. See
"Relationships with Operating Companies--Homestead--Homestead
Transaction."
(4) The European management and Board of Directors of Security Capital
USREALTY receive operating and investment advice from Security Capital
(EU) Management S.A., which subcontracts certain research and advisory
activities from its affiliates IRG and SG.
(5) This company is an investee of Security Capital USREALTY through its
subsidiary and is not directly advised by Security Capital. The ownership
percentage reflected is that of Security Capital USREALTY.
23
<PAGE>
For further information with respect to (i) Security Capital's direct
ownership interests in PTR, ATLANTIC, Homestead, SCI and Security Capital
USREALTY, (ii) the historical high and low sale prices of the common shares
for such companies, as well as the cash dividends declared by such companies,
(iii) the average annual shareholder returns on investments in such companies,
and Security Capital's unrealized appreciation in its investment in the
securities of such companies, see "--Operating Companies Market Price
Information and Financial Performance" and "Relationships with Operating
Companies."
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 June 30, 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 June 30, 1997, PTR's portfolio of multifamily
communities included 40,786 operating units, 6,672 units under construction
and an estimated 7,384 units in planning, owned or under control. In addition,
PTR owns or controls land for future development of an expected 3,578
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 June 30, 1997,
PTR's equity market capitalization has increased from $34 million to $2.0
billion. From February 1991 through June 30, 1997, the compound annual return
for PTR was 32.5%.
. 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 June 30,
1997, ATLANTIC's portfolio included 19,265 operating multifamily units, 5,487
units under construction and an estimated 4,886 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 June 30, 1997, ATLANTIC had an equity market
capitalization of $1.0 billion. Since its inception in December 1993 through
June 30, 1997, the compound annual return for ATLANTIC was 16.6%.
. 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
24
<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 June 30, 1997,
Homestead had developed, owned and operated 42 properties representing in the
aggregate 5,724 units and had 43 properties under construction totaling 5,800
units. At June 30, 1997, Homestead had an equity market capitalization of $1.0
billion. From its spin-off in October 1996 through June 30, 1997, Homestead
had a simple unannualized return of 24.9%. The simple unannualized return has
been calculated based on the following principal assumptions: (i) the
investment was made on October 17, 1996 (and recorded at the cost of the
assets contributed by PTR, ATLANTIC and Security Capital), and (ii) the per
share value of the investment on June 30, 1997 is represented by the closing
sales price on such date of the shares on the American Stock Exchange. There
can be no assurance that a comparable rate of return may be obtained in the
future by Security Capital or other investors.
. 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. SCI
expects to achieve this objective through 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 June 30, 1997, SCI had distribution properties
operating or under development in 37 national markets and four international
markets, totaling 92.5 million square feet. At June 30, 1997, SCI had an
equity market capitalization of $2.4 billion. Since October 1992 through June
30, 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 (certain other affiliates of Goldman, Sachs & Co.) have committed to
invest $200 million of capital on an equal basis in SHC. At June 30, 1997,
Security Capital had invested $23 million in SHC, and two hotels had been
purchased by SHC.
. Security Capital U.S. Realty (Amsterdam Stock Exchange: SCUSR). Security
Capital USREALTY's objective is to become Europe's preeminent real estate
operating company owning, through a wholly owned subsidiary, significant
strategic positions in leading value-added real estate operating companies
based in the United States. Through a proactive ownership role, appropriate
board representation and ongoing consultation, Security Capital USREALTY
expects to influence the business strategies of the companies in which it
invests to increase per share cash flow. The European management and Board of
Directors of Security Capital USREALTY receive operating and investment advice
from Security Capital (EU) Management S.A., which subcontracts certain
research and advisory activities from its affiliates IRG and SG. Security
Capital has advised Security Capital USREALTY that it does not intend to make
its own direct strategic investments in equity-oriented REITs in the future,
other than those in which Security Capital currently owns a strategic
ownership position. At June 30, 1997, Security Capital USREALTY had an equity
market capitalization of $2.0 billion. Since its inception in October 1995
through June 30, 1997, the compound annual return for Security Capital
USREALTY was 26.5%.
Security Capital USREALTY seeks to have 65% to 85% of its assets deployed in
long-term strategic ownership positions in real estate operating companies
organized as REITs and real estate operating companies which are expected in
due course to become REITs.
25
<PAGE>
Security Capital USREALTY also seeks to acquire up to 10% (but generally
less than 5%) of the shares of publicly traded real estate companies and to
hold such positions for an intermediate term of 12 to 18 months (or sooner if
the targeted returns are realized more quickly) with the objective of
obtaining attractive total returns through dividends and share price
appreciation. Security Capital USREALTY seeks to have 10% to 25% of its assets
deployed in such publicly traded positions and, as of June 30, 1997, Security
Capital USREALTY had $332 million (market value) of publicly traded positions
in 27 companies. See "--Security Capital Investment Research Group--Security
Capital USREALTY: Special Opportunity Investments Portfolio."
Security Capital USREALTY also seeks to invest up to 10% of its assets in
securities of the Company to enhance the diversification of its asset base and
to enable European investors in Security Capital USREALTY to participate in
the full activities of Security Capital. As of June 30, 1997, Security Capital
USREALTY owned 52,431 Class A Shares and $55 million principal amount of 2016
Convertible Debentures. Security Capital USREALTY purchases securities of the
Company at arm's-length prices.
Security Capital USREALTY's Strategic Investees:
. CarrAmerica Realty Corporation (NYSE: CRE). CarrAmerica is focused on
becoming the leading owner, operator and developer of value-driven office
properties in key growth markets throughout the United States. Management
seeks to achieve these objectives by offering corporate customers exceptional
customer service on a national basis. At June 30, 1997, CarrAmerica had an
equity market capitalization of $1.9 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
June 30, 1997, Storage USA had an equity market capitalization of $1.1
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 southeastern United
States. REGENCY is utilizing the equity from Security Capital USREALTY's
investment to take advantage of attractive acquisition and development
opportunities in its target market. At June 30, 1997, REGENCY had an equity
market capitalization of $604 million.
. Pacific Retail Trust (PACIFIC RETAIL). PACIFIC RETAIL is building a
portfolio and implementing a business strategy that is designed to make it the
leading owner, operator and developer of grocery-and-drug-store-anchored
neighborhood infill shopping centers in the western United States. A fully
integrated operating company, PACIFIC RETAIL plans to go public in early 1998,
after it reaches critical mass in several key growth markets. At June 30,
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.
Security Capital 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 ($75 million commitment for an
approximate 100% ownership interest with an option to invest an additional $75
million); 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 ($75 million commitment for an approximate
100% ownership interest with an option to invest an additional $75 million).
Although both companies currently are privately held, it is expected that both
companies ultimately will conduct initial public offerings. As of June 30,
1997, Security Capital USREALTY had invested $59.0 million in City Center
Retail Trust.
26
<PAGE>
FINANCIAL SECURITY
SERVICES GROUP CAPITAL
(FSG)
-------------------------------------------
ADMINISTRATIVE AND
CAPITAL MARKET
SERVICES
Chicago-El Paso- FSG
London-
Luxembourg-New
York-Santa Fe
Security Capital Financial Services Group (FSG)
. SCGroup Incorporated ("SCGroup"). SCGroup provides operational support,
accounting services, human resources and benefits administration, and
technical support to the companies in which Security Capital has direct
investments. As a result, Security Capital's operating companies realize the
benefits of economies of scale by consolidating several management activities
in a centralized operations center.
. Security Capital Markets Group Incorporated ("Security Capital Markets
Group"). Security Capital Markets Group is focused on efficiently accessing
institutional capital through private placements for certain private and
public companies within the Security Capital organization. This gives
institutional investors the early opportunity to invest in Security Capital's
real estate operating companies that Security Capital believes will ultimately
achieve preeminent positions in their respective market niches. Equally
importantly, the professionals in the Security Capital Markets Group maintain
open lines of communication with institutional investors that have taken
ownership positions in Security Capital's private and public companies.
FUTURE STRATEGY
Since its inception, Security Capital has committed capital to research and
development in order to identify opportunities where it can invest in the
start-up of new businesses or new investment services with the objective that
they will ultimately become publicly traded companies. Once opportunities are
identified and thoroughly researched, Security Capital commits substantial
additional capital to the development of operating systems and human capital.
By pursuing a strategy of making a significant investment in advance of the
start-up company's initial operations, as well as making ongoing investments
in operating and people systems as the company grows, Security Capital seeks
to ensure that the start-up company can successfully implement an attractive
growth strategy.
In 1993, initial research began on an investment strategy which was referred
to as SCG Box X and which was announced in 1995 as Security Capital USREALTY.
As of June 30, 1997, Security Capital USREALTY had an equity market
capitalization of $2.0 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 June
30, 1997, approximately $424 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 June 30,
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
27
<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), committed to make a
$100 million investment in SC-ERF (previously known as SCG Box X-2) and
continued its research and development activities with respect to its
additional new investments. 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.
28
<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
--------------------------
| Security Capital Group |
----------------| Incorporated |----------------
| -------------------------- |
| DIVIDENDS/ | | SERVICE |
| CAPITAL | | MANAGEMENT |
| APPRECIATION | | FEES |
| | | |
| | | |
| -------------- | ------------------
| | | | | |
-------| CAPITAL | --------| SERVICES |
| DIVISION | | DIVISION (1) |
| | | |
-------------- ------------------
| | |
- ---------------------- ----------------------- -------------------
SERVICE/
PRIVATE/START-UP MANAGEMENT
PUBLIC COMPANIES COMPANIES 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
Incorporated (4) Incorporated (1)
Homestead Village
Incorporated (2) Strategic Hotel Capital Security Capital
Incorporated (2)(4) Real Estate
Security Capital Research Group
Industrial Trust SCG Box X-3 (2)(4) Incorporated (1)
Security Capital U.S. Security Capital
Realty (2)(3) (EU) Investment
Research Group
S.A. (1)
Security Capital
(US) Investment
Research
Incorporated (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 Investment Research 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 Security Capital USREALTY
receive operating and investment advice from Security Capital (EU)
Management S.A., which subcontracts certain research and advisory
activities from its affiliates IRG and SG.
(4) Italics represent new business initiatives.
29
<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
Security Capital USREALTY on the NYSE (in respect of SCI, ATLANTIC and PTR),
the American Stock Exchange (in respect of Homestead) and the Amsterdam Stock
Exchange (in respect of Security Capital USREALTY) and the cash dividends
declared by such companies per outstanding common share:
<TABLE>
<CAPTION>
SCI ATLANTIC PTR
------------------------- ------------------------ ------------------------
CASH CASH CASH
DIVIDEND DIVIDEND DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED HIGH LOW DECLARED
------- -------- -------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
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
August 5)............. 22 7/8 21 3/16 0.2675 24 1/2 22 1/4 0.39 23 5/8 22 0.325
<CAPTION>
SECURITY CAPITAL
HOMESTEAD USREALTY
------------------------- ------------------------
CASH CASH
DIVIDEND DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED
------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
First Quarter.......... -- -- -- -- -- --
Second Quarter......... -- -- -- -- -- --
Third Quarter.......... -- -- -- $11.50 $10.40 --
Fourth Quarter......... $19 $15 -- 12.60 10.80 --
1997
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
August 5)............. 18 1/2 16 3/8 -- 15.90 14.30 --
</TABLE>
On August 5, 1997, the last reported sale price of a common share of (i) SCI
was $21 7/8, (ii) ATLANTIC was $24, (iii) PTR was $23 7/16, (iv) Homestead was
$16 3/4 and (v) Security Capital USREALTY was $14.60. On August 5, 1997,
Security Capital owned (i) 43,086,724 common shares of SCI, (ii) 21,546,620
shares of common stock of ATLANTIC, (iii) 27,391,539 common shares of PTR,
(iv) 17,063,326 shares of common stock of Homestead and (v) 46,008,358 shares
of common stock of Security Capital USREALTY. For a description of certain
transactions which may affect the number of shares of common stock of such
companies owned by the Company, see "Business--The Proposed Mergers" and
"Relationships with Operating Companies--Homestead--Homestead Transaction."
Security Capital has announced that it may over time reduce its beneficial
ownership in ATLANTIC to below 50%.
30
<PAGE>
The following table presents the average annual return for all common share
investors in PTR, ATLANTIC, SCI and Security Capital USREALTY for the periods
indicated through June 30, 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 June 30, 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 22.8%
ATLANTIC..................... 12/31/93 17.8%
SCI.......................... 10/20/92 24.2%
Security Capital USREALTY.... 10/31/95 36.1%
</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 June 30, 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 June
30, 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....... $ 381,421,263 $22.875 $ 626,581,455 $245,160,192
ATLANTIC Common Shares.. 417,732,742 23.938 515,782,990 98,050,248
Homestead Common Shares. 145,001,037 17.875 276,068,668 131,067,631
Homestead Warrants...... 10,216,019 7.875 12,268,596 2,052,577
SCI Common Shares....... 582,798,700 21.500 926,364,571 343,565,871
Security Capital
USREALTY
Common Shares.......... 488,044,355 14.800 642,856,562 154,812,207
-------------- -------------- ------------
Total at June 30, 1997.. $2,025,214,116 $2,999,922,842 $974,708,726
============== ============== ============
</TABLE>
- --------
(1) Represents the closing price of the common shares and warrants on June 30,
1997 on the principal exchange on which the shares and warrants are
listed.
(2) Represents the number of common shares and warrants owned by Security
Capital multiplied by the closing price for the common shares and warrants
on the principal exchange on which the shares and warrants are listed.
EMPLOYEES
After giving effect to the Mergers, it is expected that Security Capital
will have approximately 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.
31
<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.
32
<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.
33
<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.
34
<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>
35
<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.
36
<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.
37
<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 SECURITY CAPITAL USREALTY INVESTEES
The following discussion sets forth, with respect to the real estate
operating companies in which Security Capital 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 Security Capital USREALTY and there are
no mortgages, liens or other encumbrances against any properties which are
material to any such strategic investee of Security Capital USREALTY. Whereas
none of the strategic investees of Security Capital USREALTY has at present
any material plans for the renovation or improvement of properties in
operation, each strategic investee of Security Capital 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 Security Capital USREALTY, the properties of the strategic
investees of Security Capital USREALTY are adequately covered by insurance.
38
<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).
39
<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.
40
<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.
41
<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 36%
Charlotte Area Market............................ 6 6
Cincinnati, Ohio................................. 1 5
Jacksonville Area Market......................... 14 16
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 five retail centers under construction or redevelopment with a
total expected investment of approximately $35.8 million.
42
<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 will be licensed to
ATLANTIC, PTR and SCI upon completion of the Mergers. See "Relationships with
Operating Companies" for a description of the license agreements. The Company
intends to defend vigorously against infringement of its trademarks, service
marks and copyrights.
LEGAL PROCEEDINGS
Security Capital and its subsidiaries are parties to certain legal
proceedings arising in the ordinary course of their business, none of which
are expected to have a material adverse impact on Security Capital.
THE PROPOSED MERGERS
In December 1996, management of Security Capital proposed to its Board that
Security Capital exchange its REIT management companies and property
management companies for common shares of ATLANTIC, PTR and SCI, respectively.
In January 1997, based on the direction of its Board, Security Capital
proposed to the Board of Directors of ATLANTIC and the Board of Trustees of
each of PTR and SCI, that each of ATLANTIC, PTR and SCI become internally
managed. On March 24, 1997, Security Capital and each of ATLANTIC, PTR and SCI
entered into the Merger Agreements. Pursuant to the Merger Agreements,
Security Capital will cause its affiliates providing REIT management and
property management services to each of ATLANTIC, PTR and SCI, respectively,
to be merged into a newly formed subsidiary of each such entity with the
result that all personnel employed in the REIT management and property
management businesses would become officers and employees of the REITs,
respectively, as follows:
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital (Atlantic) Incorporated and SCG Realty
Services Atlantic Incorporated (which provide Security Capital's REIT
management and property management services to ATLANTIC), to a newly
formed subsidiary of ATLANTIC in exchange for shares of ATLANTIC's common
stock valued at $54,608,549.
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital Pacific Incorporated and SCG Realty
Services Incorporated (which provide Security Capital's REIT management
and property management services to PTR), to a newly formed subsidiary of
PTR in exchange for common shares of PTR valued at $75,838,457.
43
<PAGE>
. Security Capital will transfer its interests in its wholly owned
subsidiaries, Security Capital Industrial Incorporated and SCI Client
Services Incorporated (which provide Security Capital's REIT management
and property management services to SCI), to a newly formed subsidiary of
SCI in exchange for common shares of SCI valued at $81,870,626.
. Security Capital will license to each of ATLANTIC, PTR and SCI the
trademarks and tradenames used in their respective businesses.
. The shareholders of each of Security Capital, ATLANTIC, PTR and SCI must
approve the respective Merger Agreements. The shareholders of Security
Capital approved each Merger Agreement on April 17, 1997. It is currently
expected that the shareholder votes of ATLANTIC, PTR and SCI will occur
in the third quarter of 1997 and, if approved, the Mergers are expected
to close in that same quarter. The Mergers are also subject to customary
closing conditions.
. The number of shares of ATLANTIC common stock and common shares of PTR
and SCI to be issued to Security Capital 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, subject to the price being within an 11.24% range of the
closing price of the shares on March 14, 1997 ($23 1/4, $24 3/8 and $22
1/4 for ATLANTIC, PTR and SCI, respectively).
. In order to allow the common shareholders to maintain (and, to the extent
a shareholder oversubscribes 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 is conducting a rights offering entitling its
common shareholders, other than Security Capital, to purchase additional
common shares. Shareholders will be entitled to subscribe for common
shares not purchased by other common shareholders pursuant to an
oversubscription privilege. The rights offering price is at a discount to
the price at which shares will be 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 are as follows:
<TABLE>
<CAPTION>
ATLANTIC PTR SCI
-------- -------- -------
<S> <C> <C> <C>
Exercise Price in Rights Offering............... $22.375 $21.8125 $21.00
Price to Security Capital in Merger............. $23.675 $23.0125 $22.175
NYSE Closing Price on August 5, 1997............ $24.00 $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.
. As part of the transactions contemplated by the Merger Agreements,
Security Capital will issue, pro rata, Warrants to the common equity
holders (e.g., holders of common shares, convertible preferred shares
and, in the case of SCI, units) of each of ATLANTIC, PTR and SCI, other
than Security Capital, after the closing of the Mergers and the Offering.
The Warrants are being 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. If all the Mergers are approved by
their respective shareholders, Security Capital will issue, pro rata,
Warrants to acquire an aggregate of $250 million of its Class B Shares.
The number of Class B Shares subject to the Warrants will be based on the
market price of the Class B Shares on a date within approximately 60 days
following the closing of the Mergers. The Warrants will each be
exercisable at an exercise price based on the price of the Class B Shares
on the Warrant Issuance Date. The Warrants have
44
<PAGE>
been approved for listing on the NYSE under the symbol "SCZ WS". The
Warrants will expire one year after issuance and will contain customary
provisions to protect holders from dilution in certain events, including
certain distributions and certain sales of shares at less than market
price.
THE WARRANT ISSUANCE
The Warrants will be issued by Security Capital directly to Securityholders
(other than Security Capital) following approval of the proposals by the
shareholders of ATLANTIC, PTR and SCI, respectively, and subject to the
satisfaction of certain conditions to each of the Merger Agreements. The
Warrants will be issued to the Warrant Issuance Agent for distribution to
Securityholders on the Warrant Issuance Date, which date will be within 30
days following the Warrant Issuance Record Date, as determined by the Board.
The Warrant Issuance will be made to Securityholders of record at the close of
business on the Warrant Issuance Record Date, which record date will be within
31 days after the closing date of the Mergers. The amount of Warrants to be
received by each Securityholder will depend on the number of REIT Securities
outstanding on the Warrant Issuance Record Date and the closing price of the
Class B Shares on the Warrant Issuance Date.
No certificates or scrip representing fractional Warrants will be issued to
Securityholders as part of the Warrant Issuance. The First National Bank of
Boston, 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."
45
<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........ 32 Managing Director, Security Capital USREALTY --
John H. Gardner, Jr. ... 43 Managing Director, Security Capital --
Investment Research Group
C. Robert Heaton........ 52 Senior Vice President, Security Capital --
W. Joseph Houlihan...... 49 Managing Director, Security Capital (EU) --
Investment
Research Group
Jeffrey A. Klopf........ 49 Senior Vice President and Secretary,
Security Capital --
Anthony R. Manno, Jr.... 45 Managing Director, Security Capital --
Investment
Research Group
Todd W. Mansfield....... 39 Managing Director, Security Capital --
Strategic Group
Caroline S. McBride..... 43 Managing Director, Security Capital
Strategic Group --
Daniel F. Miranda....... 44 Managing Director, Security Capital --
Investment Research Group
Mary Lou Rogers......... 46 Managing Director, Security Capital
Strategic Group --
Donald E. Suter......... 40 Managing Director, Security Capital Markets
Group --
Paul E. Szurek.......... 36 Managing Director, SCGroup --
Thomas G. Wattles*...... 45 Managing Director, Security Capital --
</TABLE>
- --------
*Member of the Operating Committee
SAMUEL W. BODMAN. Chairman and Chief Executive Officer of Cabot Corporation
since 1988, a company with business in energy and specialty chemicals and
materials. Prior thereto, Mr. Bodman was President and Chief Operating Officer
of FMR Corporation, the holding company overseeing all activities of Fidelity
Investments. Prior thereto, Mr. Bodman was an Associate Professor at the
Massachusetts Institute of Technology ("M.I.T.") and Technical Director of
American Research and Development Corporation. Mr. Bodman is a director of
Cabot Corporation, Cabot Oil & Gas Corporation, John Hancock Mutual Life
Insurance Company and Westvaco, Inc. He is also a member of the Executive
Committee of the Board of Trustees of M.I.T., a member of the American Academy
of Arts and Sciences, a trustee of Isabella Stewart Gardner Museum, a trustee
of the New England Aquarium and a trustee of The French Library and Cultural
Center.
HERMANN BUERGER. Executive Vice President of Commerzbank AG in New York, a
position he has held since 1989. Mr. Buerger is also Co-Chairman of the
Business Advisory Committee of the American Council on Germany, a trustee of
the Virginia Tech Foundation and is a director of United Dominion Industries.
Mr. Buerger was previously Vice Chairman of the Institute of International
Bankers.
JOHN P. FRAZEE, JR. Formerly President and Chief Operating Officer of Sprint
Corporation and, prior to the March 1993 merger with Sprint, the Chairman and
Chief Executive Officer of Centel Corporation, a major
46
<PAGE>
telecommunications company he joined in 1972. Mr. Frazee is a director of
Cable Satellite Public Affairs Network ("C-SPAN"), Nalco Chemical Company,
Dean Foods Company, Homestead and Paging Network, Inc. Mr. Frazee is also a
member of the board of trustees of the Foundation for Independent Higher
Education and a trustee of Rush-Presbyterian-St. Luke's Medical Center, The
Newberry Library and Florida State University.
CYRUS F. FREIDHEIM, JR. Vice Chairman of Booz . Allen & Hamilton, Inc., an
international management consulting firm, which he joined in 1966. Previously,
he was with Ford Motor Company and Price Waterhouse. Mr. Freidheim is a
director of Household International Inc. and LaSalle Street Fund. He is also a
trustee of Rush-Presbyterian-St. Luke's Medical Center and The Orchestral
Association (the Chicago Symphony Orchestra). He is also a member of the
America-China Society, the Council on Foreign Relations and the U.S. Japan
Business Council.
H. LAURANCE FULLER. Chairman and Chief Executive Officer of Amoco
Corporation, a company he joined in 1961. Mr. Fuller is a director of Abbott
Laboratories, the Chase Manhattan Corporation, the Chase Manhattan Bank, N.A.,
Motorola Corporation, the American Petroleum Institute and the Rehabilitation
Institute of Chicago. Mr. Fuller is also a trustee of The Orchestral
Association (the Chicago Symphony Orchestra) and a member of the University
Council of Cornell University.
RAY L. HUNT. President of Hunt Consolidated, Inc. since April 1981, where he
has also been Chief Executive Officer since November 1984 and Chairman since
June 1986. Chief Executive Officer of Hunt Oil Company since April 1985 and
Chairman since June 1986. Mr. Hunt is a director of Electronic Data Systems
Corporation, Dresser Industries, Inc., Pepsico, Inc. and Ergo Science
Corporation and is a member of the advisory board of Texas Commerce Bank, N.A.
Mr. Hunt serves as a member of the board of trustees of Southern Methodist
University, is a trustee of the Center for Strategic and International
Studies, serves on the board of directors of the Texas Research League and the
Southwestern Legal Foundation, is the chairman of Texas Medical Resource and a
member of the executive committee of the Southwestern Medical Foundation in
Dallas.
JOHN T. KELLEY III. Founding officer of SCI, trustee of PTR since January
1988, an advisory trustee of SCI since December 1993 and Chairman of PACIFIC
RETAIL. From 1987 to 1991, Mr. Kelley was Chairman of the Board of Kelley-
Harris Company, Inc., El Paso, a real estate investment company and from 1968
to 1987, Managing Director of LaSalle Partners Limited, specializing in
corporate real estate services. Mr. Kelley is a director of Tri State Media.
WILLIAM D. SANDERS. Founder, Chairman and Chief Executive Officer of
Security Capital. Previously, Mr. Sanders was Chairman and Chief Executive
Officer of LaSalle Partners Limited from 1968 through 1989. Mr. Sanders
currently serves as a director of CarrAmerica, R.R. Donnelley & Sons Company,
Security Capital USREALTY and Storage USA. He is also an advisory director of
REGENCY. He is a member of the Board of Governors of the National Association
of Real Estate Investment Trusts ("NAREIT"). He was previously a director of
Continental Bank Corporation, King Ranch, Inc., and Lone Star Technologies. He
has also served as a trustee of the University of Chicago and a trustee fellow
of Cornell University.
PETER S. WILLMOTT. President and Chief Executive Officer of Zenith
Electronics Corporation since July 1996, and Chairman and Chief Executive
Officer of Willmott Services, Inc. since 1989. Prior to that, Mr. Willmott was
Chairman, President and Chief Executive Officer of Carson Pirie Scott & Co.
and, prior thereto, President and Chief Operating Officer of Federal Express
Corporation. Mr. Willmott is a director of Federal Express Corporation and
Zenith Electronics Corporation. He is also Chairman of the Executive Committee
of Williams College.
C. RONALD BLANKENSHIP. Managing Director of Security Capital since March
1991 and 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
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.
47
<PAGE>
JEFFREY A. COZAD. Managing Director of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management
Limited since June 1996 and located in London, where he is responsible for
investment oversight, capital markets and investor relations. Previously, he
was a Senior Vice President of Security Capital Markets Group in its New York
office where he was a co-head of capital markets activities and where he
provided capital markets services for affiliates of Security Capital since
1991. Mr. Cozad is a general securities principal registered with the National
Association of Securities Dealers, Inc. (the "NASD").
JOHN H. GARDNER, JR. Managing Director of Investment Research 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) Investment
Research Group S.A. since April 1997 and located in Brussels, where he is
responsible for global investment research and strategic investments; former
Director of Security Capital USREALTY from July 1995 to April 1997. Prior
thereto, he was Executive Vice President and Director of Institutional
Management Group at GIM Algemeen Vermogensbeheer ("GIM"), a Netherlands-based
investment management company where he specialized in publicly traded real
estate investments since joining GIM in 1977.
JEFFREY A. KLOPF. Senior Vice President and Secretary of Security Capital
since January 1996; from January 1988 to December 1995, Partner with Mayer,
Brown & Platt, where he practiced corporate and securities law. Mr. Klopf
provides securities offering and corporate acquisitions services and legal
services to Security Capital and its operating companies.
ANTHONY R. MANNO, JR. Managing Director of the Investment Research Group
since March 1997, where he is responsible for overseeing all investment and
capital allocation matters for Investment Research Group's public market
securities activities and also responsible for company and industry analysis,
market strategy and trading and reporting; from January 1995 to March 1997, he
was Managing Director of Security Capital Investment Research Group
Incorporated, where he performed the same functions. Mr. Manno was a member of
Security Capital's Investment Committee from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing Director of LaSalle
Partners Limited from March 1980 to March 1994.
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.
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
48
<PAGE>
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 Investment Research Group since
March 1997; from September 1996 to March 1997 Managing Director of Security
Capital Investment Research Group Incorporated where he is responsible for
operating oversight of various investments relating to public and private U.S.
real estate operating companies. Prior thereto, Mr. Miranda was regional vice
president and later a managing director of General Electric Capital Real
Estate Finance and Services from September 1991 to September 1996, where he
was responsible for a real estate portfolio in the fourteen-state Midwest
region.
MARY LOU ROGERS. Managing Director of the Strategic Group since March 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 since July 1997. From January
1996 to June 1997, Managing Director of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management
Limited, 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.
THOMAS G. WATTLES. Managing Director of Security Capital since March 1991
and a trustee of SCI since January 1993; he was a director of SCI's
predecessor since its formation in June 1991 and has been Non-Executive
Chairman of SCI since March 1997; prior thereto, a Co-Chairman and Chief
Investment Officer of SCI and the SCI REIT Manager (as defined below) since
November 1993; Managing Director of SCI and the SCI REIT Manager from January
1993 to November 1993, and Director of the SCI REIT Manager since June 1991.
From January 1991 to December 1992, Mr. Wattles served as Managing Director of
the PTR REIT Manager (as defined below); from July 1989 to December 1990,
Managing Partner of Stanwich Advisors Incorporated, a real estate advisory and
development services company; from July 1985 to June 1989, Senior Vice
President--Property Finance Group of LaSalle Partners Limited, a corporate
real estate services entity.
SENIOR OFFICERS OF SECURITY CAPITAL AND CERTAIN AFFILIATES AFTER THE MERGERS
ARIEL AMIR--37--Vice President of Security Capital since June 1994, where he
provides securities offering and corporate acquisition services for affiliates
of the Company. Prior to joining Security Capital, Mr. Amir was an associate
attorney with the law firm of Weil, Gotshal & Manges in New York from
September 1985 to April 1994 where he practiced securities and corporate law.
49
<PAGE>
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--Vice President of Security Capital Markets Group since
March 1997 and from August 1993 to January 1996, President of Security Capital
Markets Group from January 1996 to March 1997 and a member of Security Capital
Markets Group since March 1992, where he participates in capital markets and
institutional investor relations. Mr. Canon is a general securities principal
registered with the NASD.
MARK J. CHAPMAN--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 November 1995, Mr. Chapman was a Vice President of PTR with
asset management responsibilities in five major markets. From July 1989 to
November 1994, Mr. Chapman was a Vice President at Copley Real Estate
Advisors, Inc. where he directed asset management for Copley assets located
from Connecticut to Virginia.
JAYSON C. CYR--48--Vice President of SCGroup since October 1994, where he
supervises accounting and financial reporting. Prior to joining Security
Capital, Mr. Cyr was controller for Lincoln Property Company from June 1990 to
June 1994.
ROBERT H. FIPPINGER--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--Vice President of the Strategic Group since March
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.
50
<PAGE>
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.
ROBERT I.S. MEYER--36--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management
Limited since April 1997 and located in London, where he is a member of the
corporate finance team. Prior thereto, he was Vice President of J.P. Morgan
Securities Limited from June 1993 to March 1997, where he was responsible for
capital markets origination among German financial institutions and
corporations; from June 1992 to May 1993, Mr. Meyer was with J.P. Morgan's
venture/private equity investment division.
GERALD R. MORGAN, JR.--34--Vice President of Security Capital since March
1995, where he is involved in treasury and corporate finance for affiliates of
the Company. Prior thereto, Mr. Morgan was in Security Capital's management
development program since July 1993.
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 A. ROTH--30--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management
Limited since April 1997 and located in London, where he is responsible for
mergers and acquisitions. From October 1995 to March 1997, Mr. Roth was Vice
President of Investment Research Group, where he was responsible for
researching corporate and portfolio acquisitions. Prior thereto, he was an
associate attorney with the law firm of Wachtell, Lipton, Rosen and Katz in
New York from December 1993 to October 1995, where he practiced securities and
corporate law.
GERIOS ROVERS--34--Vice President of Security Capital (EU) Investment
Research Group S.A. since April 1997 and located in Brussels, where he
participates in global investment research; prior thereto, from July 1988 to
March 1997, he was an associate director of GIM Algemeen Vermogensbeheer
responsible for client servicing, client acquisition, portfolio management and
research of publicly traded real estate securities worldwide.
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.
51
<PAGE>
KENNETH D. STATZ--38--Senior Vice President of the Investment Research Group
since March 1997; Senior Vice President of Security Capital Investment
Research Incorporated since July 1996, where he is responsible for the
development and implementation of portfolio investment strategy. Prior
thereto, Vice President from May 1995 to June 1996. Prior to joining Security
Capital, Mr. Statz was a Vice President in the investment research department
of Goldman, Sachs & Co., from February 1993 to January 1995, concentrating on
research and underwriting for the REIT industry. Prior thereto, Mr. Statz was
a real estate stock portfolio manager and a managing director of Chancellor
Capital Management from August 1982 to February 1992.
ROBERT S. UNDERHILL--41--Senior Vice President of the Strategic Group since
March 1997 and Senior Vice President of Security Capital Investment Research
Incorporated, where he is responsible for researching corporate and portfolio
acquisitions. Mr. Underhill was a consultant for affiliates of Security
Capital from November 1994 to February 1995. Prior to joining Security
Capital, Mr. Underhill was a Senior Vice President of LaSalle Partners Limited
from September 1984 to October 1994 where he was responsible for the
investment management of a portfolio of office and retail properties.
ANDREW N. WALKER--34--Vice President of Security Capital USREALTY, Security
Capital (EU) Management Group S.A. and Security Capital (UK) Management
Limited since March 1997 and located in London, where he is a member of the
corporate finance team. Prior thereto, from February 1995 to February 1997, he
was a European property analyst for Paribas Capital Markets; from May 1991 to
January 1995, he was a managing director of Institutional Property Forecasting
Services in the U.K., a privately-held real estate research firm in England;
and from February 1991 to May 1991, he was a property analyst with S.G.
Warburg Securities (Japan) Ltd.
CLASSIFICATION OF DIRECTORS
Pursuant to the terms of the Charter, the directors are divided into three
classes. One class will hold office for a term expiring at the annual meeting
of shareholders to be held in 1998 (consisting of Messrs. Freidheim, Fuller
and Hunt), a second class will hold office for a term expiring at the annual
meeting of shareholders to be held in 1999 (consisting of Messrs. Kelley,
Sanders and Willmott), and a third class will hold office for a term expiring
at the annual meeting of shareholders to be held in 2000 (consisting of
Messrs. Bodman, Buerger and Frazee). Each director will hold office for the
term to which he or she is elected and until his or her successor is duly
elected and qualified. At each annual meeting of shareholders of Security
Capital, the successors to the class of directors whose terms expire at such
meeting will be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election. See "Certain Provisions of Maryland Law and of Security Capital's
Charter and Bylaws."
COMMITTEES OF THE BOARD
The Board has established an Audit Committee consisting of Messrs. Fuller
(Chairman), Buerger, Freidheim and Willmott, each an independent director. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants, reviews the plans and results of the audit engagement with
the independent public accountants, approves professional services provided by
the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of Security Capital's internal accounting
controls.
The Board has established a Management Development and Compensation
Committee (the "Compensation Committee") consisting of Messrs. Bodman
(Chairman), Kelley and Frazee, each an independent director. The Compensation
Committee reviews and approves compensation arrangements and plans of Security
Capital and it administers the various option plans of Security Capital
described below.
The Board has established an Executive Committee consisting of Messrs.
Sanders (Chairman), Hunt and Frazee. The Executive Committee has full
authority to act on behalf of the Board between regular meetings of the Board,
except with respect to securities offerings.
52
<PAGE>
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.
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.
53
<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.
54
<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 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
55
<PAGE>
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.
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
56
<PAGE>
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 termination occurs by reason of death,
disability or retirement, the one-year anniversary of the date of
57
<PAGE>
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.
58
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for Security
Capital as of and for the three months ended March 31, 1997, for the three
months ended March 31, 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>
THREE MONTHS ENDED
MARCH 31, 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...... $ 39,035 $ 14,963 $ 168,473 $ 45,685 $ 8,812 $ 6,032 $ 1,722 $ 242
Rental revenues......... 50,667 30,809 145,907 103,634 55,071 10,916 1,592 --
Services Division
revenues (2)........... 22,970 15,408 77,512 49,404 -- -- -- --
Total revenues.......... 114,031 61,539 398,122 200,534 156,855 17,503 3,534 467
Rental expenses......... 19,957 12,635 58,259 40,534 23,052 1,428 292 --
Services Division
expenses (2)........... 21,324 16,819 79,296 56,317 -- -- -- --
General, administrative
and other (2).......... 11,701 5,654 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)............. 26,665 22,291 93,912 78,785 29,647 1,616 180 --
Line of credit......... 1,412 2,240 6,256 5,977 6,424 1,808 960 88
Majority-owned
subsidiaries (4)...... 4,761 4,342 17,056 19,042 8,057 362 -- --
---------- ---------- ----------- ----------- ---------- -------- -------- --------
Total interest expense. 32,838 28,873 117,224 103,804 44,128 3,786 1,140 88
Net earnings (loss)
attributable to Class A
Shares................. $ 3,349 $ (9,854) $ 32,067 $ (201,634) $ (7,685) $ 5,155 $ 1,014 $ 141
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 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.............. $ 18.75 -- $ 56.25 -- -- -- -- --
Net earnings (loss)
attributable to Class A
Shares................. $ 2.53 $ (9.91) $ 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..... 1,322,054 994,789 1,133,711 896,681 458,945 131,776 46,913 35,565
<CAPTION>
AS OF DECEMBER 31,
AS OF ----------------------------------------------------------------
MARCH 31, 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.. $1,512,391 $1,438,937 $ 930,043 $ 230,756 $161,270 $ 68,160 $24,911
Real estate, net of
accumulated
depreciation (1)....... 1,463,173 1,365,373 865,367 2,005,957 478,630 41,577 --
Total assets............ 3,222,715 2,929,284 1,855,056 2,300,613 673,019 110,765 25,003
Long-term debt:
Security Capital (3)... 1,036,712 940,197 718,611 514,383 48,970 6,532 --
Majority-owned
subsidiaries (4)...... 273,163 257,099 118,524 301,787 47,988 -- --
Minority interests...... 401,134 394,537 159,339 554,752 157,545 4,884 --
Total shareholders'
equity................. $1,018,809 $ 918,702 $ 528,539 $ 359,859 $293,823 $ 57,847 $16,314
</TABLE>
59
<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.
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information" and the financial statements included elsewhere in this
Prospectus. Historical results and percentage relationships set forth in
"Selected Financial Information" and the consolidated financial statements of
Security Capital are not indicative of the future operations of Security
Capital.
OVERVIEW
Security Capital has obtained its income historically from two sources: (1)
Security Capital's share of earnings in ATLANTIC, PTR, SCI, Security Capital
USREALTY and Homestead, some of which Security Capital accounts for by the
equity method where it owns less than a 50% controlling interest (PTR, SCI and
Security Capital USREALTY) and others of which are consolidated in Security
Capital's consolidated financial statements (ATLANTIC and Homestead) and (2)
financial services revenues earned by the Real Estate Research Group, the
Investment Research Group and the Financial Services Group and, prior to the
Mergers, the REIT management and property management companies. Revenues from
the Services Division are only reflected in Security Capital's consolidated
financial statements if they were earned from investees accounted for by the
equity method. Services Division revenues earned from consolidated investees
are eliminated in the Company's consolidated financial statements. Services
Division revenues earned from PTR and SCI have historically been based upon a
percentage of the cash flow from operations or a percentage of revenues, as
defined in the applicable REIT management and property management agreements,
respectively. See "Relationships with Operating Companies--PTR--PTR REIT
Management Agreement," "--PTR Property Management," "--SCI--SCI REIT
Management Agreement" and "--SCI Property Management."
Security Capital USREALTY, in accordance with generally accepted accounting
principles, accounts for its investments at market value or estimated fair
value (depending on whether the investment is publicly traded) and reflects
changes in such values in its statement of income pursuant to fair value
accounting principles. The Company accounts for its investment in Security
Capital USREALTY using the equity method and, as a consequence, the Company's
results of operations are affected by changes in the fair value of Security
Capital USREALTY's investments. Security Capital USREALTY values its
investments in publicly traded companies at market determined by using closing
market prices as of the relevant balance sheet date. Security Capital USREALTY
values its investments in private companies at fair value, generally
determined at cost, or an appropriate lower value if the investment is not
performing as expected. If substantial additional capital is raised by an
investee from independent third parties in a private placement, Security
Capital USREALTY values its investment at the price at which that capital was
raised when a substantial percentage of the new subscriptions have been
funded. In addition, through an advisory relationship with Security Capital
USREALTY, the Services Division also earns advisory fee revenues based on a
percentage of the fair value of Security Capital USREALTY's investments (not
including short-term investments and investments in Security Capital). See
"Relationships with Operating Companies--Security Capital USREALTY--Advisory
Agreement" and "--Sub-Advisory Agreements."
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.
61
<PAGE>
If the proposed Mergers involving ATLANTIC, PTR and SCI are consummated,
Security Capital will exchange its interests in the applicable REIT management
companies and property management companies for common shares of ATLANTIC, PTR
and SCI, respectively. Although the effects of completion of the proposed
Mergers on the Company's future consolidated results of operations are
complex, the Company expects reductions in Services Division revenues relating
to the sale of the REIT management and property management companies for PTR
and SCI to be substantially offset by decreases in Company-level personnel and
other costs attributable to the operation of such companies and increases in
capital investments revenues attributable to its ownership of additional
common shares of PTR and SCI.
Please refer to the Index to Financial Statements for the audited financial
statements of PTR, SCI and Security Capital USREALTY, Security Capital's
unconsolidated affiliates that are accounted for by the equity method.
1996 COMPARED TO 1995
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $19.0 million, or 21%, from
$89.6 million in 1995 to $108.6 million in 1996.
Equity in earnings of less than 50% owned investees
Security Capital's share of SCI's earnings increased 21% from $21.0 million
in 1995 to $25.4 million in 1996. This increase was primarily attributable to
an increase in the amount of distribution space owned and leased by SCI (80.6
million square feet at December 31, 1996 compared to 58.5 million square feet
at December 31, 1995) and increased rental rates on renewal leases for
previously occupied space, and was partly offset by a small decrease in SCI's
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 Security Capital USREALTY's earnings increased
substantially from $0.1 million in 1995 to $103.2 million in 1996. Security
Capital USREALTY effectively commenced its investment activities in October
1995, and at December 31, 1996, Security Capital USREALTY had investments at
cost of $1.18 billion with a fair market value of $1.43 billion, resulting in
unrealized appreciation of $250 million which is accounted for by Security
Capital USREALTY pursuant to fair value accounting principles. In addition,
Security Capital USREALTY recorded net investment income (defined as dividends
and other investment income net of administration expenses, advisor fees,
taxes and interest) of $16.4 million in 1996. At December 31, 1996 and 1995,
Security Capital's ownership interest in the outstanding common stock of
Security Capital USREALTY was 39% and 32%, respectively.
Rental Operations--from greater than 50% owned consolidated investees
Rental Revenues
Rental revenues increased $42.3 million, or 41%, from $103.6 million in 1995
to $145.9 million in 1996. This increase was primarily attributable to an
increase in the number of multifamily units owned and operated by ATLANTIC
(19,241 operating units at December 31, 1996 compared to 15,823 operating
units at December
62
<PAGE>
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 Security Capital USREALTY, Security Capital earns
revenues based on a percentage of the fair value of Security Capital
USREALTY's investments (not including short term investments and investments
in Security Capital). The increase of $28.1 million in Services Division
revenues in 1996 as compared to 1995 was primarily attributable to growth in
operations at each of the Company's non-consolidated investees. In particular,
financial services revenues earned from SCI increased $13.8 million, financial
services revenues earned from PTR increased $3.8 million and advisory revenues
earned from Security Capital USREALTY increased $7.9 million. The remaining
services revenues of $2.6 million were earned by Security Capital Markets
Group. Services Division revenues and associated expenses will be reduced
substantially following completion of the proposed Mergers. See "--Overview."
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 Security Capital USREALTY increased by $9.2 million, $7.6 million
and $1.6 million, respectively. In addition, the aggregate expenses of the
Investment Research 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 proposed Mergers as a result
of the transfer of personnel employed by Security Capital to PTR and SCI. See
"--Overview."
63
<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.
64
<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 Security Capital 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
65
<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
66
<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.
67
<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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996.
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $2.0 million, or 7%, from
$26.8 million for the three months ended March 31, 1996 to $28.8 million for
the three months ended March 31, 1997.
Equity in earnings of less than 50% owned investees
Security Capital's share of SCI's earning increased 32% from $5.7 million to
$7.5 million for the three months ended March 31, 1996 and 1997, respectively.
This increase was primarily attributable to an increase in the amount of
distribution space owned and leased by SCI (82.7 million square feet at March
31, 1997 compared to 65.1 million square feet at March 31, 1996) and increased
rental rates on renewal leases for previously occupied space, and was partly
offset by a small decrease in SCI's occupancy level (91.1% as of March 31,
1997 compared to 94.1% at March 31, 1996). At March 31, 1997 and 1996,
Security Capital's ownership interest in the outstanding common shares of SCI
was 44% and 48%, respectively.
Security Capital's share of PTR's earnings increased 97% from $7.4 million
for the first three months of 1997 to $14.6 million for the first three months
of 1997. This increase was attributable to a slight net increase in the number
of multifamily properties owned by PTR (40,874 operating units at March 31,
1997 compared to 38,970 operating units at March 31, 1996), interest income on
the Homestead convertible mortgage notes and gains of $25.3 million on sales
of properties in the first quarter of 1997. At March 31, 1997 and 1996,
Security Capital's ownership interest in the outstanding common shares of PTR
was 36% and 38%, respectively.
Security Capital's share of Security Capital USREALTY's earnings increased
substantially from $1.9 million for the three months ended March 31, 1996 to
$16.9 million for the three months ended March 31, 1997. Security Capital
USREALTY effectively commenced its investment activities in October 1995, and
at March 31, 1996, Security Capital USREALTY had investments at cost of
approximately $185 million with a fair market value of approximately $191
million. At March 31, 1997, Security Capital USREALTY had investments at a
cost of $1.50 billion with a fair market value of $1.78 billion. Unrealized
appreciation on Security Capital USREALTY's investments were $27.1 million and
$4.8 million for the three months ended March 31, 1997 and 1996, respectively.
In addition, Security Capital USREALTY recorded net investment income of $16.1
million and $0.3 million for the three months ended March 31, 1997 and 1996,
respectively. At March 31, 1997 and 1996, Security Capital's ownership
interest in the outstanding common stock of Security Capital USREALTY was 37%
and 39%, respectively.
RENTAL OPERATIONS--FROM GREATER THAN 50% OWNED CONSOLIDATED INVESTEES
Rental Revenues
Rental revenues increased $19.9 million, or 65%, from $30.8 million for the
three months ended March 31, 1996 to $50.7 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 (19,241 operating units at
March 31, 1997 compared to 16,159 operating units at March 31, 1996), coupled
with stable occupancies (approximately 95%) for the first quarter of both 1997
and 1996. This resulted in an $8.9 million increase in rental revenues between
the quarter periods. 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 $11.0 million in revenues
for the three month period ended March 31, 1997.
68
<PAGE>
Other Income, Net
Other income consists of interest and miscellaneous income of $1.4 million
and $0.4 million for the three months ended March 31, 1997 and 1996,
respectively. The majority of the increase in other income is due to the
formation of SC-ERF. Security Capital's equity in earnings of SC-ERF amounted
to $0.7 million for the three months ended March 31, 1997 and was included in
other income.
Rental Expenses
Rental expenses increased by $7.4 million, or 59%, to $20.0 million for the
three months ended March 31, 1997 from $12.6 million for the same period in
1996. The increase was primarily attributable to the increase in the number of
ATLANTIC's operating multifamily communities discussed previously. ATLANTIC's
rental expenses increased $2.6 million (excluding REIT and property management
fees) in the first quarter of 1997 compared to the first quarter of 1996.
Homestead's rental expenses were $4.8 million for the first quarter of 1997.
SERVICES DIVISION
Revenues
Services Division revenues increased from $15.4 million for the three months
ended March 31, 1996 to $23.0 million for the same period in 1997. The
increase of $7.6 million in Services Division revenues in 1997 as compared to
1996 was primarily attributable to growth in operations at each of the
Company's non-consolidated investees. In particular, advisory revenues from
Security Capital USREALTY increased $4.5 million and financial services
revenues earned from SCI and PTR increased the remaining $2.9 million.
Expenses
Services Division expenses increased by $4.5 million, or 27%, for the three
months ended March 31, 1997, to $21.3 million from $16.8 million for the same
period in 1996. This increase results from the expansion of the Services
Division, including the hiring of additional professionals primarily for the
REIT and property management companies and the Investment Research Group.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for Security Capital was $8.8 million
and $5.5 million for the three months ended March 31, 1997 and 1996,
respectively. Of those amounts, $7.9 million and $4.8 million represented
depreciation and amortization from rental operations for those same periods in
1997 and 1996, respectively. Depreciation for ATLANTIC increased $1.3 million
to $6.1 million for the first quarter of 1997 from $4.8 million for the first
quarter of 1996, an increase of 27%, due to the increase in the number of
operating multifamily communities between those quarter periods. Depreciation
for Homestead was $1.8 million for the three months period ended March 31,
1997. The remaining depreciation and amortization of $0.9 million and $0.7
million in 1997 and 1996, respectively, is attributable to the Services
Division and the administrative support functions, representing an increase of
$0.2 million over such depreciation and amortization for the first quarter of
1996. The increase of $0.2 million between 1997 and 1996 is primarily a result
of depreciation on additional furniture, fixtures and equipment.
INTEREST EXPENSE
Interest expenses on the Convertible Debentures increased $4.4 million or
20% to $26.7 million for the first quarter of 1997 compared to $22.3 million
for the same period in 1996. The increase is attributable to the receipt of
the subscriptions of the 2016 Convertible Debentures from a private placement
offering completed in March, 1996, which totalled $323 million.
69
<PAGE>
Interest expense on other obligations decreased by $0.4 million from the
first quarter of 1996 to the same period in 1997, largely due to Homestead's
increased construction and development activity which resulted in additional
interest capitalization in the first quarter of 1997.
GENERAL, ADMINISTRATIVE AND OTHER
General, administrative and other expenses increased by $6.0 million, or
105% for the three months ended March 31, 1997, to $11.7 million from $5.7
million for the same period in 1996. This increase resulted primarily from (a)
consolidation of Homestead's accounts in 1997 ($2.8 million), (b) additional
personnel and related costs and professional fees applicable to enhancing
information systems, human resources and other administrative support
functions ($2.6 million) and (c) an increase in ATLANTIC's administrative
expenses ($0.6 million).
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of 1997 was primarily
attributable to deferred income taxes on the equity in earnings of Security
Capital USREALTY. During the first quarter of 1996, 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 for the three-month period ended March 31, 1996.
MINORITY INTERESTS
Minority interests increased from $1.9 million for the three months ended
March 31, 1996 to $5.0 million for the three months ended March 31, 1997 due
to increased earnings at ATLANTIC and Homestead, coupled with an increase in
minority ownership interests in ATLANTIC in conjunction with its initial
public offering in October 1996 and the spin-off 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 Stock carries a
7.5% preferential cash dividend rate, payable when and if authorized by the
Board quarterly in arrears. Security Capital paid $2.6 million in dividends on
the Series A Preferred Stock for the three months ended March 31, 1997.
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. Security Capital
has historically financed its investment activities primarily through the sale
of stock and debentures in private placements and borrowings under its line of
credit.
Based on Security Capital's current level of operations and anticipated
growth as a result of pending new business initiatives, Security Capital
expects that cash flows from operations (including dividends and fees received
from its operating companies), the proceeds of 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 requirements for operating and investing activities for the next
twelve months. Security Capital intends to finance its long-term business
activities (including investments in new business initiatives) through the
proceeds of the Offering 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, 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.
70
<PAGE>
Concurrent with the Warrant Issuance, Security Capital has registered to
sell $250 million of Class B Shares to the public in the 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, as described in registration statements initially filed with
the Securities and Exchange Commission on July 3, 1997, ATLANTIC has
proposed to offer approximately $50 million of preferred stock and $150
million of unsecured senior debt securities 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 $38
million of Homestead common stock outstanding as of March 31, 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.
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 Security Capital USREALTY.
Security Capital's 1995 net financing activity of $486.9 million primarily
consisted of (i) net proceeds from the sale of common stock of $363.3 million,
(ii) $184.8 million in net proceeds from the issuance of Convertible
Debentures, (iii) a decrease in outstanding mortgage loans of $7.0 million for
ATLANTIC, (iv) net repayments on lines of credit of $39.5 million and (v)
other financing transactions resulting in an aggregate use of cash of $14.7
million.
71
<PAGE>
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.
THREE MONTHS ENDED MARCH 31, 1997 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of $236 million for the first quarter
of 1997 consisting primarily of (i) $51 million invested by ATLANTIC for the
development and acquisition of multifamily communities; (ii) $52 million
invested by Homestead for the development of extended-stay lodging properties;
(iii) $55 million invested by Security Capital for common shares of Security
Capital USREALTY; (iv) $65 million invested by Security Capital in SC-ERF and
(v) $11 million invested by Security Capital to purchase Homestead warrants in
the open market.
Security Capital obtained financing of $234 million in the first quarter of
1997 primarily from (i) net proceeds from the sale of common stock of $97
million and convertible debentures of $97 million; and (ii) net proceeds from
line of credit borrowings $33 million. Other financing transactions resulted
in additional net proceeds from financing activities of $7 million.
LINES OF CREDIT
Security Capital
SC Realty, a wholly owned subsidiary of the Company, has entered into 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
72
<PAGE>
pays a commitment fee ranging from .125% to .25% per annum based on the
average unfunded line of credit balance. The line of credit is guaranteed by
Security Capital and is secured by shares of PTR, SCI, ATLANTIC, Security
Capital USREALTY and Homestead, as well as warrants to purchase shares in
Homestead.
The line of credit contains a restricted payments covenant which prohibits
dividends and distributions on SC Realty's capital stock in excess of 100% of
SC Realty's cash flow available for distribution (as defined). Security
Capital's guaranty of the line of credit also contains various financial and
other covenants applicable to the Company, including a minimum shareholders'
equity test, a total liabilities to net worth ratio and an interest coverage
ratio, as well as restrictions on the Company's ability to incur indebtedness
and effect consolidations, mergers (other than a consolidation or merger in
which the Company is the surviving entity) and sales of assets. The guaranty
also contains a restricted payments covenant which prohibits dividends and
distributions on the Company's capital stock in excess of 95% of the Company's
cash flow available for distribution (as defined). As of March 31, 1997,
Security Capital and SC Realty were in compliance with all financial
covenants.
The line of credit also provides for loans of up to $50,000,000 from SC
Realty 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 paid by SC Realty under the credit agreement. If
SC Realty has no borrowings outstanding under the credit agreement, then
interest is computed using the "base rate" (defined as the higher of the Wells
Fargo prime rate or the Federal Funds Rate plus .50%).
As of July 31, 1997, SC Realty had borrowed $188.5 million under the line of
credit. The weighted average interest rate on the line of credit balance at
July 31, 1997 was 7.1763%. See "Use of Proceeds."
ATLANTIC
ATLANTIC has obtained a $350 million unsecured line of credit from Morgan
Guaranty Trust Company of New York ("MGT"). The line of credit matures in
December 1998 and may be extended for one year with the approval of MGT and
the other participating lenders. Borrowings on the line of credit bear
interest at ATLANTIC's option, at either (i) 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, or (ii) the higher of the
federal funds rate plus a margin of .50% or MGT's prime rate, with interest
payable monthly in arrears. 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.
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. ATLANTIC
was in compliance with all financial covenants at March 31, 1997.
As of July 31, 1997, ATLANTIC had borrowed $254.8 million under the line of
credit.
MORTGAGE NOTES PAYABLE
Mortgage notes payable totalled $273.2 million at March 31, 1997 and
consisted of the following: (i) conventional fixed rate mortgage obligations
of ATLANTIC in the amount of $34.1 million; (ii) tax exempt mortgage
obligations of ATLANTIC of $121.4 million; and (iii) convertible mortgage
obligations of Homestead of $117.7 million. Mortgage note obligations of
ATLANTIC and Homestead are not guaranteed by Security Capital.
73
<PAGE>
The Homestead convertible 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.
Approximately 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 (nine months from April 1 to December 31)................... $ 1,164
1998............................................................. 7,136
1999............................................................. 1,576
2000............................................................. 3,554
2001............................................................. 1,812
Thereafter....................................................... 257,921
--------
$273,163
========
</TABLE>
CONVERTIBLE DEBENTURES
2014 Convertible Debentures
At June 30, 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 June 30, 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 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.
74
<PAGE>
RELATIONSHIPS WITH OPERATING COMPANIES
In addition to the transactions with affiliates described elsewhere in this
Prospectus, Security Capital has entered into the following agreements with
its affiliated real estate operating companies:
ATLANTIC
ATLANTIC REIT Management Agreement
ATLANTIC's REIT manager, Security Capital (Atlantic) Incorporated (the
"ATLANTIC REIT Manager"), is owned by Security Capital. The ATLANTIC REIT
Manager's sole business and principal occupation since its formation in
October 1993 is advising ATLANTIC. The services provided or coordinated by the
ATLANTIC REIT Manager include strategic and day-to-day management, research,
investment analysis, acquisition and due diligence, multifamily property
development, asset management, capital markets, asset disposition, legal and
accounting services. All such services are included in the fee paid to the
ATLANTIC REIT Manager by ATLANTIC (the "ATLANTIC REIT Management fee"),
including capital markets and development services, which most REITs
capitalize (or, in the case of capital markets, deduct from proceeds). The
ATLANTIC REIT Management fee is paid monthly and was $3.0 million for the
three months ended March 31, 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 will be terminated upon the closing of the Mergers and all the
employees of the ATLANTIC REIT Manager will become employees of ATLANTIC.
ATLANTIC Property Management
Commencing May 12, 1994, SCG Realty Services (Atlantic) Incorporated (the
"ATLANTIC Property Manager"), an affiliate of the ATLANTIC REIT Manager and a
subsidiary of Security Capital, began providing property management services
for certain of ATLANTIC's properties. At June 30, 1997, the ATLANTIC Property
Manager managed approximately 92.6% of ATLANTIC's multifamily units. The
agreement terminates September 30, 1997, subject to earlier termination by
ATLANTIC on 30 days' notice, is renewable annually upon approval of ATLANTIC's
independent directors and contemplates a fee to the ATLANTIC Property Manager
of 3.5% 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 $1.3 million for the three months ended March 31, 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 are expected to be at market rates. This agreement
will be terminated upon the closing of the Mergers and all employees of the
ATLANTIC Property Manager will become employees of ATLANTIC.
ATLANTIC Investor Agreement
ATLANTIC and Security Capital are parties to an Investor Agreement, dated as
of October 28, 1993 (the "ATLANTIC Investor Agreement"), which required
Security Capital to purchase $21.5 million in common stock of ATLANTIC,
subject to certain conditions. The ATLANTIC Investor Agreement, among other
things, requires ATLANTIC to obtain Security Capital's approval of (i) the
annual operating budget and substantial deviations therefrom, (ii) contracts
for investment management, property management or leasing services or that
contemplate annual payments in excess of $100,000 and (iii) acquisitions or
dispositions in a single transaction or a group of related transactions where
the purchase price exceeds $5 million. The ATLANTIC Investor Agreement also
provides that, so long as Security Capital owns at least 10% of the
outstanding common stock of ATLANTIC, ATLANTIC may not increase its Board of
Directors to more than seven members. Security Capital is entitled to
designate one or more persons as directors, and ATLANTIC is obligated to use
its best efforts to cause the election of such persons, as follows: (i) so
long as Security Capital owns at least 10%, but less than 20%, of the
outstanding common stock of ATLANTIC, it is entitled to nominate two persons;
and (ii) so long as Security Capital owns at least 20% of the outstanding
common stock of ATLANTIC, it is entitled to nominate three persons.
75
<PAGE>
In addition, the ATLANTIC Investor Agreement provides Security Capital with
registration rights pursuant to which, in certain circumstances, Security
Capital may demand, at any time, registration pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act") of all or any part
of the shares of ATLANTIC's common stock owned by Security Capital.
At the closing of the Mergers, ATLANTIC and Security Capital will amend and
restate the ATLANTIC Investor Agreement (as so amended and restated, the
"ATLANTIC Amended Investor Agreement"), which will provide that, without first
having consulted with the nominees of Security Capital designated in writing,
ATLANTIC may not seek Board of Directors approval of (i) ATLANTIC's annual
budget; (ii) the incurrence of expenses in any year exceeding (a) any line
item in the annual budget by the greater of $500,000 or 20% and (b) the total
expenses set forth in the annual budget by 15%; (iii) the purchase or sale of
any assets in any single transaction or series of related transactions in the
ordinary course of ATLANTIC's business where the aggregate purchase price to
be paid or received by ATLANTIC would exceed $25 million; and (iv) the
entering into of any new contract with a service provider (a) for investment
management, property management or leasing services or (b) that reasonably
contemplates annual contract payments by ATLANTIC in excess of $1 million.
ATLANTIC is under no obligation to accept or comply with any advice offered by
Security Capital with respect to the foregoing matters.
Additionally, so long as Security Capital beneficially owns at least 25% of
the common shares of ATLANTIC, Security Capital will have the right to approve
the following matters proposed by ATLANTIC: (i) the issuance or sale of any
common shares, (including the grant of any rights, options or warrants to
subscribe for or purchase common shares or any security convertible into or
exchangeable for common shares or the issuance or sale of any security
convertible into or exchangeable for common shares) at a price per share less
than the fair market value of a common share on the date of such issuance or
sale; (ii) the issuance and sale of any disqualified shares (as defined) if,
as a result thereof, ATLANTIC's Fixed Charge Coverage Ratio (as defined) would
be less than 1.4 to 1.0; (iii) the adoption of any employee benefit plan
pursuant to which shares of ATLANTIC or any securities convertible into shares
of ATLANTIC may be issued and any action with respect to the compensation of
the senior officers of ATLANTIC (including the granting or award of any
bonuses or share-based incentive awards); and (iv) the incurrence of any
additional indebtedness (including guarantees and including renegotiations and
restructurings of existing indebtedness) if, as a result thereof, ATLANTIC's
Interest Expense Coverage Ratio (as defined) would be less than 2.0 to 1.0.
The restriction referred to in clause (i) above does not apply to (A) the sale
or grant of any options to purchase shares of ATLANTIC pursuant to the
provisions of any benefit plan approved by the shareholders of ATLANTIC, (B)
the issuance or sale of shares upon the exercise of any rights, options or
warrants granted, or upon the conversion or exchange of any convertible or
exchangeable security issued or sold, prior to the closing date of the Mergers
or in accordance with the provisions of the ATLANTIC Amended Investor
Agreement, (C) the issuance and sale of any shares of ATLANTIC pursuant to any
dividend reinvestment and share purchase plan approved by the ATLANTIC Board
of Directors or (D) the issuance, grant of distribution of rights, options or
warrants to all holders of common shares entitling them to subscribe for or
purchase shares of ATLANTIC or securities convertible into or exercisable for
shares.
The ATLANTIC Amended Investor Agreement will also provide that, so long as
Security Capital owns at least 10% of the outstanding common shares, ATLANTIC
may not increase the number of persons serving on the ATLANTIC Board of
Directors to more than seven. Security Capital also will be entitled to
designate one or more persons as directors of ATLANTIC, as follows: (i) so
long as Security Capital owns at least 10% but less than 25% of the
outstanding common shares, it is entitled to nominate one person; and (ii) so
long as Security Capital owns at least 25% of the outstanding common shares,
it is entitled to nominate that number of persons as shall bear approximately
the same ratio to the total number of members of the ATLANTIC Board of
Directors as the number of common shares beneficially owned by Security
Capital bears to the total number of outstanding common shares, provided, that
Security Capital shall be entitled to designate no more than three persons so
long as the ATLANTIC Board of Directors consists of no more than seven
members.
As part of the ATLANTIC Amended Investor Agreement, Security Capital may
make employment opportunities with Security Capital or its affiliates
available to the officers and employees of ATLANTIC. Prior
76
<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. Security Capital may request one such registration for every $100 million
(based on market value) of common shares of ATLANTIC it owns.
Administrative Services Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into
an administrative services agreement, pursuant to which Security Capital will
provide ATLANTIC with certain administrative and other services with respect
to certain aspects of ATLANTIC's business, as selected from time to time by
ATLANTIC at its option. These services are expected to include, but are not
limited to, payroll and tax administration services, cash management and
accounts payable services, data processing and other computer services, human
resources, research, investor relations, insurance administration and legal
administration. The fees payable to Security Capital will be equal to Security
Capital's cost of providing such services plus 20%, subject to a maximum
amount of approximately $5.2 million during the initial term of the agreement,
of which approximately $1.5 million will apply to the period between the
closing of the Mergers and December 31, 1997 and the remainder will apply to
1998. Cost savings under this agreement will accrue to ATLANTIC. The agreement
will be for an initial term expiring on December 31, 1998 and will be
automatically renewed for consecutive one-year terms, subject to approval by a
majority of the independent members of the ATLANTIC Board of Directors.
License Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into
a license agreement pursuant to which Security Capital will grant ATLANTIC a
non-exclusive license to use Security Capital's registered logo and the non-
exclusive right to use the name "Security Capital." The term of the license
will be for a period of 15 years, subject to ATLANTIC's right to extend the
license for up to two additional five-year periods.
Protection of Business Agreement
At the closing of the Mergers, ATLANTIC and Security Capital will enter into
a protection of business agreement (the "ATLANTIC Protection of Business
Agreement"), which will prohibit Security Capital and its affiliates from
providing, anywhere within the United States, directly or indirectly,
substantially the same services as those currently provided by the ATLANTIC
REIT Manager and the ATLANTIC Property Manager to any entity that owns or
operates multifamily properties. The ATLANTIC Protection of Business Agreement
does not prohibit Security Capital or its affiliates from owning the
securities of any class of ATLANTIC or PTR. The ATLANTIC Protection of
Business Agreement will terminate in the event of an acquisition, directly or
indirectly, (other than by purchase from Security Capital or any of its
affiliates), by any person (or group of persons acting in concert), other than
Security Capital or any of its affiliates, of the greater of (i) 25% or more
of the outstanding shares of voting securities of ATLANTIC and (ii) the
percentage of outstanding voting securities of ATLANTIC owned directly or
indirectly by Security Capital and its affiliates, in either case without the
prior written consent of the ATLANTIC Board of Directors. Subject to earlier
termination pursuant to the preceding sentence, the ATLANTIC Protection of
Business Agreement will terminate on the third anniversary of the closing date
of the Mergers.
ATLANTIC Development Agreements
ATLANTIC 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
77
<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. The aggregate amount of such
earnout amounts for the seven remaining communities cannot exceed $7.3
million. The developer/managers were not entitled to receive any earnout
payment at June 30, 1997 on the seven remaining communities.
HOMESTEAD
Homestead Transaction
In January 1996, Security Capital began considering ways for ATLANTIC, PTR
and Security Capital to maximize shareholder value with respect to their
Homestead Village properties and operations. In May 1996, ATLANTIC, PTR,
Security Capital and Homestead entered into a merger agreement, pursuant to
which each of ATLANTIC, PTR and Security Capital agreed to contribute, through
a series of merger transactions, all of their respective assets relating to
Homestead Village properties to Homestead, and ATLANTIC and PTR agreed to
enter into certain funding commitment agreements. ATLANTIC's and PTR's
respective shareholders approved the Homestead transaction on September 13,
1996 and September 12, 1996, respectively, and the closing of the Homestead
transaction occurred on October 17, 1996, which resulted in (i) ATLANTIC (a)
owning 4,201,220 shares of Homestead common stock, (b) owning 2,818,517
warrants each to purchase one share of Homestead common stock at $10 per
share, (c) agreeing to provide up to $111.1 million of mortgage financing to
Homestead in exchange for up to approximately $98 million in convertible
mortgage notes and (d) providing a cash payment of $16.6 million to Homestead
on the closing date; (ii) PTR (a) owning 9,485,727 shares of Homestead common
stock, (b) owning 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 June
30, 1997, Security Capital had purchased in the open market warrants to
purchase 2,377,895 shares of Homestead common stock and has exercised warrants
to purchase 5,550,000 shares of Homestead common stock, and as a result, as of
June 30, 1997 owned 15,444,401 shares of Homestead common stock and warrants
to purchase 1,557,917 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,
78
<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,
79
<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 June 30, 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 $525,000 for the three months ended March 31, 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,
80
<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
Security Capital Pacific Incorporated (the "PTR REIT Manager") is owned by
Security Capital. All officers of PTR are employees of the PTR REIT Manager
and PTR has no employees. Pursuant to a REIT management agreement (the "PTR
REIT Management Agreement"), the PTR REIT Manager provides both strategic and
day-to-day management to PTR, including research, investment analysis,
acquisition and development services, asset management, capital markets
services, disposition of assets and legal and accounting services. The PTR
REIT Management Agreement requires PTR to pay a base annual fee of $855,000
plus 16% of cash flow (as defined in the PTR REIT Management Agreement) in
excess of $4,837,000. The PTR REIT Manager also receives a fee of 0.25% per
year on the average daily balance of cash equivalent investments. PTR is
obligated to reimburse the PTR REIT Manager for certain expenses incurred by
the PTR REIT Manager on behalf of PTR relating to PTR's operations, primarily
including third party legal, accounting and similar fees paid on behalf of
PTR, and travel expenses incurred in seeking financing, property acquisitions,
property sales, property development, attendance at trustee and shareholder
meetings and similar activities on behalf of PTR. The PTR REIT Management
Agreement is renewable by PTR annually, subject to a determination by the
independent trustees that the PTR REIT Manager's performance has been
satisfactory and that the compensation payable to the PTR REIT Manager is
fair. Each of PTR and the PTR REIT Manager may terminate the PTR REIT
Management Agreement on 60 days' notice. For the three months ended March 31,
1997 and the years ended December 31, 1996, 1995 and 1994, the PTR REIT
Manager earned REIT management fees totalling $4.6 million, $22.2 million,
$20.4 million and $13.2 million, respectively. This agreement will be
terminated upon the closing of the Mergers and all employees of the PTR REIT
Manager will become employees of PTR.
PTR Property Management
At June 30, 1997, SCG Realty Services Incorporated ("SCG Realty Services"),
as property manager for most of PTR's multifamily communities, managed
approximately 94.1% of PTR's operating multifamily units, with the balance in
various stages of transition to SCG Realty Services' management. Security
Capital owns SCG Realty Services. Rates for services performed by SCG Realty
Services are subject to annual approval by PTR's independent trustees (who
receive an annual review of fees paid for similar services from an independent
third party). During the three months ended March 31, 1997 and the years ended
December 31, 1996, 1995 and 1994, PTR paid aggregate fees of $2.7 million,
$9.7 million, $7.9 million and $7.1 million, respectively, to SCG Realty
Services. This agreement will be terminated upon the closing of the Mergers
and all employees of SCG Realty Services will become employees of PTR.
PTR Investor Agreement
Pursuant to various agreements, as amended, between PTR and Security Capital
(the "PTR Investor Agreement"), Security Capital is entitled to designate
three persons to be nominated for election to the PTR Board of Trustees. So
long as Security Capital beneficially owns at least 10% of PTR's common
shares, PTR is prohibited from increasing the number of members of the PTR
Board of Trustees to more than seven. Additionally, the PTR Investor
Agreement, among other things, requires PTR to obtain Security Capital's
approval of (i) the annual operating budget and substantial deviations
therefrom, (ii) contracts for investment management, property management or
leasing services or that contemplate annual payments in excess of $100,000 and
(iii) acquisitions or dispositions in a single transaction or a group of
related transactions where the purchase or sale price exceeds $5 million. The
PTR Investor Agreement also provides certain registration rights to Security
Capital in respect of PTR's common shares beneficially owned by Security
Capital.
At the closing of the Mergers, PTR and Security Capital will amend and
restate the PTR Investor Agreement such that it will be substantially similar
to the ATLANTIC Amended Investor Agreement described above
81
<PAGE>
except: (i) it will restrict the ability of Security Capital (or a group of
which it is a member) from acquiring in excess of 49% of PTR's common shares
subject to certain exceptions and (ii) it will permit PTR to increase the size
of the PTR Board of Trustees to eight members.
Administrative Services Agreement
At the closing of the Mergers, PTR and Security Capital will enter into an
administrative services agreement, pursuant to which Security Capital will
provide PTR with certain administrative and other services with respect to
certain aspects of PTR's business, as selected from time to time by PTR at its
option. These services are expected to include, but are not limited to,
payroll and tax administration services, cash management and accounts payable
services, data processing and other computer services, human resources,
research, investor relations, insurance administration and legal
administration. The fees payable to Security Capital will be equal to Security
Capital's cost of providing such services plus 20%, subject to a maximum
amount of approximately $7.7 million during the initial term of the agreement,
of which approximately $2.2 million will apply to the period between closing
of the Mergers and December 31, 1997 and the remainder will apply to 1998.
Cost savings under this agreement will accrue to PTR. The agreement will be
for an initial term expiring on December 31, 1998 and will be automatically
renewed for consecutive one-year terms, subject to approval by a majority of
the independent members of the PTR Board of Trustees.
License Agreement
At the closing of the Mergers, PTR and Security Capital will enter into a
license agreement (the "PTR License Agreement") pursuant to which Security
Capital will grant PTR a non-exclusive license to use Security Capital's
registered logo and the non-exclusive right to use the name "Security
Capital." The term of the license will be for a period of 15 years, subject to
PTR's right to extend the license for up to two additional five-year periods.
As part of the PTR License Agreement, Security Capital will agree that, during
the term of the agreement, it will not exercise its rights under the PTR
Declaration of Trust to cause PTR to change its name.
Protection of Business Agreement
At the closing of the Mergers, PTR and Security Capital will enter into a
protection of business agreement (the "PTR Protection of Business Agreement"),
which will prohibit Security Capital and its affiliates from providing,
anywhere within the United States, directly or indirectly, substantially the
same services as those currently provided by the PTR REIT Manager and the PTR
Property Manager to any entity that owns or operates multifamily properties.
The PTR Protection of Business Agreement does not prohibit Security Capital or
its affiliates from owning the securities of any class of PTR or ATLANTIC. The
PTR Protection of Business Agreement will terminate in the event of an
acquisition, directly or indirectly, (other than by purchase from Security
Capital or any of its affiliates), by any person (or group of persons acting
in concert), other than Security Capital or any of its affiliates, of the
greater of (i) 25% or more of the outstanding shares of voting securities of
PTR and (ii) the percentage of outstanding voting securities of PTR owned
directly or indirectly by Security Capital and its affiliates, in either case
without the prior written consent of the PTR Board of Trustees. Subject to
earlier termination pursuant to the preceding sentence, the PTR Protection of
Business Agreement will terminate on the third anniversary of the closing date
of the Mergers.
PTR Development Services
PTR owns all of the preferred stock of PTR Development Services Incorporated
("PTR Development Services"), which entitles PTR to 95% of the net operating
cash flow of PTR Development Services. Security Capital owned all of the
common stock of PTR Development Services during 1995. Effective as of January
1, 1996, Security Capital transferred such common stock to an unaffiliated
trust. The common stock is entitled to receive the remaining 5% of net
operating cash flow. As of March 31, 1997 and December 31, 1996, PTR had
mortgage loans outstanding to PTR Development Services aggregating $19.2
million and $18.8 million, respectively, for the purchase of land for
multifamily development. Owning land through PTR Development
82
<PAGE>
Services provides greater flexibility for the use of such land and the
disposition of excess parcels. PTR expects to make similar loans to PTR
Development Services in 1997. The aggregate amount of such loans will vary
depending upon the volume of development activity.
SCI
SCI REIT Management Agreement
Security Capital Industrial Incorporated (the "SCI REIT Manager") is owned
by Security Capital. All officers of SCI are employees of the SCI REIT Manager
and SCI has no employees. Pursuant to a REIT management agreement (the "SCI
REIT Management Agreement"), the SCI REIT Manager provides both strategic and
day-to-day management, research, investment analysis, acquisition and due
diligence, development, marketing, asset management, capital markets,
disposition of assets, management information systems support and legal and
accounting services. The SCI REIT Management Agreement requires SCI to pay a
base annual fee of approximately 16% of cash flow as defined in the SCI REIT
Management Agreement. The SCI REIT Manager also receives a fee of 0.20% per
year on the average daily balance of cash equivalent investments. SCI is
obligated to reimburse the SCI REIT Manager for all expenses incurred by the
SCI REIT Manager on behalf of SCI relating to SCI's operations, primarily
including third-party legal, accounting, property development and similar fees
paid on behalf of SCI, and travel expenses incurred in seeking financing,
property acquisitions, property sales, attendance at SCI Board of Trustees and
shareholder meetings and similar activities on behalf of SCI. The SCI REIT
Management Agreement is renewable annually by SCI, subject to a determination
by the independent trustees that the SCI REIT Manager's performance has been
satisfactory and that the compensation payable to the SCI REIT Manager is
fair. Each of SCI and the SCI REIT Manager may terminate the SCI REIT
Management Agreement on 60 days' notice. For the three months ended March 31,
1997 and the years ended December 31, 1996, 1995 and 1994, the SCI REIT
Manager earned REIT management fees of $6.6 million, $21.5 million, $14.2
million and $8.7 million, respectively, pursuant to the SCI REIT Management
Agreement. This agreement will be terminated upon the closing of the Mergers
and all employees of the SCI REIT Manager will become employees of SCI.
SCI Property Management
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 June 30, 1997, the Property Manager was
providing property management services in 30 target market cities and was
actively managing 82.0 million square feet, 96.2% of SCI's operating portfolio
of 85.3 million square feet. Rates for services performed by Client Services
range between 1.5% and 3.0% per annum of property revenues and are subject to
annual approval by SCI's independent trustees and are at or below market
rates. SCI may terminate the property management agreements on 60 days'
notice. During the three months ended March 31, 1997 and the year ended
December 31, 1996, SCI paid property management fees and leasing commissions
of $3.6 million and $10.1 million to Client Services, respectively, and
reimbursed Client Services for maintenance recovery expenditures collected
from SCI's customers of $506,000 and $1.7 million, respectively. The
management agreements between SCI and Client Services will be terminated upon
closing of the Mergers, and all employees of Client Services will become
employees of SCI.
SCI Investor Agreement
SCI and Security Capital are parties to an Investor Agreement, dated as of
November 18, 1993 (the "SCI Investor Agreement"), which required Security
Capital to invest a minimum of $75 million in SCI's common shares in SCI's
December 1993 private rights offering to shareholders, subject to certain
conditions. The SCI Investor Agreement, among other things, requires SCI to
obtain Security Capital's approval of (i) the annual operating budget and
substantial deviations therefrom, (ii) contracts for investment management,
property management or leasing services or that contemplate annual payments in
excess of $100,000 and (iii) acquisitions
83
<PAGE>
or dispositions in a single transaction or a group of related transactions
where the purchase or sale price exceeds $5 million. The SCI Investor
Agreement also provides that, so long as Security Capital beneficially owns at
least 10% of the outstanding SCI common shares, SCI may not increase the size
of its Board of Trustees to more than seven members. Security Capital is
entitled to designate one or more persons for nomination to election as
trustees, and SCI is obligated to use its best efforts to cause the election
of such persons, as follows: (i) so long as Security Capital beneficially owns
at least 10% but less than 20% of the outstanding SCI common shares, it is
entitled to designate two persons; and (ii) so long as Security Capital
beneficially owns at least 20% of the outstanding SCI common shares, it is
entitled to designate three persons. The SCI Investor Agreement also provides
certain registration rights to Security Capital with respect to SCI's common
shares beneficially owned by Security Capital.
As of the closing of the Mergers, SCI and Security Capital will amend and
restate the SCI Investor Agreement such that it will be substantially similar
to the ATLANTIC Amended Investor Agreement described above.
Administrative Services Agreement
At the closing of the Mergers, SCI and Security Capital will enter into an
administrative services agreement, pursuant to which Security Capital will
provide SCI with certain administrative and other services with respect to
certain aspects of SCI's business, as selected from time to time by SCI at its
option. These services are expected to include, but are not limited to,
payroll and tax administration services, cash management and accounts payable
services, data processing and other computer services, human resources,
research, investor relations, insurance administration and legal
administration. The fees payable to Security Capital will be equal to Security
Capital's cost of providing such services plus 20%, subject to a maximum
amount of approximately $7.1 million during the initial term of the agreement,
of which approximately $2.0 million will apply to the period between the
closing of the Mergers and December 31, 1997 and the remainder will apply to
1998. Cost savings under this agreement will accrue to SCI. The agreement will
be for an initial term expiring on December 31, 1998 and will be automatically
renewed for consecutive one-year terms, subject to approval by a majority of
the independent members of the SCI Board of Trustees.
License Agreement
At the closing of the Mergers, SCI and Security Capital will enter into a
license agreement (the "SCI License Agreement") pursuant to which Security
Capital will grant SCI a non-exclusive license to use Security Capital's
registered logo and the non-exclusive right to use the name "Security
Capital." The term of the license will be for a period of 15 years, subject to
SCI's right to extend the license for up to two additional five-year periods.
As part of the SCI License Agreement, Security Capital will agree that during
the term of the agreement, it will not exercise its rights under the SCI
Declaration of Trust to cause SCI to change its name.
Protection of Business Agreement
At the closing of the Mergers, SCI and Security Capital will enter into a
protection of business agreement (the "SCI Protection of Business Agreement"),
which will prohibit Security Capital and its affiliates from providing,
anywhere within the United States, directly or indirectly, substantially the
same services as those currently provided by the SCI REIT Manager and the SCI
Property Manager to any entity that owns or operates distribution properties.
The SCI Protection of Business Agreement does not prohibit Security Capital or
its affiliates from owning the securities of any class of SCI. The SCI
Protection of Business Agreement will terminate in the event of an
acquisition, directly or indirectly, (other than by purchase from Security
Capital or any of its affiliates), by any person (or group of persons acting
in concert), other than Security Capital or any of its affiliates, of the
greater of (i) 25% or more of the outstanding shares of voting securities of
SCI and (ii) the percentage of outstanding voting securities of SCI owned
directly or indirectly by Security Capital and its affiliates, in either case
without the prior written consent of the SCI Board of Trustees. Subject to
earlier termination pursuant to the preceding sentence, the SCI Protection of
Business Agreement will terminate on the third anniversary of the closing date
of the Mergers.
84
<PAGE>
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 three months ended March 31, 1997 and the years ended
December 31, 1996 and 1995 was approximately $606,000, $1.3 million and
$700,000, respectively (there was no fee incurred in 1994). During the three
months ended March 31, 1997 and the years ended December 31, 1996, 1995 and
1994, SCI earned $5.5 million, $8.5 million, $2.2 million and $17,000,
respectively, in interest income and had $6.9 million, $7.4 million, $1.9
million and $17,000, respectively, in accrued interest receivable from SCI
Development Services. As of March 31, 1997 and December 31, 1996, 1995 and
1994, SCI had outstanding $175.7 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.
SECURITY CAPITAL USREALTY
Advisory Agreement
Pursuant to an agreement dated July 1, 1997 (the "Advisory Agreement"),
Security Capital USREALTY appointed Security Capital (EU) Management S.A.
("USREALTY Adviser") as operating advisor to provide Security Capital USREALTY
with advice with respect to strategy, investments, financing, administrative
and all other operating matters affecting Security Capital USREALTY. The
USREALTY Adviser receives a single all-inclusive annual advisory fee equal to
1.25% of Security Capital USREALTY's assets, excluding investments in Security
Capital securities and investments of short-term cash and cash equivalents.
The fee payable to the USREALTY Adviser is reduced to the extent that the
third-party operating and administrative expenses of Security Capital USREALTY
exceed .25% of assets per annum. The USREALTY Adviser is responsible for
paying all fees of Security Capital Investment Research and Security Capital
Investment Research Group (described below) and any other Security Capital
advisory affiliates for services related to advising Security Capital
USREALTY. The Advisory Agreement is automatically renewable for successive
two-year periods, unless either the USREALTY Adviser, on one hand, or Security
Capital USREALTY and Security Capital Holdings S.A., a wholly owned subsidiary
of Security Capital USREALTY ("USREALTY Holdings"), acting together, on the
other hand, give sixty days' prior written notice that the Advisory Agreement
will not be renewed; provided, however, after the first anniversary date of
the agreement or the first anniversary date of any renewal date, both Security
Capital USREALTY and USREALTY Holdings, acting together, may terminate the
agreement on not less than sixty days' prior written notice to the USREALTY
Adviser. During the three months ended March 31, 1997 and the years ended
December 31, 1996 and 1995, the USREALTY Adviser received fees of $4.8
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
85
<PAGE>
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 value of strategic
investments in excess of $1 billion, (ii) a one-time fee equal to .10% of the
consideration payable each time Security Capital USREALTY makes a strategic
investment, (iii) an annual fee equal to .50% on Security Capital 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 three months ended March 31, 1997 and
the years ended December 31, 1996 and 1995, Security Capital Investment
Research earned $664,000, $1.6 million and $60,000, respectively, pursuant to
the Sub-Advisory Agreement.
OTHER TRANSACTIONS WITH AFFILIATES
In ATLANTIC's March through June 1995 private offering, Security Capital
purchased $94.8 million of shares of ATLANTIC's common stock at $22 per share.
In ATLANTIC's December 1995 through May 1996 private offering, Security
Capital purchased an aggregate of $50 million of shares of ATLANTIC's common
stock, $21.1 million of which were purchased at $23 per share (which was the
price per share paid by other investors in the offering) and $28.9 million of
which were purchased at $23.136 per share. In ATLANTIC's October 1996 initial
public offering, Security Capital purchased $10 million of shares of
ATLANTIC's common stock at $24 per share. Except as described above, all
subscriptions were made on the same terms and at the same times as made
available to other investors.
In previous offerings, Security Capital purchased approximately $75 million
of SCI's common shares in 1993 at a price of $11 per share, $98 million of
SCI's common shares in 1994 at a price of $11.50 per share, $53 million of
SCI's common shares in 1994 at a price of $15.125 per share, $150 million of
SCI's common shares in 1994 at a price of $15.25 per share, $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 shareholders or 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.
86
<PAGE>
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.
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
87
<PAGE>
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 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, through 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.
88
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 15, 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>
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)
John T. Kelley III...................... 2,809(8) * 140,450
William D. Sanders...................... 42,919(9) 3.17 2,145,950
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................... 2,326 * 116,300
All directors and executive officers
as a group (26 persons)................ 96,134(12) 7.11 4,806,700
The Allstate Corporation
2775 Sanders Road
Northbrook, IL 60062................... 69,474 5.14 3,473,700
</TABLE>
- --------
*Less than 1%
(1) Includes Class A Shares that may be acquired upon the exercise of options
or warrants within 60 days for Messrs. Bodman (1,512), 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 (1,330).
(2) For each person who owns options or warrants that are exercisable within
60 days, the calculation of the percentage ownership assumes that only
that person has exercised all of his options or warrants and that no
other person has exercised any outstanding options or warrants.
(3) Assumes full conversion of all Class A Shares into Class B Shares and
does not give effect to the exercise of any Warrants that may be issued
pursuant to the Merger Agreements.
(4) Mr. Buerger is Executive Vice President of Commerzbank AG in New York.
Commerzbank Aktiengesellschaft, Grand Cayman Branch, owns all 139,000
shares of Series A Preferred Stock, which are convertible into a maximum
of 105,896 Class A Shares as described under "Description of Capital
Stock--Preferred Stock." Mr. Buerger disclaims beneficial ownership of
these shares.
(5) Includes five shares held by Mr. Frazee's children, and one share held by
his wife.
(6) Includes one share held by Mr. Fuller's wife, and three shares held by
his children.
89
<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, of 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 July 15, 1997, the beneficial
ownership of the outstanding common shares of each of the operating companies
for (i) each director of Security Capital, (ii) each Named Executive Officer
and (iii) the directors and executive officers of Security Capital as a group.
The address of each person listed below is c/o Security Capital Group
Incorporated at its administrative offices located at 7777 Market Center
Avenue, El Paso, Texas 79912. Unless otherwise indicated in the footnotes, all
of such interests are owned directly, and the indicated person or entity has
sole voting and investment power.
<TABLE>
<CAPTION>
SECURITY
ATLANTIC HOMESTEAD PTR SCI CAPITAL
(1)(2) (2)(3) (1)(2) (1)(2) USREALTY(2)
-------------- ---------------- --------------- --------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
- ------------------------ ------ --- ------- ---- ------- --- ------- --- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Samuel W. Bodman(4)..... -- -- -- -- -- -- 48,308 * 196,705 *
Hermann Buerger(5)...... -- -- 12,000 -- -- -- -- -- -- --
John P. Frazee, Jr.(6).. 6,250 * 6,758(7) * 7,637 * 40,223 * -- --
Cyrus F. Freidheim,
Jr.(8)................. 2,500 * 1,102 * 3,055 * 5,477 * 5,000 *
H. Laurance Fuller(9)... 500 * 216 * 610 * 2,850 * -- --
Ray L. Hunt............. 17,000(10) * 85,567(11) * 390,404(12) * 160,135(13) * 2,131,056(14) 1.56
John T. Kelley III(15).. 250 * 2,739 * 16,835 * 90,288 * 25,000 *
William D. Sanders(16).. 6,155 * 232,486 * 287,938 * 269,403 * 611,038 *
Peter S. Willmott(17)... 1,250 * 3,447 * 15,327 * 10 * -- --
C. Ronald
Blankenship(18)........ 500 * 7,311 * 34,385 * 447 * -- --
Thomas G. Wattles(19)... 12 * 1,837 * 8,750 * 26,180 * -- --
David C. Dressler(20)... 500 * 25,629 * 6,611 * 2,456 * 1,600 *
K. Dane Brooksher(21)... 1,075 * 325 * 611 * 30,246 * 5,000 *
All directors and
executive officers as a
group (26 persons)..... 39,578 * 382,804 1.37% 785,506 * 689,285 * 3,050,330 2.23%
</TABLE>
- --------
*Less than 1%
(1) Assumes that (i) no common shares are issued pursuant to the rights
offerings being conducted pursuant to the Merger Agreements and (ii)
Security Capital receives 2,306,591 common shares of ATLANTIC, 3,295,533
common shares of PTR and 3,692,023 common shares of SCI, respectively,
pursuant to the Merger Agreements.
(2) For each person who owns options or warrants that are exercisable within
60 days, the calculation of the percentage ownership assumes that only
that person has exercised all of his options or warrants and that no
other person has exercised any outstanding options or warrants. 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.
(3) Includes common shares and warrants.
(4) SCI shares are owned by the Bodman Foundation, a charitable trust of
which Mr. Bodman is a trustee. Security Capital USREALTY shares include
49,176 shares owned by Elizabeth L. Bodman Trust. Mr. Bodman claims no
beneficial interest in these shares.
(5) Homestead shares include warrants to acquire 11,000 shares held by Mr.
Buerger and warrants to acquire 1,000 shares held in trust for Mr.
Buerger's daughter.
90
<PAGE>
(6) ATLANTIC and PTR shares are held in an IRA account; SCI shares include
404 shares held by Mr. Frazee's wife and 2,428 shares held by children.
(7) Includes option to acquire 4,000 shares.
(8) Security Capital USREALTY shares are held by Mr. Freidheim's wife.
(9) Includes 250 ATLANTIC shares held by Mr. Fuller's wife, 108 Homestead
shares held by Mr. Fuller's wife, 305 PTR shares held by Mr. Fuller's
children, 404 SCI shares held by Mr. Fuller's children and two SCI shares
held by Mr. Fuller's wife.
(10) Includes 750 shares held by a family trust for which Mr. Hunt is trustee,
2,250 shares for which Mr. Hunt shares direct or indirect beneficial
ownership pursuant to powers of attorney, 12,500 shares held by a family
limited partnership of which a corporation that Mr. Hunt owns is the
general partner, and 750 shares held by a corporation that Mr. Hunt owns.
Excludes 750 shares that Mr. Hunt's wife owns as separate property, of
which Mr. Hunt disclaims beneficial ownership.
(11) Includes 198 shares held by family trusts for which Mr. Hunt is trustee,
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.
(12) Includes 917 shares held by a family trust for which Mr. Hunt is trustee,
2,748 shares for which Mr. Hunt shares direct or indirect beneficial
ownership pursuant to powers of attorney, 15,275 shares held by a family
limited partnership of which a corporation that Mr. Hunt owns is the
general partner, and 916 shares held by a corporation that Mr. Hunt owns.
Excludes 916 shares that Mr. Hunt's wife owns as separate property and
111,800 shares held by Hunt Financial Corporation, as to which Mr. Hunt
disclaims beneficial ownership.
(13) Includes 6,343 shares held by family trusts for which Mr. Hunt is
trustee, 3,801 shares for which Mr. Hunt shares direct or indirect
beneficial ownership pursuant to powers of attorney, 146,192 shares held
by a family limited partnership of which a corporation that Mr. Hunt owns
is the general partner, 1,266 shares held by a corporation that Mr. Hunt
owns, and 1,266 shares of which Mr. Hunt may be deemed to be the
beneficial owner as trustee of family trusts owning 50% of the stock of a
corporation that owns those shares. Excludes 1,269 shares that Mr. Hunt's
wife owns as separate property, of which Mr. Hunt disclaims beneficial
ownership.
(14) Includes 196,706 shares for which Mr. Hunt shares indirect beneficial
ownership pursuant to powers of attorney, 1,671,997 shares held by a
family limited partnership of which a corporation that Mr. Hunt owns is
the general partner, and 98,353 shares held by a corporation that Mr.
Hunt owns. Excludes 82,000 shares that Mr. Hunt's wife owns as separate
property, of which Mr. Hunt disclaims beneficial ownership.
(15) ATLANTIC shares, SCI shares and Homestead shares are held in a trust for
which Mr. Kelley is trustee.
(16) 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 72,364 shares held by partnerships and 23,489 shares held by the
Sanders Foundation. SCI shares include 74,005 shares and 22,666 shares
held by partnerships and an aggregate of 2,730 shares held by Mr.
Sanders' wife and children. Security Capital USREALTY shares include
207,117 shares held by partnerships and an aggregate of 510 shares held
by Mr. Sanders' children.
(17) Includes eight SCI shares held by Mr. Willmott's children.
(18) Includes 2,895 shares of Homestead stock held by Mr. Blankenship's child;
13,791 PTR common shares owned by a corporation of which Mr. Blankenship
is controlling shareholder.
91
<PAGE>
(19) Includes 12 shares of ATLANTIC common stock held by Mr. Wattles'
children; Homestead shares include one share held by Mr. Wattles' child,
remaining Homestead shares are held in an IRA account; PTR shares are
held in an IRA account; SCI shares include 2,022 shares held by Mr.
Wattles' children, five shares held by his wife, and 7,422 shares held in
an IRA account.
(20) ATLANTIC shares are held in trust accounts of which Mr. Dressler is
trustee; Homestead shares include 25,000 shares of restricted securities;
PTR common shares include 3,611 shares held in trust accounts for which
Mr. Dressler is trustee and SCI shares include 2,456 shares held in trust
accounts of which Mr. Dressler is trustee; Security Capital USREALTY
shares are held in trust accounts for which Mr. Dressler is trustee.
(21) SCI shares include 648 shares held in Mr. Brooksher's wife's name;
Security Capital 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 is The First National Bank
of Boston, 150 Royall Street, Canton, Massachusetts 02021.
COMMON STOCK
The holders of outstanding Class A Shares are entitled to one vote, and the
holders of outstanding Class B Shares are entitled to one two-hundredth
(1/200th) of a vote, for each share held of record on all matters submitted to
a vote of shareholders. Unless otherwise required by Maryland law, the Class A
Shares and the Class B Shares will vote as a single class with respect to all
matters submitted to a vote of shareholders of Security Capital, including the
election of directors. Shareholders do not have the right to cumulate their
votes in the election of directors, which means that the holders of a majority
of the outstanding Class A Shares can elect all of the directors then standing
for election.
Commencing January 1, 1998, each Class A Share may be converted into 50
Class B Shares at the holder's option at any time. Class B Shares are not
convertible into Class A Shares or any other security.
Holders of Class A Shares are entitled to receive ratably such dividends as
may be authorized by the Board out of funds legally available therefor.
Holders of Class B Shares are entitled to dividends equal to one-fiftieth
92
<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
93
<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 Security Capital USREALTY and certain affiliates of
Security Capital, has acquired beneficial ownership of 20% or more of the
voting power of the voting equity securities of Security Capital (thereby
becoming an "Acquiring Person") or (2) 15 business days (or such later date as
may be determined by action of the Board prior 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
94
<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
95
<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 to be issued under a Warrant Agreement (the "Warrant
Agreement") between Security Capital and The First National Bank of Boston, 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.
96
<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 U.S. Internal Revenue Service (the "IRS") or an opinion of
counsel or other evidence satisfactory to the Board and
97
<PAGE>
upon such other conditions as the Board may direct, may also exempt a proposed
transferee from the Ownership Limit. As a condition of such exemption, the
proposed transferee must give written notice to Security Capital of the
proposed transfer no later than the fifteenth day prior to any transfer which,
if consummated, would result in the intended transferee owning shares of
Security Capital's stock in excess of the Ownership Limit. The Board may
require such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary or advisable in order to determine or ensure the operating
companies' status as REITs. Any transfer of Shares that would (i) create a
direct or indirect ownership of shares of Security Capital's stock in excess
of the Ownership Limit or (ii) result in a Security Capital investee being
"closely held" within the meaning of Section 856(h) of the Code, shall be null
and void ab initio, and the intended transferee will acquire no rights to the
shares of Security Capital's stock. The foregoing restrictions on
transferability and ownership will not apply if the Board determines, which
determination must be approved by the shareholders, that it is no longer in
the best interests of Security Capital to attempt to, or to continue to,
assist Security Capital's operating companies in qualifying as REITs. The
Charter excludes Security Capital USREALTY (and its transferees) from the
Ownership Limit.
Any shares of Security Capital's stock, the purported transfer of which
would result in a person owning Shares in excess of the Ownership Limit or
cause any or all of the operating companies to become "closely held" under
Section 856(h) of the Code, that is not otherwise permitted as provided above
will constitute excess shares ("Excess Shares"), which will be transferred
pursuant to the Charter to a party not affiliated with Security Capital
designated by Security Capital as the trustee of a trust for the exclusive
benefit of an organization or organizations described in Sections 170(b)(1)(A)
and 170(c) of the Code and identified by the Board as the beneficiary or
beneficiaries of the trust (the "Charitable Beneficiary"), until such time as
the Excess Shares are transferred to a person whose ownership will not violate
the restrictions on ownership. While these Excess Shares are held in trust,
they will be entitled to share in any distributions which will be paid to the
trust for the benefit of the Charitable Beneficiary and may only be voted by
the trustee for the benefit of the Charitable Beneficiary. Subject to the
Ownership Limit, the Excess Shares shall be transferred by the trustee at the
direction of Security Capital to any person (if the Excess Shares would not be
Excess Shares in the hands of such person). The purported transferee will
receive the lesser of (i) the price paid by the purported transferee for the
Excess Shares (or, if no consideration was paid, fair market value on the day
of the event causing the Excess Shares to be held in trust) and (ii) the price
received from the sale or other disposition of the Excess Shares held in
trust. Any proceeds in excess of the amount payable to the purported
transferee will be paid to the Charitable Beneficiary. In addition, such
Excess Shares held in trust are subject to purchase by Security Capital for a
90-day period at a purchase price equal to the lesser of (i) the price paid
for the Excess Shares by the purported transferee (or, if no consideration was
paid, fair market value at the time of the event causing the Shares to be held
in trust) and (ii) the fair market value of the Excess Shares on the date
Security Capital elects to purchase. Fair market value, for these purposes,
means the last reported sales price reported on the NYSE on the trading day
immediately preceding the relevant date, or if not then traded on the NYSE,
the last reported sales price on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over or through
which the relevant class of shares of stock may be traded, or if not then
traded over or through any exchange or quotation system, then the market price
on the relevant date as determined in good faith by the Board.
From and after the purported transfer to the purported transferee of the
Excess Shares, the purported transferee shall cease to be entitled to
distributions, voting rights and other benefits with respect to the Excess
Shares except the right to payment on the transfer of the Excess Shares as
described above. Any distribution paid to a purported transferee on Excess
Shares prior to the discovery by Security Capital that such Excess Shares have
been transferred in violation of the provisions of the Charter shall be
repaid, upon demand, to Security Capital, which shall pay any such amounts to
the trust for the benefit of the Charitable Beneficiary. If the foregoing
transfer restrictions are determined to be void, invalid or unenforceable by
any court of competent jurisdiction, then the purported transferee of any
Excess Shares may be deemed, at the option of Security Capital, to have acted
as an agent on behalf of Security Capital in acquiring such Excess Shares and
to hold such Excess Shares on behalf of Security Capital.
All certificates representing Shares will bear a legend referring to the
restrictions described above.
98
<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,
99
<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
100
<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 Security Capital USREALTY and its affiliates and
successors. As a result, Security Capital USREALTY and its affiliates and
successors may be able to enter into business combinations with Security
Capital that may not be in the best interests of its stockholders without
compliance by Security Capital with the 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 Security Capital
USREALTY and its affiliates and successors from the provisions of the Control
Share acquisition statute.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
For nominations or other business to be properly brought before an annual
meeting of shareholders by a stockholder, the Bylaws require such shareholder
to deliver a notice to the Secretary, absent specified circumstances, not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting setting forth: (i) as to each person whom the
shareholder proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for the election of directors, pursuant to Regulation
14A of the Exchange Act; (ii) as to any other
101
<PAGE>
business that the shareholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest
in such business of such shareholder and of the beneficial owner, if any, on
whose behalf the proposal is made; and (iii) as to the shareholder giving
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such shareholder as they appear
on Security Capital's books, and of such beneficial owner and (y) the number
of Shares which are owned beneficially and of record by such shareholder and
such beneficial owner, if any.
SHARES AVAILABLE FOR FUTURE SALE
At June 30, 1997, Security Capital had 1,327,150 Class A Shares issued and
outstanding, which will be convertible beginning January 1, 1998 into a total
of 66,357,500 Class B Shares. After consummation of the Mergers, Security
Capital is expected to have outstanding Warrants to purchase a total of $250
million of Class B Shares (based on the price of the Class B Shares on the
Warrant Issuance Date). To the extent such Warrants are exercised, the Class B
Shares may be sold in the public markets without limitation. Additionally,
upon completion of the Offering, Security Capital is expected to have an
additional $250 million of 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 683,790 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 130,615 Class A Shares and $45,495,000 principal amount of
2014 Convertible Debentures (convertible into 43,849 Class A Shares) reserved
for issuance upon exercise of options under Security Capital's employee
benefit plans. All such Class A Shares, except those held by affiliates, and
the Class B Shares into which they may be converted, may be sold in the public
market in the future pursuant to registration rights or available exemptions
from registration. 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."
102
<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 which are highly focused, value added operating companies
engaged in real estate activities (collectively, "Operating Companies"). In
addition, Security Capital manages or advises capital invested in focused
funds which invest in securities of real estate operating companies (Security
Capital USREALTY Special Opportunity Investment Portfolio, SC-ERF and SC-PG,
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
103
<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. Security Capital will issue the
Warrants to the Warrant Issuance Agent on the Warrant Issuance Date, which
will be within 30 days following the Warrant Issuance Record Date. See
"Management--Outside Directors Plan" and "--1995 Option Plan" and "Business--
The Proposed 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
104
<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
105
<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
106
<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 July 31, 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 July
31, 1997, which may change, such as the relative fair market value of Security
Capital's assets and investments made by Security Capital as of July 31, 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
107
<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.
108
<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.
109
<PAGE>
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-month periods ended March 31, 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 Security Capital USREALTY
included in this Prospectus and elsewhere in the registration statement of
which this Prospectus forms a part, have been audited by Price Waterhouse LLP,
independent public accountants to the extent indicated in their reports
thereon also appearing elsewhere herein and in the registration statement.
Such financial statements have been included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters in respect of the validity of the issuance of the
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 proposed Mergers. As to
certain matters of Maryland law, Mayer, Brown & Platt may rely upon the
opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
110
<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.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Security Capital Group Incorporated
Report of Independent Public Accountants............................... F-3
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996. F-4
Consolidated Statements of Operations for the three month periods ended
March 31, 1997 and 1996............................................... F-5
Consolidated Statement of Shareholders' Equity for the three month
period ended March 31, 1997 .......................................... F-6
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1997 and 1996............................................... F-7
Notes to Consolidated Financial Statements............................. F-8
Report of Independent Public Accountants............................... F-23
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-24
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-25
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994...................................... F-26
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-27
Notes to Consolidated Financial Statements............................. F-30
Schedule I--Condensed Financial Information of Registrant.............. F-48
Schedule III--Real Estate and Accumulated Depreciation................. F-53
Security Capital Group Incorporated (acquired company)
Report of Independent Public Accountants............................... F-62
Consolidated Balance Sheet as of December 31, 1994..................... F-63
Consolidated Statement of Operations for the year ended December 31,
1994.................................................................. F-64
Consolidated Statement of Shareholders' Equity for the year ended
December 31, 1994..................................................... F-64
Consolidated Statement of Cash Flows for the year ended December 31,
1994.................................................................. F-65
Notes to Consolidated Financial Statements............................. F-66
Security Capital Pacific Trust
Report of Independent Public Accountants............................... F-71
Condensed Balance Sheets as of March 31, 1997 and December 31, 1996.... F-72
Condensed Statements of Earnings for the three month periods ended
March 31, 1997 and 1996............................................... F-73
Condensed Statement of Shareholders' Equity for the three month period
ended March 31, 1997.................................................. F-74
Condensed Statements of Cash Flows for the three month periods ended
March 31, 1997 and 1996............................................... F-75
Notes to Condensed Financial Statements................................ F-76
Report of Independent Public Accountants............................... F-84
Balance Sheets as of December 31, 1996 and 1995........................ F-85
Statements of Earnings for the years ended December 31, 1996, 1995 and
1994.................................................................. F-86
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994................................................... F-87
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994.............................................................. F-88
Notes to Financial Statements.......................................... F-89
Schedule III--Real Estate and Accumulated Depreciation................. F-107
Security Capital Industrial Trust
Report of Independent Public Accountants............................... F-113
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996. F-114
Consolidated Statements of Operations for the three month periods ended
March 31, 1997 and 1996............................................... F-115
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1997 and 1996............................................... F-116
Notes to Consolidated Financial Statements............................. F-117
Report of Independent Public Accountants............................... F-122
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-123
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-124
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994...................................... F-125
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-126
Notes to Consolidated Financial Statements............................. F-127
Report of Independent Public Accountants............................... F-143
Schedule III--Real Estate and Accumulated Depreciation................. F-144
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Security Capital U.S. Realty
Report of Independent Public Accountants............................... F-160
Consolidated Statement of Net Assets at December 31, 1996.............. F-161
Consolidated Statement of Operations for the year ended December 31,
1996.................................................................. F-162
Consolidated Statement of Cash Flows for the year ended December 31,
1996.................................................................. F-163
Consolidated Statement of Changes in Net Assets for the year/period
ended December 31, 1996 and 1995...................................... F-164
Consolidated Statement of Changes in Shares Outstanding for the
year/period ended December 31, 1996 and 1995.......................... F-164
Consolidated Financial Highlights for the year/period ended December
31, 1996 and 1995..................................................... F-164
Consolidated Schedule of Investments in Strategic Positions at December
31, 1996.............................................................. F-165
Consolidated Schedule of Investments in Special Opportunity Positions
at December 31, 1996.................................................. F-165
Notes to the Consolidated Financial Statements......................... F-166
Report of Independent Public Accountants............................... F-171
Statement of Net Assets at December 31, 1995........................... F-172
Statement of Operations for the period from incorporation (July 7,
1995) to December 31, 1995............................................ F-173
Statement of Changes in Net Assets for the period from incorporation
(July 7, 1995) to December 31, 1995................................... F-174
Statement of Changes in Shares Outstanding for the period from
incorporation (July 7, 1995) to December 31, 1995..................... F-174
Financial Highlights for the period from incorporation (July 7, 1995)
to December 31, 1995.................................................. F-175
Schedule of Strategic Investments in Real Estate Companies at December
31, 1995.............................................................. F-175
Schedule of Special Opportunity Investments at December 31, 1995....... F-175
Notes to Financial Statements.......................................... F-176
Security Capital Atlantic Incorporated
Report of Independent Public Accountants............................... F-180
Homestead Village Incorporated
Report of Independent Public Accountants............................... F-181
</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 March 31, 1997,
and the related consolidated statements of operations for the three-month
periods ended March 31, 1997 and 1996, the statement of shareholders' equity
for the three-month period ended March 31, 1997 and the statements of cash
flows for the three-month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's 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 60.1% of the total assets of Security Capital Group Incorporated and
subsidiaries as of March 31, 1997 and whose income represent 57.7% and 62.0% of
the total income in the consolidated statements of operations of Security
Capital Group Incorporated and subsidiaries for the three-month periods ended
March 31, 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 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. 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
May 14, 1997
F-3
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
-----------------
<CAPTION>
MARCH 31, DECEMBER
1997 31, 1996
ASSETS (UNAUDITED) (AUDITED)
------ ----------- ----------
<S> <C> <C>
Investments, at equity:
Security Capital Industrial Trust $ 544,179 $ 548,194
Security Capital Pacific Trust 380,040 374,317
Security Capital U.S. Realty 588,172 516,426
---------- ----------
1,512,391 1,438,937
---------- ----------
Real estate, less accumulated depreciation, held by:
Security Capital Atlantic Incorporated 1,160,932 1,116,069
Homestead Village Incorporated 302,241 249,304
---------- ----------
1,463,173 1,365,373
---------- ----------
Total real estate investments 2,975,564 2,804,310
Cash and cash equivalents 41,360 23,662
Other assets 205,791 101,312
---------- ----------
Total assets $3,222,715 $2,929,284
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Lines of credit $ 295,250 $ 262,000
Mortgage notes payable 273,163 257,099
Convertible debt 1,036,712 940,197
Accrued interest on convertible debt 69,115 42,450
Accounts payable and accrued expenses 89,215 83,427
Deferred income taxes 39,317 30,872
---------- ----------
Total liabilities 1,802,772 1,616,045
---------- ----------
Minority interests 401,134 394,537
SHAREHOLDERS' EQUITY:
Common shares, $.01 par value; 20,000,000 shares
authorized, 1,301,027 and 1,209,009 shares issued
and outstanding in 1997 and 1996, respectively 13 12
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 1,082,149 985,392
Accumulated deficit (202,353) (205,702)
---------- ----------
Total shareholders' equity 1,018,809 918,702
---------- ----------
Total liabilities and shareholders' equity $3,222,715 $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
MARCH 31,
----------------------
1997 1996
---------- -----------
<S> <C> <C>
INCOME:
Equity in earnings of:
Security Capital Industrial Trust $ 7,510 $ 5,705
Security Capital Pacific Trust 14,624 7,356
Security Capital U.S. Realty 16,901 1,902
Rental revenues 50,667 30,809
Services Division revenues from related parties 22,970 15,408
Other income 1,359 359
---------- -----------
114,031 61,539
---------- -----------
EXPENSES:
Rental expenses 19,957 12,635
Services Division expenses 21,324 16,819
Depreciation and amortization 8,827 5,521
Interest expense--convertible debt 26,665 22,291
Interest expense--other obligations 6,173 6,582
General, administrative and other 11,701 5,654
---------- -----------
94,647 69,502
---------- -----------
Earnings (loss) before income taxes and minority
interests 19,384 (7,963)
Provision for income taxes 8,445 -
Minority interests in net earnings of
subsidiaries 4,984 1,891
---------- -----------
Net earnings (loss) 5,955 (9,854)
Less Series A Preferred Share dividends 2,606 -
---------- -----------
Net earnings (loss) attributable to common shares
and common equivalent shares $ 3,349 $ (9,854)
========== ===========
Weighted average common shares outstanding 1,322,054 994,789
========== ===========
Net earnings (loss) per common share and common
equivalent share $ 2.53 $ (9.91)
========== ===========
</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
THREE MONTHS ENDED MARCH 31, 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 92,018 0.920 - 96,531 - 96,532
Income tax benefit
from stock options
exercised - - - 226 - 226
Net earnings - - - - 5,955 5,955
Series A Preferred
Share dividends - - - - (2,606) (2,606)
--------- --------- --------- ---------- --------- ----------
Balances at March 31,
1997 (Unaudited) 1,301,027 $13.010 $139,000 $1,082,149 $(202,353) $1,018,809
========= ========= ========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
--------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 5,955 $ (9,854)
Adjustments to reconcile net earnings (loss) to
cash flows provided by operating activities:
Provision for deferred income taxes 8,445 -
Minority interests 4,984 1,891
Equity in earnings of unconsolidated investees (39,035) (14,963)
Distributions from unconsolidated investees 20,426 18,428
Depreciation and amortization 8,827 5,521
Other 286 657
Increase in other assets (8,529) (2,416)
Increase in accrued interest on convertible debt 26,665 22,291
Decrease (increase) in accounts payable and accrued
expenses (7,592) 3,918
--------- ---------
Net cash flows provided by operating activities 20,432 25,473
--------- ---------
INVESTING ACTIVITIES:
Real estate properties (102,820) (47,201)
Investment in shares of:
Security Capital U.S. Realty (54,845) (59,910)
Security Capital Employee REIT Fund Incorporated (64,934) -
Purchase of Homestead Village Incorporated warrants (10,714) -
Other (3,011) (679)
--------- ---------
Net cash flows used in investing activities (236,324) (107,790)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from lines of credit $ 216,000 $ 111,500
Payments on lines of credit (182,750) (30,500)
Proceeds from mortgage notes payable 16,250 5,000
Principal payments on mortgage notes payable (372) (233)
Proceeds from issuance of convertible debt 96,515 4
Proceeds from issuance of common shares, net of
expenses 96,532 8
Distributions paid to minority interest holders (6,351) (3,318)
Proceeds from issuance of stock to minority
interest holders 210 431
Preferred dividends paid (2,606) -
Other 162 (302)
--------- ---------
Net cash flows provided by financing activities 233,590 82,590
--------- ---------
Net increase in cash and cash equivalents 17,698 273
Cash and cash equivalents, beginning of period 23,662 13,708
--------- ---------
Cash and cash equivalents, end of period $ 41,360 $ 13,981
========= =========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Liability for securities purchased by Security
Capital Employee REIT Fund Incorporated $ 12,042 $ -
========= =========
</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
MARCH 31, 1997
(UNAUDITED)
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 real estate research, investment and management.
Security Capital has invested in five real estate 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. In addition, Security Capital has invested in a real
estate investment fund that invests in securities of publicly traded real
estate companies in the United States. Security Capital also includes a
"Services Division", which provides management and property management services
to the companies in which Security Capital has made investments. The Services
Division provides strategic guidance, research, investment analysis,
acquisition and development services, asset management, property management,
capital markets services and legal and accounting services.
Merger:
Security Capital was formed by the merger of two affiliated, but not commonly
controlled, entities on January 1, 1995. Security Capital Group Incorporated
("GROUP"), a Delaware corporation, which consisted of the Services Division
companies, was merged with and into Security Capital Realty Incorporated
("REALTY"). Subsequently REALTY changed its name to that of its merged
affiliate, Security Capital Group Incorporated, and the combined entity is
referred to herein as Security Capital. In the merger, all of GROUP's
outstanding stock and principal amount of GROUP convertible subordinated
debentures were exchanged for REALTY stock and REALTY convertible subordinated
debentures due June 30, 2014 (the "2014 Convertible Debentures"). REALTY issued
135,261 shares of common stock, $70,178,000 of 2014 Convertible Debentures and
options to acquire 58,772 shares of REALTY common stock and $29,298,000 of 2014
Convertible Debentures for an aggregate securities issuance of $233,708,000.
The REALTY options were issued in exchange for GROUP options and warrants held
by certain employees and directors and such options are exercisable subject to
their prior terms regarding vesting and aggregate exercise price.
The 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 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.
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.
F-8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the three months ended March 31, 1997 and
1996, the total interest paid on all outstanding debt was $9,115,000 and
$8,023,000, respectively, including $5,913,000 and $2,036,000, 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 three months ended March 31, 1997 and 1996 was
$714,000 and $658,000, 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 Pronouncements:
Properties and other long-lived assets are periodically evaluated for
impairment and provisions for possible losses are made if required. Statement
of Financial Accounting Standards No. 121, Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, has been adopted
by Security Capital and its affiliates, as required, effective January 1, 1996.
The adoption of this accounting standard had no material impact on the
financial statements as of the date of adoption.
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
Security Capital's reported earnings per share.
F-9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The FASB has also released Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS No. 129"). Security
Capital already complies with the requirements of the standard which is
effective for periods ending after December 15, 1997.
Reclassifications:
Certain amounts in the 1996 consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the 1997
presentation.
General:
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of Security Capital's financial position and results of
operations for the interim period.
2. SERVICES DIVISION
Certain Security Capital Services Division subsidiaries, under the terms of
separate agreements, manage the operations of the separate REITs ("REIT
Managers"), provide property management services to those REITs ("Property
Managers") and manage the operations of Security Capital U.S. Realty
("USREALTY") ("Operating Advisor"). Each REIT Manager is paid a REIT management
fee based on a percentage of the REIT's pre-management fee cash flow, after
deducting actual and assumed regularly scheduled principal payments for long-
term debt and dividends paid on non-convertible preferred shares, as defined in
the REIT Management Agreements. The fee is generally 16% of cash flow, as so
defined, for the REIT. Property management fees are at market rates and are
paid separately to Security Capital's property management subsidiaries. The
REIT and Property Management Agreements are generally one year in term,
renewable annually by the REIT and cancelable upon sixty days notice. The
Operating Advisor is paid a management fee of 1.25% of USREALTY's investments
at fair value (other than liquid short-term investments and investments in
Security Capital). The Operating Advisor agreement dated August 7, 1995 is for
a term of two years, renewable every two years on the same terms and cancelable
upon sixty days notice.
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 transaction, each of the REITs would become internally managed. The
board of trustees or directors 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 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 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. On April 29, 1997 Security Capital filed a registration
statement with the Securities and Exchange Commission covering its initial
public offering of Class B shares, which is expected to be effective in the
third quarter of 1997.
F-10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REIT, Property and Operating Advisor management fees for the three months ended
March 31, 1997 and 1996 were earned from the following sources (in thousands):
<TABLE>
---
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
REIT management fees:
Security Capital Industrial Trust $ 6,606 $ 4,641
Security Capital Pacific Trust 4,617 5,555
Security Capital Atlantic Incorporated 3,029 2,123
--------- ---------
14,252 12,319
--------- ---------
Property management fees:
Security Capital Industrial Trust 4,129 2,070
Security Capital Pacific Trust 2,689 2,854
Security Capital Atlantic Incorporated 1,280 920
--------- ---------
8,098 5,844
--------- ---------
Security Capital U.S. Realty advisory fee 4,813 288
Administrative services and other fees 641 -
--------- ---------
Total Services Division revenues 27,804 18,451
Less amounts eliminated in consolidation 4,834 3,043
--------- ---------
Consolidated Services Division revenues $22,970 $15,408
========= =========
</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 March 31, 1997 through its wholly owned
subsidiary, SC Realty Incorporated ("SC Realty"), as follows:
. 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 and in
Mexico and Europe. At March 31, 1997 and December 31, 1996, Security
Capital owned 44.08% 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.
. PTR, a publicly held REIT, primarily owns, develops, acquires and
operates income-producing multifamily properties in the western United
States. At March 31, 1997 and December 31, 1996, Security Capital owned
36.00% 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.
. ATLANTIC, a publicly held REIT as of October 18, 1996, owns, acquires,
develops and operates income-producing multifamily properties in the
southeastern United States. 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 March 31, 1997 and
December 31, 1996, Security Capital owned 56.86% of the issued and
outstanding common shares of ATLANTIC. Security Capital consolidates
ATLANTIC's accounts in the accompanying consolidated financial
statements.
. USREALTY is a Luxembourg real estate corporation formed at the direction
of Security Capital with the objective of becoming one of Europe's
preeminent publicly held real estate entities that will principally own
real estate through strategic positions in both public and private real
estate companies in the United States. Security Capital has funded total
subscriptions of $200,000,000 for the common stock of USREALTY
($199,700,000 was invested by Security Capital and $300,000 by Security
Capital (EU) Management S.A., a wholly owned subsidiary of Security
Capital and the advisor to USREALTY). In
F-11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
addition to the subscriptions, on July 1, 1996, Security Capital
purchased 9,132,420 shares of USREALTY in a public European offering at
a cost of $11.06 per share and an additional 6,282,241 shares in a
public European offering, at a cost of $12.44 a share, on December 17,
1996. Also, during 1996, Security Capital purchased shares of USREALTY
with a total value of $34,041,000 in the open market and in a privately
negotiated transaction. At March 31, 1997 and December 31, 1996,
Security Capital owned 36.92% and 39.44%, respectively, of the issued
and outstanding common shares of USREALTY. Security Capital accounts for
its investment in USREALTY by the equity method.
. On October 17, 1996, Security Capital, ATLANTIC and PTR completed the
spin-out of their extended stay lodging assets to Homestead Village
Incorporated ("Homestead"). As described below, upon consummation of the
transaction, Homestead's common shares are 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 1,671,929
shares remaining in escrow which 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 the Investor Agreement,
Homestead can require Security Capital to exercise all or a portion of
its warrants with proper written notice.
ATLANTIC and PTR contributed assets consisting of operating properties
as well as properties under construction or in planning (or the rights
to acquire such properties) and ATLANTIC contributed $16.8 million in
cash. In addition, ATLANTIC and PTR entered into Funding Commitment
Agreements to provide secured financing of up to $111.1 million and
$199.0 million, respectively, to Homestead for completing the
development and construction of the properties contributed in the
transaction. ATLANTIC and PTR received 4,201,220 and 9,485,727 shares,
respectively, of Homestead common stock in exchange for the assets
contributed and 2,818,517 and 6,363,789 warrants, respectively, to
purchase Homestead shares at $10 per share in exchange for entering into
the Funding Commitment Agreements. ATLANTIC and PTR will receive
convertible mortgage notes from Homestead as fundings occur under the
Funding Commitment Agreements. On November 12, 1996 ATLANTIC and PTR
distributed the Homestead common stock and warrants to their
shareholders of record as of October 29, 1996. This distribution caused
Security Capital to receive an additional 5,831,613 shares of Homestead
common stock and 3,912,328 warrants to purchase Homestead shares at $10
per share. Additionally, Security Capital made purchases of Homestead
warrants in the open market totaling 206,400 shares for $1,313,000.
Security Capital exercised $17,500,000 in warrants between October 17,
1996 and December 31, 1996.
During the first quarter of 1997, Security Capital exercised $15,000,000
of warrants and purchased 1,214,300 Homestead warrants in the open
market for $10,714,000. Security Capital's ownership of Homestead's
outstanding common shares as of March 31, 1997 and December 31, 1996 was
61.97% and 59.14%, respectively. Security Capital consolidates
Homestead's accounts in the accompanying consolidated financial
statements.
. Security Capital Employee REIT Fund ("SC-ERF") is a real estate
investment fund that invests in securities of publicly traded real
estate companies in the United States. Between December 23, 1996 and
March 31, 1997, Security Capital and a wholly owned subsidiary purchased
8,362,849 shares of SC-ERF for $86,903,000. Such amount is included in
other assets in the accompanying consolidated balance
F-12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sheets. 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. As of March 31, 1997, a wholly owned
subsidiary of Security Capital was the sole shareholder of SC-ERF.
Security Capital is not consolidating its investment in SC-ERF as its
ownership interest is expected to fall below 50% prior to the end of
1997. Security Capital's equity in earnings of SC-ERF for the three
months ended March 31, 1997 of $671,000 is included in other income in
the accompanying 1997 consolidated statement of operations.
Security Capital received cash dividends from its investees for the three
months ended March 31, 1997 and 1996 as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
SCI $11,525 $ 9,937
PTR 8,901 8,491
ATLANTIC 8,404 8,349
--------- ---------
$28,830 $26,777
========= =========
</TABLE>
The following summarizes real estate investments of Security Capital's
consolidated investees as of March 31, 1997 and December 31, 1996 (in
thousands):
<TABLE>
------------------
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Multifamily properties (ATLANTIC):
Operating properties $ 956,345 $ 952,770
Developments under construction 238,176 194,587
Developments in planning 11,625 7,795
Land held for future development 2,083 2,083
---------- ----------
Subtotal 1,208,229 1,157,235
---------- ----------
Extended-stay lodging properties (Homestead):
Operating properties 153,470 129,035
Developments under construction 139,869 108,691
Developments in planning 9,264 12,256
Land held for future development 1,452 1,448
Land held for sale 7,361 5,590
---------- ----------
Subtotal 311,416 257,020
---------- ----------
Total real estate, at cost 1,519,645 1,414,255
Less accumulated depreciation 56,472 48,882
---------- ----------
Total real estate $1,463,173 $1,365,373
========== ==========
</TABLE>
F-13
<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 March
31, 1997 and December 31, 1996 (in thousands):
<TABLE>
-----------------
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net real estate investments $2,466,043 $2,399,600
Cash and other assets 112,351 62,706
---------- ----------
Total assets $2,578,394 $2,462,306
========== ==========
Total liabilities $ 824,344 $ 805,933
Minority interest 56,472 56,984
Total shareholders' equity 1,697,578 1,599,389
---------- ----------
Total liabilities and shareholders' equity $2,578,394 $2,462,306
========== ==========
</TABLE>
Presented below is the summary statement of earnings information for SCI for
the three months ended March 31, 1997 and 1996 (in thousands):
<TABLE>
-----------------
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Rental and other income $69,231 $50,362
--------- ---------
Expenses:
Rental expenses, net of recoveries 5,828 6,145
Depreciation and amortization 18,048 13,089
Interest 11,375 8,508
General and administrative, including REIT
management fee 7,524 5,387
--------- ---------
42,775 33,129
--------- ---------
Net earnings before minority interest 26,456 17,233
Minority interest share in net earnings 895 756
--------- ---------
Net earnings 25,561 16,477
Less Preferred Share dividends 8,829 4,673
--------- ---------
Net earnings attributable to common shares $16,732 $11,804
========= =========
Security Capital share of net earnings $ 7,510 $ 5,705
========= =========
</TABLE>
Presented below is the summary balance sheet information for PTR as of March
31, 1997 and December 31, 1996 (in thousands):
<TABLE>
-----------------
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net real estate investments $2,339,191 $2,245,619
Cash and other assets 102,786 36,813
---------- ----------
Total assets $2,441,977 $2,282,432
========== ==========
Total liabilities $1,135,018 $1,014,924
Total shareholders' equity 1,306,959 1,267,508
---------- ----------
Total liabilities and shareholders' equity $2,441,977 $2,282,432
========== ==========
</TABLE>
F-14
<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 three months ended March 31, 1997 and 1996 (in thousands):
<TABLE>
-----------------
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Rental and other income $83,494 $76,356
--------- ---------
Expenses:
Rental expenses 30,575 30,297
Depreciation 12,049 10,618
Interest 13,961 6,520
General and administrative, including REIT
management fee 6,633 6,001
--------- ---------
63,218 53,436
--------- ---------
Earnings from operations 20,276 22,920
Gain on sale of investments 25,335 2,923
--------- ---------
Net earnings 45,611 25,843
Less Preferred Share dividends 5,035 6,388
--------- ---------
Net earnings attributable to common shares $40,576 $19,455
========= =========
Security Capital share of net earnings $14,624 $ 7,356
========= =========
</TABLE>
Presented below is the summary balance sheet information for USREALTY as of
March 31, 1997 and December 31, 1996 (in thousands):
<TABLE>
-----------------------
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Investments in common shares of real estate
operating companies, at fair value $1,669,917 $1,408,140
Investment in common shares and debentures of
Security Capital, at cost which approximates fair
value 110,000 22,500
Cash and other assets 7,070 63,617
---------- ----------
Total assets $1,786,987 $1,494,257
========== ==========
Total liabilities $ 184,662 $ 175,158
Total shareholders' equity 1,602,325 1,319,099
---------- ----------
Total liabilities and shareholders' equity $1,786,987 $1,494,257
========== ==========
</TABLE>
F-15
<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 three months ended March 31, 1997 and 1996 (in thousands):
<TABLE>
-------------------------
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Dividends $16,216 $ 195
Realized gains 9,292 237
Increase in unrealized gains 27,106 4,800
Other income 373 414
--------- ---------
52,987 5,646
--------- ---------
Expenses:
Interest on line of credit 4,117 -
General and administrative, including advisory fee 5,644 541
--------- ---------
9,761 541
--------- ---------
Net earnings $43,226 $5,105
========= =========
Security Capital share of net earnings $16,901 $1,902
========= =========
</TABLE>
4. INDEBTEDNESS:
Lines of Credit:
At March 31, 1997, Security Capital and its consolidated REIT subsidiary,
ATLANTIC, had revolving bank lines of credit. Security Capital has a
$300,000,000 revolving line of credit with Wells Fargo Realty Advisors,
Incorporated ("Wells Fargo") as agent for a group of lenders. The agreement is
effective through November 15, 1998 with an option to renew for successive one
year periods, with the approval of Wells Fargo and the participating lenders.
Borrowings bear interest, at Security Capital's option, at either LIBOR plus
1.50% (1.75% prior to August 19, 1996) or a base rate (defined as the higher of
Wells Fargo prime rate or the Federal Funds Rate plus .50%) with interest
payable monthly in arrears. Commitment fees range from .125% to .25% per annum
based on the average unfunded line of credit balance (such fees were .125% on
all unfunded balances prior to October 1, 1996). Security Capital's line is
secured by its holdings in SCI, PTR, ATLANTIC, USREALTY and Homestead,
including warrants to purchase shares of Homestead's common stock, as well as
any unfunded subscriptions for Security Capital's common stock and convertible
subordinated debentures. There were no unfunded subscriptions as of March 31,
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.
On December 18, 1996, ATLANTIC obtained a $350,000,000 unsecured line of credit
from Morgan Guaranty Trust Company of New York ("MGT"), as agent for a group of
lenders, that replaced its previous $350,000,000 secured line of credit.
Borrowings bear interest at prime, or at ATLANTIC's option, LIBOR plus a margin
ranging from 1.0% to 1.375% (currently 1.375% as compared to 1.5% under the
previous agreement) depending on ATLANTIC's debt rating. ATLANTIC currently
pays a commitment fee on the average unfunded line of credit balance of
0.1875%. The line of credit matures December 1998 and may be extended for one
year with the approval of MGT and the other participating lenders.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100,000,000 of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed rate of interest of 7.46% from February 5, 1996 to
December 17, 1996 and 7.335% thereafter. Upon expiration of the existing swap
agreement on February 5, 1997, a swap agreement
F-16
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with MGT took effect. The MGT agreement provides for a fixed rate of 7.325% on
$100,000,000 of borrowing through February 5, 1998. The interest rate ATLANTIC
will pay under the new agreement will be reduced if ATLANTIC achieves an
investment-grade debt rating and will range from 6.95% to 7.2% depending on the
rating 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 March 31, 1997.
A summary of the lines of credit borrowings as of and for the three months
ended March 31, 1997 is as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Total lines of credit $650,000
Borrowings outstanding at March 31, $295,250
Weighted average daily borrowings $314,236
Maximum borrowings outstanding at any month end $340,000
Weighted average daily interest rate 7.10%
Weighted average interest rate as of March 31, 7.08%
</TABLE>
Mortgage Notes Payable:
Mortgage notes payable, which are obligations of ATLANTIC and Homestead,
consisted of the following at March 31, 1997 (dollar amounts in thousands):
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
INTEREST MATURITY PERIODIC PAYMENT PRINCIPAL
MORTGAGE TYPE RATE DATE TERMS BALANCE
- ------------- --------- --------- -------------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate 7.000% 9/10/98 (a) fully amortizing $ 5,839
Conventional fixed rate 7.750% 11/01/00 (b) 1,995
Conventional fixed rate 7.655% 7/01/02 (c) 5,918
Conventional fixed rate 8.000% 7/10/03 (d) 5,967
Conventional fixed rate 8.750% 4/01/24 fully amortizing 6,327
Conventional fixed rate 7.125% 3/01/29 fully amortizing 8,005
---------
34,051
---------
Tax exempt fixed rate 6.000% 6/1/07 interest only 14,500
Tax exempt variable rate
subject to 7 year
interest rate
protection agreement 6.480%(f) 6/1/25 interest only 23,085
Tax exempt variable rate
subject to 7 year
interest rate
protection agreement 6.510%(f) 6/1/25 interest only 15,500
Tax exempt variable rate
subject to 10 year
interest rate
protection agreement 6.740%(f) 6/1/25 interest only 64,635
Tax exempt variable note
subject to 10 year
interest rate
protection agreement 6.180%(f) 6/1/25 interest only 5,000
Less amounts held in
principal reserve fund
(e) (1,353)
---------
121,367
---------
Convertible fixed rate
(g) 9.000% 10/31/06 interest only 130,728
Less discount (12,983)
---------
117,745
---------
$273,163
=========
</TABLE>
- --------
(a) This loan is callable at the option of the mortgage lender on September 10,
1998 and at subsequent five-year intervals through September 10, 2013.
(b) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
F-17
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(d) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(e) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to eight tax exempt bond issues. This
credit enhancement agreement requires ATLANTIC to make monthly payments on each
mortgage, based upon a thirty-year amortization, into a principal reserve
account.
(f) Interest rate is fixed through swap agreements executed in conjunction with
the credit enhancement agreement with the Federal National Mortgage
Association.
(g) In connection with the Homestead spin-out transaction described in Note 3,
Homestead executed a funding commitment agreement with PTR which provides
borrowing capability in the amount of $199,000,000. Under this funding
agreement, Homestead may call for funding from PTR through March 31, 1998 for
the development of the projects acquired from PTR in the transaction. As a
result of the fundings, PTR will receive convertible mortgage notes in stated
amounts of up to $221,000,000. The notes are collaterized by Homestead
properties.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
AMOUNTS OF FIXED
BONDS TERM INTEREST RATE (1) ISSUER
---------- ---- ----------------- ------
<S> <C> <C> <C>
$23.1 million June 1995 to June 2002 6.48% General Re Financial Products Corporation
$64.6 million June 1995 to June 2005 6.74 Morgan Guaranty Trust Company of NY
$5.0 million March 1996 to March 2006 6.21 Morgan Guaranty Trust Company of NY
$15.5 million August 1996 to August 2006 6.50 Morgan Stanley Derivative Products Inc.
----
Weighted-average interest rate 6.63%
====
</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 $493,000 and $428,000 more in interest during the three months
ended March 31, 1997 and 1996, respectively, 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 March 31, 1997 of
$51,019,000 and $207,462,000 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.
F-18
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (nine months from April 1 to December 31) $ 1,164
1998 7,136
1999 1,576
2000 3,554
2001 1,812
Thereafter 257,921
---------
$273,163
=========
</TABLE>
Convertible Debt:
Security Capital's 2014 Convertible Debentures totaling $713,678,000 at March
31, 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 $323,034,000 at March 31, 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.
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. All subscriptions have been funded
as of March 31, 1997. Included in the fundings was $110,000,000 received from
USREALTY.
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
F-19
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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 March 31, 1997, 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
("SFAS No. 123"). Accordingly, no compensation cost has been recognized for the
option plans. As permitted by SFAS No. 123, Security Capital has applied its
provisions to options granted subsequent to December 31, 1994, and considers
the resulting pro forma compensation cost to be immaterial for options granted
during the three months ended March 31, 1997.
F-20
<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 as of March
31, 1997 and changes during the three months then ended is presented in the
following table:
<TABLE>
-------------------------------------------
<CAPTION>
2014 CONVERTIBLE
COMMON STOCK DEBENTURES
--------------------- -----------------------
WTD. AVG.
WTD. AVG. CONVERSION
SHARES EX. PRICE AMOUNT PRICE
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1996 140,314 $ 928 $56,739,674 $1,048
Granted 1,481 1,238 - -
Exercised - - - -
Forfeited (3,703) 834 (1,165,164) 1,047
--------- --------- ----------- ---------
Outstanding at March 31,
1997 138,092 $ 934 $55,574,510 $1,047
========= ========= =========== =========
</TABLE>
The following table summarizes information about options and warrants for
common stock and convertible debentures outstanding at March 31, 1997:
<TABLE>
------------------------------------------------------------------------------------
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
REMAINING EXERCISE/ EXERCISE/
RNGEAOF EXERCISE AND NUMBER/AMOUNT CONTRACTUAL CONVERSION NUMBER/AMOUNT CONVERSION
CONVERSION PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Stock
-------------------
$ 100-247 69,314 5.25 years $ 207 52,209 $ 216
$ 882-948 23,706 8.25 years $ 943 613 $ 948
$1139-1239 45,072 9.80 years $1089 - n/a
----------- -----------
138,092 52,822
=========== ===========
Convertible Deben-
tures
-------------------
$ 1043 $15,279,856 8.25 years $1043 $ 254,980 $1043
$1046-1191 40,294,654 5.25 years $1051 29,067,294 $1046
----------- -----------
$55,574,510 $29,322,274
=========== ===========
</TABLE>
In connection with ATLANTIC's acquisition of a portfolio of multifamily assets
in June 1994, Security Capital issued a warrant to the seller to purchase
40,241 shares and $30,500,000 of 2014 Convertible Debentures for an aggregate
price of $60,000,000 ($865 per fully converted share).The warrant expires March
31, 1998; however, if Security Capital's common stock is not registered by that
date, the warrant will automatically be exercised according to its cashless
exercise provisions. Due to its immateriality, no value has been assigned to
the warrant in the accompanying consolidated balance sheets.
7. LEASES
Minimum future rental payments due under non-cancelable operating leases,
principally for office space, having remaining terms in excess of one year as
of March 31, 1997 are as follows (in thousands):
<TABLE>
----
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ---------
<S> <C>
1997 (nine months from April 1 to December 31) $ 2,289
1998 2,566
1999 2,170
2000 1,774
2001 1,496
Thereafter 3,622
---------
$13,917
=========
</TABLE>
F-21
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Lease expense for the three months ended March 31, 1997 and 1996 was $971,900
and $828,400, respectively, including $420,100 and $281,600 in 1997 and 1996,
respectively, paid to SCI. Included above are lease agreements with SCI with a
total remaining obligation of $10,803,000.
8. 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 provisions have been made for federal income taxes for its
operations in Security Capital's consolidated financial statements.
Federal income tax expense for the three months ended March 31, 1997 and 1996
consisted of $8,445,000 and none, respectively. Security Capital had tax net
operating loss carryforwards of approximately $63,000,000 at March 31, 1997. 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 rules.
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.
9. COMMITMENTS AND CONTINGENCIES
Security Capital and its investees are parties to various claims and routine
litigation arising in the ordinary course of business. Based on discussion with
legal counsel, Security Capital does not believe that the results of all claims
and litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
Security Capital's investees are subject to environmental regulations related
to the ownership, operation, development and acquisition of real estate. As
part of due diligence procedures, Security Capital's investees conduct Phase I
environmental assessments on each property prior to acquisition. The cost of
complying with environmental regulations was not material to Security Capital's
results of operations. Security Capital and its investees are not aware of any
environmental condition on any of their properties which is likely to have a
material adverse effect on financial condition or results of operations.
At March 31, 1997, Security Capital had approximately $243,900,000 of unfunded
development commitments for developments under construction, which consist of
ATLANTIC and Homestead's commitments of $96,800,000 and $147,100,000,
respectively.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, other assets, accounts
payable and accrued expenses approximate fair value as of March 31, 1997 and
December 31, 1996, 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 March 31, 1997 and December 31,
1996, 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 March 31, 1997,
($16.875) is $191,829,000.
F-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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
("USREALTY") ("Operating Advisor"). Each REIT Manager is paid a REIT management
fee based on a percentage of the REIT's pre-management fee cash flow, after
deducting actual and assumed regularly scheduled principal payments for long-
term debt and dividends paid on non-convertible preferred shares, as defined in
the REIT Management Agreements. The fee is generally 16% of cash flow, as so
defined, for the REIT. Property management fees are at market rates and are
paid separately to Security Capital's property management subsidiaries. The
REIT and Property Management Agreements are generally one year in term,
renewable annually by the REIT and cancelable upon sixty days notice. The
Operating Advisor is paid a management fee of 1.25% of USREALTY's investments
at fair value (other than liquid short-term investments and investments in
Security Capital). The Operating Advisor agreement dated August 7, 1995 is for
a term of two years, renewable every two years on the same terms and cancelable
upon sixty days notice.
There were no Services Division revenues reported for the year ended 1994.
These subsidiaries were acquired January 1, 1995 in the GROUP/REALTY merger.
See Note 1.
In late January 1997, Security Capital made a proposal to Security Capital
Industrial Trust, Security Capital Pacific Trust and Security Capital Atlantic
Incorporated to exchange the REIT and Property Managers for additional shares
of the respective REITs. As a result of the proposed transaction, each of the
REITs would become internally managed. The board of trustees or directors of
each REIT has appointed a special committee comprised of independent directors
or trustees to review the proposed transaction. The proposed transaction is
subject to approval (see Note 11) by each REIT's special committee as well as
its board of directors or trustees and shareholders.
F-32
<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-33
<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.
. USREALTY is a Luxembourg real estate corporation formed at the direction
of Security Capital with the objective of becoming one of Europe's
preeminent publicly held real estate entities that will principally own
real estate through strategic positions in both public and private real
estate companies in the United States. Security Capital made its first
investment of $19,970,000 in USREALTY, by converting $19,970,000 of the
principal of a $53,000,000 note receivable to an investment in 1,997,000
shares of USREALTY, on October 30, 1995 as part of its subscription
commitment. Security Capital has funded total subscriptions of
$200,000,000 for the common stock of USREALTY ($199,700,000 was invested
by Security Capital and $300,000 by Security Capital (EU) Management
S.A., a wholly-owned subsidiary of Security Capital and the advisor to
USREALTY). In addition to the subscriptions, on July 1, 1996, Security
Capital purchased 9,132,420 shares of USREALTY in a public European
offering at a cost of $11.06 per share and an additional 6,282,241
shares in a public European offering, at a cost of $12.44 a share, on
December 17, 1996. Also, during 1996, Security Capital purchased shares
of USREALTY with a total value of $34,041,000 in the open market and in
a privately negotiated transaction. At December 31, 1996 and 1995
Security Capital owned 39.44% and 32.20%, respectively, of the issued
and outstanding common shares of USREALTY. Security Capital accounts for
its investment in USREALTY by the equity method.
. 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-34
<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-35
<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-36
<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-37
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presented below is the summary statement of earnings information for USREALTY
for the year ended December 31, 1996 and the period from inception (July 1,
1995) to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Dividends $ 32,163 $504
Realized gains 3,480 -
Unrealized gains 252,294 126
Other income 2,673 84
--------- ---------
290,610 714
--------- ---------
Expenses:
Interest on line of credit 6,168 163
General and administrative, including advisory
fee 15,729 349
--------- ---------
21,897 512
--------- ---------
Net earnings $268,713 $202
========= =========
Security Capital share of net earnings $103,170 $ 64
========= =========
</TABLE>
4. INDEBTEDNESS:
Lines of Credit:
At December 31, 1996, Security Capital and its consolidated REIT subsidiary,
ATLANTIC, had revolving bank lines of credit. Security Capital has a
$300,000,000 revolving line of credit with Wells Fargo Realty Advisors,
Incorporated ("Wells Fargo") as agent for a group of lenders. The agreement is
effective through November 15, 1998 with an option to renew for successive one
year periods, with the approval of Wells Fargo and the participating lenders.
Borrowings bear interest, at Security Capital's option, at either LIBOR plus
1.50% (1.75% prior to August 19, 1996) or a base rate (defined as the higher of
Wells Fargo prime rate or the Federal Funds Rate plus .50%) with interest
payable monthly in arrears. Commitment fees range from .125% to .25% per annum
based on the average unfunded line of credit balance (such fees were .125% on
all unfunded balances prior to October 1, 1996). Security Capital's line is
secured by its holdings in SCI, PTR, ATLANTIC, USREALTY and Homestead,
including warrants to purchase shares of Homestead's common stock, as well as
any unfunded subscriptions for Security Capital's common stock and convertible
subordinated debentures. Subscriptions receivable for Security Capital's 1996
private placement offering totaled $193,045,000 as of December 31, 1996.
The Security Capital line of credit is a primary obligation of SC Realty.
Security Capital guarantees the line. SC Realty is a legal entity which is
separate and distinct from Security Capital and its affiliates, and has
separate assets, liabilities, business functions and operations.
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 ("MGT"), as agent for a group of
lenders, that replaced its previous $350,000,000 secured line of credit.
Borrowings bear interest at prime, or at ATLANTIC's option, LIBOR plus a margin
ranging from 1.0% to 1.375% (currently 1.375% as compared to 1.5% under the
previous agreement) depending on ATLANTIC's debt rating. ATLANTIC currently
pays a commitment fee on the average unfunded line of credit
F-38
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
balance of 0.1875%. The line of credit matures December 1998 and may be
extended for one year with the approval of MGT and the other participating
lenders.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100,000,000 of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed rate of interest of 7.46% from February 5, 1996 to
December 17, 1996 and 7.335% thereafter. Upon expiration of the existing swap
agreement on February 5, 1997, a swap agreement with MGT took effect. The MGT
agreement provides for a fixed rate of 7.325% on $100,000,000 of borrowing
through February 5, 1998. The interest rate ATLANTIC will pay under the new
agreement will be reduced if ATLANTIC achieves an investment-grade debt rating
and will range from 6.95% to 7% 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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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 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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION
- ----------------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $ 15,500 $ 3,717 $ 21,076 $ 975
Balmoral
Village......... - 2,871 16,270 74
Cameron
Ashford......... - 3,672 20,841 399
Cameron
Briarcliff...... (b) 2,105 11,953 191
Cameron Brook... 19,500 3,318 18,784 326
Cameron Creek
I............... - 3,627 20,589 328
Cameron Crest... - 3,525 20,009 290
Cameron
Dunwoody........ - 2,486 14,114 252
Cameron Forest.. - 884 5,008 352
Cameron Place... - 1,124 6,372 579
Cameron Pointe.. - 2,172 12,306 413
Cameron
Station......... 14,500 2,338 13,246 496
Clairmont
Crest........... 11,600 1,603 9,102 315
The Greens...... 10,400 2,004 11,354 382
Lake Ridge...... - 2,001 11,359 4,012
Morgan's
Landing......... - 1,168 6,646 857
Old Salem....... - 1,053 6,144 919
Trolley Square.. - 2,031 11,528 347
Vinings
Landing......... - 1,363 7,902 714
WintersCreek.... 5,000 1,133 6,434 220
Woodlands....... - 3,785 21,471 485
Birmingham,
Alabama:
Cameron on the
Cahaba I........ - 1,020 5,784 352
Cameron on the
Cahaba II....... 8,021 1,688 9,580 501
Colony Woods I.. - 1,560 8,845 281
Morning Sun
Villas.......... - 1,260 7,309 732
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 5,979 1,203 6,808 381
Cameron Oaks.... - 2,255 12,800 306
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
---------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIES LAND IMPROVEMENTS (C) DEPRECIATION YEAR ACQUIRED
- ----------------------- -------- ------------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $ 3,717 $ 22,051 $ 25,768 $ 715 1987 1995
Balmoral
Village......... 2,871 16,344 19,215 73 1990 1996
Cameron
Ashford......... 3,672 21,240 24,912 1,551 1990 1994
Cameron
Briarcliff...... 2,105 12,144 14,249 897 1989 1994
Cameron Brook... 3,318 19,110 22,428 1,279 1988 1994
Cameron Creek
I............... 3,627 20,917 24,544 1,473 1988 1994
Cameron Crest... 3,525 20,299 23,824 1,426 1988 1994
Cameron
Dunwoody........ 2,486 14,366 16,852 1,050 1989 1994
Cameron Forest.. 884 5,360 6,244 145 1981 1995
Cameron Place... 1,124 6,951 8,075 185 1979 1995
Cameron Pointe.. 2,172 12,719 14,891 192 1987 1996
Cameron
Station......... 2,338 13,742 16,080 354 (c) 1995
Clairmont
Crest........... 1,603 9,417 11,020 626 1987 1994
The Greens...... 2,004 11,736 13,740 794 1986 1994
Lake Ridge...... 2,001 15,371 17,372 1,200 1979 1993
Morgan's
Landing......... 1,168 7,503 8,671 608 1983 1993
Old Salem....... 1,053 7,063 8,116 485 1968 1994
Trolley Square.. 2,031 11,875 13,906 911 1989 1994
Vinings
Landing......... 1,363 8,616 9,979 613 1978 1994
WintersCreek.... 1,133 6,654 7,787 233 1984 1995
Woodlands....... 3,785 21,956 25,741 761 (d) 1995
Birmingham,
Alabama:
Cameron on the
Cahaba I........ 1,020 6,136 7,156 281 1987 1995
Cameron on the
Cahaba II....... 1,688 10,081 11,769 463 1990 1995
Colony Woods I.. 1,560 9,126 10,686 676 1991 1994
Morning Sun
Villas.......... 1,260 8,041 9,301 554 1985 1994
Charlotte, North
Carolina:
Cameron at
Hickory Grove... 1,203 7,189 8,392 137 1988 1996
Cameron Oaks.... 2,255 13,106 15,361 974 1989 1994
</TABLE>
F-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 ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LANDACQUIMPROVEMENTSISITION(C) DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... $ - $ 1,225 $ 6,961 $ 324 $ 1,225 $ 7,285 $ 8,510 $ 271
Park Place at
Turtle Run...... - 2,208 12,223 1,283 2,208 13,506 15,714 223
Parrot's Landing
I............... 15,835 2,691 15,276 684 2,691 15,960 18,651 1,072
The Pointe at
Bayberry Lake... - 2,508 14,210 303 2,508 14,513 17,021 222
Spencer Run..... (b) 2,852 16,194 425 2,852 16,619 19,471 1,133
Sun Pointe
Cove............ 8,500 1,367 7,773 229 1,367 8,002 9,369 550
Trails at Meadow
Lakes........... - 1,285 7,293 262 1,285 7,555 8,840 282
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 210 2,031 11,750 13,781 815
Greenville, South
Carolina:
Cameron Court... - 1,602 9,369 89 1,602 9,458 11,060 163
Jacksonville,
Florida:
Bay Club........ - 1,789 10,160 273 1,789 10,433 12,222 773
Memphis,
Tennessee:
Cameron Century
Center.......... - 2,382 13,496 50 2,382 13,546 15,928 60
Cameron at Kirby
Parkway......... - 1,386 7,959 829 1,386 8,788 10,174 686
Country Oaks.... 5,933 1,246 7,061 177 1,246 7,238 8,484 63
Stonegate....... - 985 5,608 483 985 6,091 7,076 360
Miami, Florida:
Park Hill....... - 1,650 9,377 (2,185)(e) 1,650 7,192 8,842 606
Nashville,
Tennessee:
Arbor Creek..... - -(f) 17,671 512 - 18,183 18,183 1,267
Enclave at
Brentwood....... - 2,263 12,847 1,016 2,263 13,863 16,126 605
Orlando, Florida:
Camden Springs.. - 2,477 14,072 808 2,477 14,880 17,357 1,056
Cameron Villas
I............... 6,343 1,087 6,317 609 1,087 6,926 8,013 473
Cameron Villas
II.............. (b) 255 1,454 64 255 1,518 1,773 56
Kingston
Village......... - 876 4,973 164 876 5,137 6,013 192
The Wellington.. (b) 1,155 6,565 282 1,155 6,847 8,002 466
Raleigh, North
Carolina:
Cameron Lake.... - 1,385 7,848 60 1,385 7,908 9,293 35
Cameron Ridge... 5,888 1,503 8,519 109 1,503 8,628 10,131 38
Cameron Square.. - 2,314 13,143 525 2,314 13,668 15,982 959
Emerald Forest.. - 2,202 12,478 - 2,202 12,478 14,680 -
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Park Place at
Turtle Run...... 1989 1996
Parrot's Landing
I............... 1986 1994
The Pointe at
Bayberry Lake... 1988 1996
Spencer Run..... 1987 1994
Sun Pointe
Cove............ 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Greenville, South
Carolina:
Cameron Court... 1991 1996
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron Century
Center.......... 1988 1996
Cameron at Kirby
Parkway......... 1985 1994
Country Oaks.... 1985 1996
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cameron Villas
I............... 1982 1994
Cameron Villas
II.............. 1981 1995
Kingston
Village......... 1982 1995
The Wellington.. 1988 1994
Raleigh, North
Carolina:
Cameron Lake.... 1985 1996
Cameron Ridge... 1985 1996
Cameron Square.. 1987 1994
Emerald Forest.. 1986 1996
</TABLE>
F-54
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS
- ----------------------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... $ - $ 2,878 $ 16,339 $ 293
Potomac Hunt.... (b) 1,486 8,452 181
Sarasota,
Florida:
Camden at Palmer
Ranch........... - 3,534 20,057 607
Tampa, Florida:
Camden Downs.... - 1,840 10,447 305
Cameron
Bayshore........ - 1,607 9,105 -
Cameron Lakes... - 1,126 6,418 1,107
Country Place
Village I....... 2,004 567 3,219 140
Country Place
Village II...... - 644 3,658 94
Foxbridge on the
Bay............. 10,400 1,591 9,036 328
Summer Chase.... (b) 542 3,094 136
Washington, D.C.:
Camden at
Kendall Ridge... - 1,708 9,698 295
Cameron at
Saybrooke....... - 2,802 15,906 258
Sheffield
Forest.......... - 2,269 12,859 418
West Springfield
Terrace......... - 2,417 13,695 98
Less amounts
held in
principal
reserve
fund(g)......... (1,098) - - -
-------- -------- -------- --------
Total Operating
Communities
Acquired........ $155,790 $124,701 $726,004 $ 27,324
-------- -------- -------- --------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ - $ 1,254 $ - $ 9,261
Charlotte, North
Carolina:
Waterford
Hills........... - 1,508 - 11,109
Waterford Square
I............... - 1,890 - 17,763
Jacksonville,
Florida:
Cameron Lakes
I............... - 1,759 - 14,358
Raleigh, North
Carolina:
Waterford
Point........... - 985 - 14,854
-------- -------- -------- --------
Total Operating
Communities
Developed....... $ - $ 7,396 $ - $ 67,345
-------- -------- -------- --------
TOTAL OPERATING
COMMUNITIES..... $155,790 $132,097 $726,004 $ 94,669
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
------------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LANDACQUIMPROVEMENTSISITION(C) DEPRECIATION YEAR ACQUIRED
- ----------------------- ---------- ------------------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Richmond,
Virginia:
Camden at
Wellesley....... $ 2,878 $ 16,632 $ 19,510 $ 1,240 1989 1994
Potomac Hunt.... 1,486 8,633 10,119 464 1987 1994
Sarasota,
Florida:
Camden at Palmer
Ranch........... 3,534 20,664 24,198 1,469 1988 1994
Tampa, Florida:
Camden Downs.... 1,840 10,752 12,592 780 1988 1994
Cameron
Bayshore........ 1,607 9,105 10,712 - 1984 1996
Cameron Lakes... 1,126 7,525 8,651 365 1986 1995
Country Place
Village I....... 567 3,359 3,926 125 1982 1995
Country Place
Village II...... 644 3,752 4,396 141 1983 1995
Foxbridge on the
Bay............. 1,591 9,364 10,955 652 1986 1994
Summer Chase.... 542 3,230 3,772 219 1988 1994
Washington, D.C.:
Camden at
Kendall Ridge... 1,708 9,993 11,701 755 1990 1994
Cameron at
Saybrooke....... 2,802 16,164 18,966 1,190 1990 1994
Sheffield
Forest.......... 2,269 13,277 15,546 374 1987 1995
West Springfield
Terrace......... 2,417 13,793 16,210 92 1978 1996
Less amounts
held in
principal
reserve
fund(g)......... - - - -
---------- ---------- ---------- -------
Total Operating
Communities
Acquired........ $ 124,701 $ 753,328 $ 878,029 $38,948
---------- ---------- ---------- -------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ 1,551 $ 8,964 $ 10,515 $ 365 1995 1994
Charlotte, North
Carolina:
Waterford
Hills........... 1,943 10,674 12,617 476 1995 1993
Waterford Square
I............... 2,053 17,600 19,653 436 1996 1994
Jacksonville,
Florida:
Cameron Lakes
I............... 1,959 14,158 16,117 216 1996 1995
Raleigh, North
Carolina:
Waterford
Point........... 1,493 14,346 15,839 519 1996 1994
---------- ---------- ---------- -------
Total Operating
Communities
Developed....... $ 8,999 $ 65,742 $ 74,741 $ 2,012
---------- ---------- ---------- -------
TOTAL OPERATING
COMMUNITIES..... $ 133,700 $ 819,070 $ 952,770 $40,960
---------- ---------- ---------- -------
</TABLE>
F-55
<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
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C)
- ----------------------- -------- -------- ------------- ------------- ---------- ------------- -----------
<S> <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
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
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
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
Woodway at
Trinity Center.. - 5,342 - 30,241 5,584 29,999 35,583
-------- -------- -------- -------- ---------- ---------- ----------
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ - $ 36,676 $ - $157,911 $ 37,593 $ 156,994 $ 194,587
-------- -------- -------- -------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIES DEPRECIATION YEAR ACQUIRED
- ----------------------- ------------ ------------ --------
<S> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. $ 39 -(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............... 16 -(h) 1995
Nashville,
Tennessee:
Cameron
Overlook........ - - 1996
Raleigh, North
Carolina:
Cameron Brooke.. - - 1995
Waterford
Forest.......... 52 -(h) 1995
Richmond,
Virginia:
Cameron at
Wyndham......... - - 1993
Cameron Crossing
I & II.......... - - 1995(i)
Washington, D.C.:
Cameron at
Milestone....... 43 -(h) 1995
Woodway at
Trinity Center.. 56 -(h) 1994
--------
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ 206
--------
</TABLE>
F-56
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------
INITIAL COST COSTS
---------------------- CAPITALIZED
ENCUM- BUILDINGS AND SUBSEQUENT TO
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS
- ----------------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ - $ 1,508 $ - $ 512
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ - 4,025 - 361
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. - 1,294 - 95
-------- -------- -------- --------
TOTAL
COMMUNITIES IN
PLANNING........ $ - $ 6,827 $ - $ 968
-------- -------- -------- --------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... - 2,008 - 75
-------- -------- -------- --------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ - $ 2,008 $ - $ 75
-------- -------- -------- --------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $155,790 $177,608 $726,004 $253,623
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED AT
DECEMBER 31, 1996
---------------------------------
BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL LANDACIMPROVEMENTSQUISITIO(C)NDEPRECIATION YEAR ACQUIRED
- ----------------------- -------- ------------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ 1,508 $ 512 $ 2,020 $ - - 1996
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ 4,029 357 4,386 - - 1996
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. 1,294 95 1,389 - - 1995
-------- -------- ---------- -------
TOTAL
COMMUNITIES IN
PLANNING........ $ 6,831 $ 964 $ 7,795 $ -
-------- -------- ---------- -------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... 2,083 - 2,083 - - 1996
-------- -------- ---------- -------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ 2,083 $ - $ 2,083 $ -
-------- -------- ---------- -------
TOTAL
MULTIFAMILY
COMMUNITIES,
HELD BY
ATLANTIC........ $180,207 $977,028 $1,157,235 $41,166
-------- -------- ---------- -------
</TABLE>
F-57
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT
INITIAL COST DECEMBER 31, 1996
--------------------- COSTS -------------------------------------
EXTENDED-STAY CAPITALIZED
LODGING ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS
PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C)
------------- ------- ------- ------------- ------------- ---------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (l) $ 770 $ - $ 1,489 $ 776 $ 1,483 $ 2,259
Osuna/North I-
25.............. (l) 832 - 4,598 840 4,590 5,430
Atlanta, Georgia:
Cumberland...... (m) 1,321 524 2,419 1,321 2,943 4,264
Gwinnett Place.. (m) 743 - 241 790 194 984
North Druid
Hills........... (m) 1,814 144 1,064 1,814 1,208 3,022
Peachtree....... (m) 1,091 5,085 87 1,095 5,168 6,263
Perimeter....... (m) 2,356 982 2,100 2,381 3,057 5,438
Roswell......... (m) 1,923 110 829 1,923 939 2,862
Austin, Texas:
Burnet Road..... (l) 525 - 3,616 723 3,418 4,141
Midtown......... (l) 600 - 4,085 643 4,042 4,685
Pavillion....... (l) 633 - 4,459 633 4,459 5,092
Round Rock...... (l) 483 - 351 506 328 834
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... - 1,500 - 366 1,524 342 1,866
Dallas, Texas:
Coit Road/North
Central......... (l) 425 - 3,051 496 2,980 3,476
Ft.
Worth/Downtown
Freeway......... (l) 350 - 2,653 384 2,619 3,003
Las
Colinas/Irving.. (l) 800 - 3,900 805 3,895 4,700
North
Arlington/Six
Flags Hills..... (l) 340 - 3,487 407 3,420 3,827
North Richland
Hills Road...... (l) 470 - 3,113 544 3,039 3,583
South Arlington. (l) 550 - 3,371 642 3,279 3,921
Skillman/Northwest. (l) 400 - 2,765 400 2,765 3,165
Stemmons/NW
Highway Worth... (l) 356 - 4,275 424 4,207 4,631
Tollway/Addison
Colinas......... (l) 275 - 2,529 353 2,451 2,804
Denver, Colorado:
Cherry Creek.... (l) 1,070 - 1,677 1,078 1,669 2,747
Bellview/Denver
Tech Center..... (l) 876 - 5,318 942 5,252 6,194
Iliff/Aurora.... (l) 615 - 4,543 624 4,534 5,158
Inverness....... (l) 1,041 - 2,110 1,064 2,087 3,151
Houston, Texas:
Astrodome/Medical
Center.......... (l) 1,530 - 3,902 1,669 3,763 5,432
Bammel/Cypress
Station......... (l) 516 - 3,112 595 3,033 3,628
Fuqua/Hobby
Airport......... (l) 416 - 3,034 491 2,959 3,450
Park Ten........ (l) 791 - 3,212 860 3,143 4,003
Stafford/Sugarland. (l) 575 - 3,127 665 3,037 3,702
West by
Northwest/Hwy
290............. (l) 519 - 2,997 568 2,948 3,516
Westheimer/Beltway. (l) 796 - 3,296 897 3,195 4,092
Willowbrook/Northwest. (l) 575 - 3,437 669 3,343 4,012
Jacksonville,
Florida:
JTB............. (m) 1,137 379 976 1,206 1,286 2,492
</TABLE>
<TABLE>
<CAPTION>
EXTENDED-STAY
LODGING ACCUMULATED CONSTRUCTION YEAR
PROPERTIES EPRECIATION YEAR ACQUIRED
------------- ----------- ------------ --------
<S> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (j) (j) 1996
Osuna/North I-
25.............. 157 1996 1995
Atlanta, Georgia:
Cumberland...... (j) (j) 1996
Gwinnett Place.. (j) (j) 1996
North Druid
Hills........... (j) (j) 1996
Peachtree....... 45 1996 1996
Perimeter....... (j) (j) 1996
Roswell......... (j) (j) 1996
Austin, Texas:
Burnet Road..... 243 1995 1994
Midtown......... 109 1996 1995
Pavillion....... - 1996 1995
Round Rock...... (j) (j) 1995
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy..... (j) (j) 1996
Dallas, Texas:
Coit Road/North
Central......... 463 1994 1993
Ft.
Worth/Downtown
Freeway......... 82 1996 1994
Las
Colinas/Irving.. 126 1996 1994
North
Arlington/Six
Flags Hills..... 296 1995 1993
North Richland
Hills Road...... 464 1994 1993
South Arlington. 302 1995 1994
Skillman/Northwest 373 1993 1992
Stemmons/NW
Highway Worth... 441 1995 1992
Tollway/Addison
Colinas......... 468 1993 1993
Denver, Colorado:
Cherry Creek.... (j) (j) 1996
Bellview/Denver
Tech Center..... 120 1996 1994
Iliff/Aurora.... 125 1996 1994
Inverness....... (j) (j) 1996
Houston, Texas:
Astrodome/Medical
Center.......... 236 1995 1994
Bammel/Cypress
Station......... 303 1994 1993
Fuqua/Hobby
Airport......... 412 1994 1993
Park Ten........ 320 1994 1993
Stafford/Sugarland 332 1994 1993
West by
Northwest/Hwy
290............. 434 1994 1993
Westheimer/Beltway 383 1994 1993
Willowbrook/Northw 250 1995 1994
Jacksonville,
Florida:
JTB............. (j) (j) 1996
</TABLE>
F-58
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED
AT
INITIAL COST COSTS DECEMBER 31, 1996
EXTENDED-STAY --------------------- CAPITALIZED ------------------------------
LODGING ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND ACCUMULATED CONSTRUCTION YEAR
PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
------------- ------ ------- ------------- ------------- ------- ------------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City,
Missouri:
Merriam......... (l) $ 871 $ - $ 3,136 $ 905 $ 3,102 $ 4,007 (j) (j) 1996
Plaza........... - 1,090 - 208 1,158 140 1,298 (j) (j) 1996
Los Angeles,
California:
Brea............ - 1,518 - 173 1,529 162 1,691 (j) (j) 1996
El Segundo...... (l) 2,233 - 425 2,255 403 2,658 (j) (j) 1996
Miami/Ft.
Lauderdale,
Florida:
Coral Springs-
Northpoint...... - 1,030 - 139 1,059 110 1,169 (j) (j) 1996
Fort Lauderdale. (m) 1,328 633 926 1,384 1,503 2,887 (j) (j) 1996
Miami Airport... (m) 2,238 679 997 2,326 1,588 3,914 (j) (j) 1996
Plantation...... (m) 1,562 358 118 1,636 402 2,038 (j) (j) 1996
Nashville,
Tennessee:
Cool Springs.... (m) 1,106 - 355 1,182 279 1,461 (j) (j) 1996
Nashville
Airport......... (m) 1,292 338 954 1,324 1,260 2,584 (j) (j) 1996
Orange County,
California:
Spectrum........ (l) 2,115 - 508 2,128 495 2,623 (j) (j) 1996
Phoenix, Arizona:
Dunlap/North
West Valley..... (l) 915 - 4,418 935 4,398 5,333 77 1996 1995
Mesa............ (l) 1,470 - 161 1,529 102 1,631 (j) (j) 1996
Tempe........... (l) 808 - 4,613 830 4,591 5,421 107 1996 1995
Scottsdale...... (l) 883 - 3,454 971 3,366 4,337 218 1995 1994
Union Hills..... (l) 810 - 3,963 821 3,952 4,773 - 1996 1996
Portland, Oregon:
Lake Oswego..... (l) 1,960 - 168 2,010 118 2,128 (j) (j) 1996
Sunset East..... (l) 1,289 - 250 1,308 231 1,539 (j) (j) 1996
Raleigh/Durham,
North Carolina:
Hwy 70.......... (m) 901 - 238 936 203 1,139 (j) (j) 1996
North Raleigh... (m) 1,163 301 935 1,197 1,202 2,399 (j) (j) 1996
RTP............. (m) 984 230 1,598 993 1,819 2,812 (j) (j) 1996
Richmond,
Virginia:
Upper Broad..... (m) 1,358 - 482 1,444 396 1,840 (j) (j) 1996
Salt Lake City,
Utah:
Ft. Union....... (l) 1,285 - 440 1,288 437 1,725 (j) (j) 1996
Redwood......... (l) 844 - 2,002 912 1,934 2,846 (j) (j) 1996
San Antonio,
Texas:
Bitters......... (l) 1,000 - 3,836 1,198 3,638 4,836 254 1995 1994
DeZavala/Six
Flags Fiesta.... (l) 844 - 3,731 983 3,592 4,575 258 1995 1994
Fredricksburg/Medical
Center.......... (l) 800 - 3,356 892 3,264 4,156 319 1994 1993
San Diego,
California:
Mission Valley.. (l) 1,603 - 418 1,618 403 2,021 (j) (j) 1996
San Francisco
(Bay Area),
California:
Milpitas........ (l) 1,136 - 3,413 1,143 3,406 4,549 (j) (j) 1996
Mountain View... (l) 1,805 - 675 1,849 631 2,480 (j) (j) 1996
San Jose........ (l) 1,770 - 434 1,776 428 2,204 (j) (j) 1996
San Mateo....... (l) 1,510 - 4,233 1,517 4,226 5,743 (j) (j) 1995
</TABLE>
F-59
<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
LODGING PROPERTIES BRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ------------------ -------- -------- ------------- ------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
San Ramon....... (l) $ 1,327 $ - $ 402 $ 1,341 $ 388 $ 1,729
Santa Clara..... - 1,423 - 25 1,428 20 1,448
Sunnyvale....... (l) 1,274 - 4,309 1,278 4,305 5,583
Seattle,
Washington:
Bellevue........ (l) 2,050 - 1,119 2,067 1,102 3,169
Mountain Lake
Terrace/N.
Seattle......... (l) 1,530 - 494 1,589 435 2,024
Redmond......... (l) 2,265 - 565 2,527 303 2,830
Tukwila......... (l) 900 - 465 937 428 1,365
Tampa Area,
Florida:
Brandon......... (m) 923 762 584 971 1,298 2,269
North Airport... (m) 615 1,142 1,883 635 3,005 3,640
St. Petersburg.. (m) 766 155 264 766 419 1,185
Washington, D.C.:
BWI............. (m) 940 - 486 1,062 364 1,426
Dulles-South.... (m) 690 - 237 722 205 927
Fair Oaks....... (m) 1,152 196 372 1,157 563 1,720
Merrifield...... (m) 1,500 - 276 1,511 265 1,776
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
-------- -------- -------- -------- -------- ---------- ----------
Grand Total
Security
Capital......... $155,790 $267,246 $735,399 $411,611 $273,894 $1,140,362 $1,414,256
======== ======== ======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
EXTENDED-STAY ACCUMULATED CONSTRUCTION YEAR
LODGING PROPERTIES DEPRECIATION YEAR ACQUIRED
- ------------------ ------------ ------------ -----------
<S> <C> <C> <C>
San Ramon....... (j) (j) 1996
Santa Clara..... - (n) 1996
Sunnyvale....... (j) (j) 1995
Seattle,
Washington:
Bellevue........ (j) (j) 1996
Mountain Lake
Terrace/N.
Seattle......... (j) (j) 1996
Redmond......... (j) (j) 1996
Tukwila......... (j) (j) 1996
Tampa Area,
Florida:
Brandon......... (j) (j) 1996
North Airport... (j) (j) 1996
St. Petersburg.. (j) (j) 1996
Washington, D.C.:
BWI............. (j) (j) 1996
Dulles-South.... (j) (j) 1996
Fair Oaks....... (j) (j) 1996
Merrifield...... (j) (j) 1996
Miscellaneous.... - - 1995/1996
Less: Fair Value
in excess of
cost--Properties
acquired from
ATLANTIC......... -
-------
Total Extended-
Stay Lodging
Properties, held
by Homestead.... $ 7,717
-------
Grand Total
Security
Capital......... $48,883
=======
</TABLE>
- ----
(a) For Federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1996 was $1,133,431,000.
(b) Pledged as additional collateral under credit enhancement agreement with
the Federal National Mortgage Association.
(c) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(d) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(e) A provision for possible loss of $2,500,000 was recognized in December 1996
to more properly reflect the fair value of this community.
(f) The land associated with this community is leased by ATLANTIC through the
year 2058 under an agreement with the Metropolitan Nashville Airport
Authority.
(g) The FNMA credit enhancement agreement requires payments to be made to a
principal reserve fund.
(h) This community is leasing completed units.
(i) 19.24 acres purchased in 1995; 9.86 acres purchased in 1996.
(j) As of December 31, 1996, these properties were under construction or in
planning and owned.
(k) Land held for sale.
(l) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and PTR.
At December 31, 1996 convertible mortgage notes in the amount of $112,639
were payable to PTR (carried at $101,309, net of unamortized discount, in
the accompanying financial statements).
(m) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and
ATLANTIC. At December 31, 1996 there were no amounts funded on the
convertible mortgage notes payable to ATLANTIC.
(n) Land held for future development.
F-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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
==========
</TABLE>
Directors and officers investment notes (used to fund a portion of the purchase
price of securities sold by GROUP and its affiliates) have a term of ten years,
bear interest at prime rate plus 1/4% (8.75% at December 31, 1994) and are
recourse to the respective borrowers.
F-67
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994:
<TABLE>
<S> <C>
Office furniture and equipment $ 7,439,119
Vehicles 132,938
Leasehold improvements 433,723
Other 51,824
-----------
8,057,604
Less accumulated depreciation (1,799,224)
-----------
Net property and equipment $ 6,258,380
===========
</TABLE>
Depreciation expense charged to operations was $1,004,837 for the year ended
December 31, 1994.
The useful lives of property and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Office furniture and equipment 5-10 Years
Vehicles 3-5 Years
Leasehold improvements 1-10 Years
Other 1-3 Years
</TABLE>
6. INVESTMENT IN REALTY
At December 31, 1994, GROUP's common stock investment in REALTY aggregated
$26,619,150, which represented 6.61% of REALTY's outstanding common stock.
Dividend income from REALTY for the year ended December 31, 1994 was
$1,153,419. This stock was cancelled in the GROUP/REALTY merger (see Note 1).
On June 5, 1994, REALTY declared a dividend distribution, payable to holders of
common stock of record on June 16, 1994, (the record date) of $757.50 principal
amount of 2014 Convertible Debentures for each share of common stock. These
debentures issued to GROUP in connection with such distribution were cancelled
in the GROUP/REALTY merger.
At December 31, 1994, the investment in REALTY, at cost, was as follows:
<TABLE>
<S> <C>
Common stock $26,619,150
2014 Convertible Debentures 30,490,844
-----------
Total Investment in REALTY $57,109,994
===========
</TABLE>
Total interest income recognized and received on the REALTY 2014 Convertible
Debentures for the year ended December 31, 1994 was $1,819,234.
On March 31, 1994, GROUP renewed a $20,000,000 loan facility to REALTY. As of
December 31, 1994 there was no outstanding balance under the loan facility.
Total interest income recognized on this loan for the year ended December 31,
1994 was $230,935.
F-68
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-69
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-70
<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 March 31, 1997, and the related condensed statements of
earnings, shareholders' equity, and cash flows for the three-month periods
ended March 31, 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
May 2, 1997
F-71
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
------------------
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Real estate $2,233,866 $2,153,363
Less accumulated depreciation 100,041 97,574
---------- ----------
2,133,825 2,055,789
Homestead Notes 191,829 176,304
Other mortgage notes receivable 13,537 13,525
---------- ----------
Net investments 2,339,191 2,245,618
Cash and cash equivalents 7,941 5,601
Accounts receivable and accrued interest 8,487 4,157
Restricted cash in tax-deferred exchange escrow 59,000 42
Other assets 27,358 27,014
---------- ----------
Total assets $2,441,977 $2,282,432
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Credit facilities $ 193,865 $ 110,200
Long-Term Debt 630,000 580,000
Mortgages payable 230,578 217,188
Distributions payable - 24,537
Accounts payable 25,368 22,782
Accrued expenses and other liabilities 55,207 60,217
---------- ----------
Total liabilities 1,135,018 1,014,924
---------- ----------
SHAREHOLDERS' EQUITY:
Series A Preferred Shares (6,080,019 convertible
shares in 1997 and 6,494,967 in 1996; stated
liquidation preference of $25 per share) 152,000 162,374
Series B Preferred Shares (4,200,000 shares issued;
stated liquidation
preference of $25 per share) 105,000 105,000
Common Shares (shares issued--76,075,971 in 1997
and 75,510,986 in 1996) 76,076 75,511
Additional paid-in capital 928,330 918,434
Unrealized holding gain on Homestead Notes 73,886 74,923
Distributions in excess of net earnings (28,333) (68,734)
---------- ----------
Total shareholders' equity 1,306,959 1,267,508
---------- ----------
Total liabilities and shareholders' equity $2,441,977 $2,282,432
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-72
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
---------------
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
-------------- --------------
<S> <C> <C>
REVENUES:
Rental revenues $79,950 $75,809
Interest income on Homestead Notes 3,174 -
Other interest income 370 547
------------- -------------
83,494 76,356
------------- -------------
EXPENSES:
Rental expenses 20,357 20,086
Real estate taxes 7,268 7,103
Property management fees paid to affiliates 2,950 3,108
Depreciation 12,049 10,618
Interest 13,961 6,520
REIT management fee paid to affiliate 4,617 5,555
General and administrative 272 276
Other 1,744 170
------------- -------------
63,218 53,436
------------- -------------
Earnings from operations 20,276 22,920
Gain on disposition of investments, net 25,335 2,923
------------- -------------
Net earnings 45,611 25,843
Less Preferred Share dividends 5,035 6,388
------------- -------------
Net earnings attributable to common shares $40,576 $19,455
============= =============
Weighted-average Common Shares outstanding 75,872 72,211
============= =============
Per Common Share amounts:
Primary $ 0.53 $ 0.27
============= =============
Fully diluted $ 0.51 $ -
============= =============
Distributions paid $ 0.325 $ 0.310
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-73
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
SHARES OF BENEFICIAL
INTEREST, $1.00 PAR VALUE
---------------------------------
SERIES A SERIES B
PREFERRED PREFERRED
SHARES AT SHARES AT
AGGREGATE AGGREGATE COMMON ADDITIONAL UNREALIZED DISTRIBUTIONS
LIQUIDATION LIQUIDATION SHARES AT PAID-IN HOLDING IN EXCESS OF
PREFERENCE PREFERENCE PAR 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 - - - - - 45,611 45,611
Shareholder
Distributions - - - - - (5,210) (5,210)
Conversion of 414,948
Series A Preferred
Shares into 558,875
Common Shares (10,374) - 559 9,815 - - -
Change in unrealized
holding gain on
Homestead Notes - - - - (1,037) - (1,037)
Exercise of warrants - - 6 81 - - 87
-------- -------- ------- -------- ------- -------- ----------
Balances at March 31,
1997 $152,000 $105,000 $76,076 $928,330 $73,886 $(28,333) $1,306,959
======== ======== ======= ======== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-74
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
---------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 45,611 $ 25,843
Adjustments to reconcile net earnings to net cash
flow provided by operating activities:
Depreciation and amortization 12,466 11,036
Gain on disposition of investments, net (25,335) (2,923)
Provision for possible loss on investments 1,500 -
Change in accounts payable (1,321) (8,658)
Change in accrued expenses and other liabilities (5,010) (8,297)
Change in other operating assets (5,186) (829)
--------- ---------
Net cash flow provided by operating activities 22,725 16,172
--------- ---------
INVESTING ACTIVITIES:
Real estate investments (177,877) (101,323)
Change in tax-deferred exchange escrow (58,958) -
Funding of Homestead Notes (16,250) -
Advances on other mortgage notes receivable (100) -
Principal repayments on other mortgage notes
receivable 88 1,081
Gross proceeds from dispositions 142,137 39,548
Closing costs related to dispositions (3,075) (401)
--------- ---------
Net cash flow used in investing activities (114,035) (61,095)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 50,000 150,000
Debt issuance costs incurred (218) (1,598)
Prepayment of mortgages payable due to community
dispositions (9,534) -
Regularly scheduled principal payments on
mortgages payable (603) (484)
Proceeds from credit facilities 248,808 63,135
Principal payments on credit facilities (165,143) (155,886)
Cash distributions paid on Common Shares (24,712) (22,437)
Cash dividends paid on Preferred Shares (5,035) (6,388)
Proceeds from exercise of warrants 87 -
--------- ---------
Net cash flow provided by financing activities 93,650 26,342
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,340 (18,581)
Cash and cash equivalents at beginning of period 5,601 26,919
--------- ---------
Cash and cash equivalents at end of period $ 7,941 $ 8,338
========= =========
Non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of
multifamily communities 23,527 -
Series A Preferred Shares converted to Common
Shares 10,374 -
Fair market value adjustment related to Homestead
Notes 1,037 -
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-75
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 month periods ended March 31, 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 months ended March 31, 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-76
<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>
MARCH 31, 1997 DECEMBER 31, 1996
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities $1,885,814 40,874 $1,861,561 42,702
Communities under construction 227,325 5,671(1) 186,710 5,479(1)
Development communities in
planning:
Development communities owned 59,628 3,877(1) 48,504 3,351(1)
Development communities under
control (2) 2,074(1) (2) 3,737(1)
---------- ------ ---------- ------
Total development communities 59,628 5,951 48,504 7,088
---------- ------ ---------- ------
Land held for future development 35,095 -- 30,043 --
---------- ------ ---------- ------
Total multifamily 2,207,862 52,496 2,126,818 55,269
---------- ------ ---------- ------
Non-multifamily 26,004 26,545
---------- ----------
Total real estate $2,233,866 $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 March 31, 1997 and December 31, 1996 for developments
under control was $1.9 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 146,801
Development expenditures, excluding land acquisitions 52,883
Acquisition and improvement of land
held for current or future development 4,095
Recurring capital expenditures 1,533
Dispositions (122,769)
Provisions for possible loss on investments (1,500)
----------
Net multifamily activity subtotal 2,234,406
Non-multifamily disposition (540)
----------
Balance at March 31, 1997 $2,233,866
==========
</TABLE>
At March 31, 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 4,621 multifamily units with an aggregate
estimated development cost of approximately $411.9 million. At the same date,
PTR also had contingent contracts or letters of intent, subject to final due
diligence, for the acquisition of 897 additional operating multifamily units
with a total expected investment of $79.7 million, including planned
renovations.
At March 31, 1997, PTR had unfunded development commitments for developments
under construction of $132.0 million.
F-77
<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 12 multifamily communities
and one industrial building during the first quarter of 1997, representing
gross proceeds of $142.1 million, and disposed of four multifamily communities
during the first quarter of 1996, representing gross proceeds of $39.5 million.
As of March 31, 1997, PTR held a portion of the 1997 disposition proceeds
aggregating $59 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 $25.3 million and $2.9
million were recorded for the three months ended March 31, 1997 and 1996,
respectively.
As part of PTR's asset optimization strategy, 18 multifamily communities were
held for disposition as of March 31, 1997. The aggregate carrying value of
properties held for disposition was approximately $144.0 million at March 31,
1997, net of a provision for possible loss of $1.5 million on certain
communities. A substantial aggregate gain is expected upon the disposition of
the remaining communities, although generally accepted accounting principles
disallows recognition of anticipated gains. 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 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 March 31, 1997 which are included in PTR's earnings from
operations for the three months ended March 31, 1997 and 1996 were $3.0 million
and $2.8 million, respectively.
(3) HOMESTEAD NOTES
In addition to multifamily investment activity, PTR had developed and operated
extended-stay lodging facilities under the Homestead Village(R) name since
1992. On October 17, 1996, PTR contributed its Homestead Village(R) properties
to Homestead Village Incorporated ("Homestead"), a newly formed company, in
exchange for Homestead securities. As of the contribution date, the Homestead
Village(R) properties constituted approximately 7.1% of PTR's total assets, at
cost. The Homestead Village(R) properties generated approximately 7.2% of PTR's
Net Operating Income for the three month period ended March 31, 1996.
During the three month period ended March 31, 1997, PTR funded an additional
$16.3 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 $117.4 million as of March 31,
1997.
F-78
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconciliation of the Homestead Notes' components to the amount
reflected in the accompanying Balance Sheet (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Face amount of Homestead Notes $130,728
Original issue discount (13,290)
---------
Amount funded 117,438
Amortization of original issue discount 307
Conversion feature--initial value 9,208
Unamortized discount on conversion feature (9,010)
Fair value adjustment 73,886
---------
Carrying value and fair value $191,829
=========
</TABLE>
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 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 March 31, 1997 of $16.875. The fair value adjustment
is recognized as an unrealized gain in shareholders' equity.
PTR expects to complete the funding of the remaining $81.4 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 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 (8.5% at
March 31, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR
(5.6875% at March 31, 1997) plus 1.125% (6.8125% at March 31, 1997). The spread
over LIBOR can vary from LIBOR plus 0.75% 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 $75,000 and $110,000 for the three month period
ended March 31, 1997 and 1996, respectively.
A summary of PTR's line of credit borrowings is as follows (dollars in
thousands):
<TABLE>
---------------------------------
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 1996
------------------ ----------
<S> <C> <C>
Total line of credit $350,000 $350,000
Borrowings outstanding at end of period 133,500 99,750
Weighted-average daily borrowings 151,606 112,248
Maximum borrowings outstanding at any
month end 205,000 188,750
Weighted-average daily nominal interest
rate 6.9% 7.3%
Weighted-average daily effective interest
rate 8.1% 8.8%
Weighted-average nominal interest rate at
end of period 6.7% 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 6.50% during the three months ended
March 31, 1997. At March 31, 1997, there was $365,000 outstanding under this
agreement.
F-79
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 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.
The aggregate amount of borrowings outstanding under all of PTR's credit
facilities at March 31, 1997 was $193.9 million.
Long-Term Debt
PTR has issued Long-Term Debt which bear 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 March 31, 1997:
<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>
3/31/97 $ 20 million 7.500% 7.443% 4/1/07 10.00 (1)
3/31/97 30 million 8.050 8.038 4/1/17 20.00 (1)
------------ --------- --------- ---------
Subtotal/Average $ 50 million 7.905% 7.850% 16.00
------------ --------- --------- ---------
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 (2)
------------ --------- --------- ---------
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 (3)
2/23/96 100 million 7.900 8.030 2/15/16 18.00 (4)
------------ --------- --------- ---------
Subtotal/Average $150 million 7.710% 7.840% 15.50
------------ --------- --------- ---------
2/8/94 $100 million 6.875% 6.978% 2/15/08 10.50 (5)
2/8/94 100 million 7.500 7.653 2/15/14 18.00 (6)
------------ --------- --------- ---------
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.
F-80
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(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.
Mortgages Payable
Mortgages payable at March 31, 1997 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 MARCH 31, DECEMBER 31,
COMMUNITY RATE(1) DATE TERMS MATURITY 1997 1996
- --------- --------- --------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Conventional fixed rate:
Tigua Village 9.90% 05/01/97 (2) $ 677 $ 681 $ 683
Silvercliff 7.66 11/10/97 (2) 7,304 7,359 7,382
Braeswood Park 7.51 01/01/98 (2) 6,635 6,727 6,761
Seahawk 8.05 01/10/98 (2) 5,350 5,407 5,427
La Tierra at the Lakes 7.89 12/01/98 (2) 25,105 25,908 26,019
Windsail N/A 02/01/99 (2) 4,675 -- 4,798
Clubhouse 8.75 12/01/99 (2) 5,501 5,806 5,831
Greenpointe 8.50 03/01/00 (2) 3,410 3,622 3,638
Mountain Shadow 8.50 03/01/00 (2) 3,130 3,326 3,340
Sunterra 8.25 03/01/00 (2) 7,612 8,103 8,138
Brompton Court 8.39 09/01/00 (2) 13,340 14,259 14,318
Marina Lakes 8.20 07/19/01 (2) 12,393 13,509 --
Treat Commons 7.50 09/14/01 (2) 6,578 7,163 7,192
El Dorado 7.59 10/01/02 (2) 15,527 16,677 16,718
Ashton Place 7.75 10/01/23 (3) N/A 47,209 47,342
Double Tree II N/A 05/01/33 (3) N/A -- 4,750
-------- --------
165,756 162,337
Tax-exempt fixed rate(4):
Fox Creek 8.71 06/01/97 (2) 4,219 4,223 4,236
Cherry Creek 8.11 11/01/01 (2) 2,630 4,000 4,000
Redwood Shores 5.53 10/01/08 (2) 16,820 25,220 25,220
Summertree 6.65 12/15/18 (5) 4,435 4,435 4,435
-------- --------
37,878 37,891
Tax-exempt floating
rate(4):
River Meadows 8.66 10/01/05 (6) 10,000 10,000 --
Apple Creek 7.08 09/01/07 (6) 11,100 11,100 11,100
-------- --------
21,100 11,100
Combined(7):
Las Flores 8.42 06/01/24 (3) N/A 5,844 5,860
---- -------- --------
Total/Average Mortgage
Debt 7.62% $230,578 $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.
F-81
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(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.
The changes in mortgages payable during the three months ended March 31, 1997
consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997 $217,188
Mortgage notes assumed 23,527
Principal payments, including prepayments upon community
dispositions (10,137)
---------
Balance at March 31, 1997 $230,578
=========
</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 March 31, 1997, are
as follows (in thousands):
<TABLE>
-------------------------------
<CAPTION>
CREDIT LONG-TERM
FACILITIES DEBT MORTGAGES TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
1997 $ 60,365 $ - $ 5,129 $ 65,494
1998 133,500 - 40,012 173,512
1999 - 30,000 12,790 42,790
2000 - - 29,799 29,799
2001 - 12,500 24,807 37,307
2002 - 32,500 17,348 49,848
2003 - 38,750 1,752 40,502
2004 - 38,750 1,903 40,653
2005 - 38,750 12,066 50,816
2006 - 38,750 2,241 40,991
2007 - 38,750 13,528 52,278
2008 - 38,750 18,863 57,613
2009 - 36,250 1,603 37,853
2010 - 38,750 1,732 40,482
2011 - 25,000 1,871 26,871
2012 - 30,000 2,022 32,022
2013 - 35,000 2,185 37,185
2014 - 42,500 2,361 44,861
2015 - 40,000 2,551 42,551
2016 - 45,000 2,756 47,756
Thereafter - 30,000 33,259 63,259
--------- --------- --------- ----------
Total $193,865 $630,000 $230,578 $1,054,443
========= ========= ========= ==========
</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 March 31, 1997.
Interest paid on all borrowings for the three months ended March 31, 1997 was
$18.9 million, net of $4.4 million of interest capitalized during construction.
Interest paid on all borrowings for the three months ended March 31, 1996 was
$9.2 million, net of $3.5 million of interest capitalized during construction.
F-82
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
Amortization of loan costs included in interest expense for the three months
ended March 31, 1997 and 1996 was $729,000 and $418,000, respectively.
(5) CASH DISTRIBUTIONS
PTR paid the first quarter 1997 distribution of $0.325 per Common Share on
February 20, 1997. On April 22, 1997 the Board of Trustees (the "Board")
declared a cash distribution of $0.325 per Common Share, payable on May 29,
1997, to shareholders of record on May 13, 1997. On March 31, 1997, PTR paid
quarterly dividends of $0.4377 per cumulative convertible Series A Preferred
Share and $0.5625 per cumulative redeemable Series B Preferred Share to
preferred shareholders of record on March 17, 1997.
(6) SHELF REGISTRATION
On March 27, 1997, PTR filed a $300 million shelf registration with the
Securities and Exchange Commission. These securities can be issued in the form
of Long-Term Debt, Preferred Shares or Common Shares on an as-needed basis,
subject to PTR's ability to effect offerings on satisfactory terms. As of March
31, 1997, a total of $420 million in shelf-registered securities were available
to be issued.
(7) REIT MANAGER AND PROPERTY MANAGER ACQUISITION PROPOSAL
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 Group"), which owned
approximately 36% of PTR's outstanding Common Shares as of March 31, 1997.
SCG Realty Services Incorporated (the "Property Manager"), a wholly-owned
subsidiary of Security Capital Group, managed 95.03% and 86.61% (based on total
expected investment) of PTR's operating multifamily communities as of March 31,
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 May 1, 1997, Security Capital Group filed a registration statement with the
Securities and Exchange Commission containing PTR's preliminary proxy statement
and Security Capital Group's preliminary prospectus (relating to warrants to
purchase Class B common stock of Security Capital Group) relating to a proposed
merger transaction whereby PTR would acquire the operations and businesses of
its REIT Manager and Property Manager (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
Group and revised after negotiation with a special committee comprised of
independent Trustees (the "Special Committee"). The number of common shares
issuable to Security Capital Group will depend on the average market price of
the Common Shares over the five-day period prior to the record date, subject to
such average not being more than $27.11475 or less than $21.63525. As a result
of the transaction, PTR would become an internally managed REIT and Security
Capital Group would remain PTR's largest shareholder (35% at June 30, 1997).
The Board recently approved the proposed merger transaction based on the
recommendations of the Special Committee. The proposed merger transaction
requires the approval of the holders of a two-thirds majority of PTR's
outstanding Common Shares. PTR's proxy statement, after review and clearance by
the Securities and Exchange Commission, will be mailed to PTR's common
shareholders prior to a shareholder vote. Assuming that the market value of the
Common Shares issued to Security Capital Group 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". This one-time adjustment will be
recorded as an operating expense on PTR's statement of earnings.
F-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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 March 31, 1997, and the related
consolidated statements of operations for the three months ended March 31, 1997
and 1996, and the consolidated statements of cash flows for the three months
ended March 31, 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
May 2, 1997
F-113
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
------------------
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
ASSETS (UNAUDITED) (AUDITED)
------ ----------- ------------
<S> <C> <C>
Real Estate $2,590,876 $2,508,747
Less accumulated depreciation 124,833 109,147
---------- ----------
2,466,043 2,399,600
Cash and Cash Equivalents 49,877 4,770
Accounts Receivable 7,858 5,397
Other Assets 54,616 52,539
---------- ----------
Total assets $2,578,394 $2,462,306
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Line of credit $ - $ 38,600
Long-term debt 624,212 524,191
Mortgage notes payable 84,298 91,757
Securitized debt 35,217 36,025
Assessment bonds payable 12,156 12,170
Accounts payable and accrued expenses 32,252 35,357
Construction payable 18,268 24,645
Distributions payable - 25,058
Other liabilities 17,941 18,130
---------- ----------
Total liabilities 824,344 805,933
---------- ----------
Commitments and Contingencies
Minority Interest 56,472 56,984
SHAREHOLDERS' EQUITY:
Series A Preferred Shares; $0.01 par value;
5,400,000 shares issued and outstanding at March
31, 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
March 31, 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 March
31, 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; 97,755,518 shares issued and outstanding at
March 31, 1997 and 93,676,546 shares at December
31, 1996 978 937
Additional paid-in capital 1,338,864 1,257,347
Distributions in excess of net earnings (78,514) (95,145)
---------- ----------
Total shareholders' equity 1,697,578 1,599,389
---------- ----------
Total liabilities and shareholders' equity $2,578,394 $2,462,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-114
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
-------------------
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
-------------- --------------
<S> <C> <C>
INCOME:
Rental income $67,386 $50,062
Other real estate income 1,121 143
Interest income 724 157
------------- -------------
Total income 69,231 50,362
------------- -------------
EXPENSES:
Rental expenses, net of recoveries of $10,550
and $6,175 for the three month periods in 1997
and 1996, respectively 4,278 5,146
Property management fees paid to affiliate, net
of recoveries of $1,092 and $586 for the three
month periods in 1997 and 1996, respectively 1,550 999
Depreciation and amortization 18,048 13,089
Interest expense 11,375 8,508
REIT management fee paid to affiliate 6,606 4,641
General and administrative 307 249
Other expense 611 468
------------- -------------
Total expenses 42,775 33,100
------------- -------------
Net Earnings Before Minority Interest and Loss on
Disposition of Real Estate 26,456 17,262
Minority interest share in net earnings 895 756
------------- -------------
Net Earnings Before Loss on Disposition of Real
Estate 25,561 16,506
Loss on disposition of real estate - 29
------------- -------------
Net Earnings 25,561 16,477
Less preferred share dividends 8,829 4,673
------------- -------------
Net Earnings Attributable to Common Shares $16,732 $11,804
============= =============
Weighted Average Common Shares Outstanding 96,009 81,428
============= =============
Per Share Net Earnings Attributable to Common
Shares $ 0.17 $ 0.14
============= =============
Distributions Per Common Share $0.2675 $0.2525
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-115
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
-----------------
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 25,561 $ 16,477
Minority interest 895 756
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 18,048 13,089
Loss on disposition of real estate - 29
Rent leveling (1,233) (1,118)
Amortization of deferred financing costs 669 704
Increase in accounts receivable and other
assets (5,335) (3,176)
Decrease in accounts payable, accrued
expenses and other liabilities (3,294) (7,911)
------------- -------------
Net cash provided by operating activities 35,311 18,850
------------- -------------
INVESTING ACTIVITIES:
Real estate investments (105,024) (146,560)
Tenant improvements and lease commissions (2,542) (3,425)
Recurring capital expenditures (834) (41)
Proceeds from disposition of real estate 19,440 1,092
------------- -------------
Net cash used in investing activities (88,960) (148,934)
------------- -------------
FINANCING ACTIVITIES:
Net proceeds from sale of shares, exercised
warrants and dividend reinvestment and share
purchase plan 80,558 192,291
Proceeds from long-term debt offering 100,000 -
Debt issuance costs (1,168) (5)
Proceeds from interest rate contracts 1,658 -
Distributions paid to common shareholders (25,159) (19,032)
Distributions paid to minority interest
holders (1,423) (1,329)
Preferred share dividends (8,829) (4,673)
Proceeds from line of credit 27,000 127,000
Payments on line of credit (65,600) (179,500)
Regularly scheduled principal payments on
mortgage notes payable (780) (846)
Balloon principal payments made upon maturity (7,501) -
------------- -------------
Net cash provided by financing activities 98,756 113,906
------------- -------------
Net Increase/(Decrease) in Cash and Cash
Equivalents 45,107 (16,178)
Cash and Cash Equivalents, beginning of period 4,770 22,235
------------- -------------
Cash and Cash Equivalents, end of period $ 49,877 $ 6,057
============= =============
Supplemental Schedule of Noncash Investing and
Financing Activities:
In conjunction with real estate acquired:
Assumption of existing mortgage notes
payable $ - $ 9
Issuance of common shares $ 1,000 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-116
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. GENERAL:
The consolidated financial statements of Security Capital Industrial Trust
("SCI") as of March 31, 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 month periods ended March 31, 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 Standards 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 March 31, 1997 and
December 31, 1996 (in thousands):
<TABLE>
--------------
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
----------- ------------
<S> <C> <C>
Land held for development $ 107,024 $ 109,316
Land under development 46,773 40,465
Improved land 371,919 356,428
Buildings and improvements 1,998,166 1,918,256
Construction in progress 61,587 77,506
Capitalized preacquisition costs 5,407 6,776
---------- ----------
Total real estate 2,590,876 2,508,747
Less accumulated depreciation 124,833 109,147
---------- ----------
Net real estate $2,466,043 $2,399,600
========== ==========
</TABLE>
F-117
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized preacquisition costs include $2,072,750 and $1,634,000 of funds on
deposit with title companies as of March 31, 1997 and December 31, 1996,
respectively, for property acquisitions.
4. 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). Effective on the May 1,
1997 renewal date 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 .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 March 31, 1997,
SCI was in compliance with all covenants contained in the line of credit, and
as of May 2, 1997, $54.0 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 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. There were no outstanding borrowings on
this credit line as of May 2, 1997.
Long-Term Debt
<TABLE>
-----------------
<CAPTION>
MARCH 31, 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 14,994 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 17,451 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 17,438 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 74,675 74,668
</TABLE>
F-118
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
----------------
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
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 $ 49,954 $ 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 99,843 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 49,857 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 $624,212 $524,191
======== ========
</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. 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 March
31, 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 were secured by real estate with an aggregate
undepreciated cost of $158.8 million at March 31, 1997. Assessment bonds
payable were secured by real estate with an aggregate undepreciated cost of
$223.4 million at March 31, 1997. Securitized debt was collateralized by real
estate with an aggregate undepreciated cost of $67.8 million at March 31, 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 $ 9,984
1998 19,782
1999 25,689
2000 38,429
2001 40,686
2002 44,618
2003 and thereafter 577,483
---------
Total principal due 756,671
Less: original issue discount (788)
---------
Total carrying value $755,883
=========
</TABLE>
F-119
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the three month periods ended March 31, 1997 and 1996, interest expense on
all borrowings was $11,375,000 and $8,508,000, respectively, which was net of
capitalized interest of $4,594,000 and $3,311,000, respectively. The total
interest paid in cash was $12,299,000 and $13,920,000 for the three month
periods ended March 31, 1997 and 1996, respectively.
5. 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 March 31, 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.
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 primarily 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 March 31, 1997.
Partnership-IV had $1.7 million of borrowings from SCI IV, Inc. at March 31,
1997. SCI IV, Inc. had $1.7 million of borrowings from SCI and its affiliates
at March 31, 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 March 31, 1997, there were 68,612 limited
partnership units outstanding in Partnership-IV.
6. 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 February 18, 1997, SCI paid a distribution of $0.2675 per common share to
common shareholders of record as of February 4, 1997. On March 31, 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
and $1.0675 per cumulative redeemable Series C preferred share to preferred
shareholders of record on March 17, 1997.
On April 15, 1997, SCI declared a distribution of $0.2675 per common share,
payable on May 20, 1997, to common shareholders of record as of May 6, 1997.
7. 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 29,764 SCI common shares would not have a
F-120
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
material dilutive effect on earnings per share. The conversion of the limited
partnership units (as discussed in Note 5) and the Series B Cumulative
Convertible Redeemable Preferred Shares into common shares is not assumed since
the effect would not be dilutive.
8. SUBSEQUENT EVENTS:
On May 1, 1997, Security Capital Group Incorporated ("Security Capital") filed
a registration statement with the Securities and Exchange Commission containing
SCI's preliminary proxy statement and Security Capital's preliminary prospectus
(relating to warrants to purchase Class B common stock of Security Capital)
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 analysis of net operating
income prepared by Security Capital Group 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 will depend on the
average market price of the common shares over the five-day period prior to the
record date, subject to such average not being more than $24.75 or less than
$19.75. 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
March 31, 1997). SCI's Board of Trustees recently 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, after review and clearance by the
Securities and Exchange Commission, will be mailed to SCI's common shareholders
prior to a shareholder vote. 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 "business" for purposes of applying APB
Opinion No. 16, "Business Combinations".
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 2 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 all significant
transactions. SCI will own 100% of the nonvoting preferred stock of SCI
Logistics. An unrelated third party will own 100% of the common stock of SCI
Logistics. SCI will recognize 95% of the economic benefits from SCI Logistics
cash flow through its cumulative preferred stock dividends. SCI will account
for its investment in SCI Logistics on the cost method due to its lack of
effective management control.
F-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-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>
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-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 ------------------------- 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-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 ------------------------- 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-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 ------------------------------ 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-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 ------------------------- 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-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 -------------------------------
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-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 ------------------------------- 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-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)
- ----------- ------ ------- ------- ------------ -------------- ------- ------------ ---------- ---------------
<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-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>
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)
--- -------- ---------- -------- -------- ---------- ---------- ---------
</TABLE>
<TABLE>
<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-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 -------------------------------- 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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<PAGE>
LOGO
<PAGE>
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERGER AND ISSUANCE AGREEMENT
DATED AS OF MARCH 24, 1997
BY AND BETWEEN
SECURITY CAPITAL ATLANTIC INCORPORATED
AND
SECURITY CAPITAL GROUP INCORPORATED
AS AMENDED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS..................................................... 1
Section 1.1 Definitions................................................. 1
ARTICLE II THE MERGERS, WARRANT ISSUANCE AND RIGHTS OFFERING.............. 4
Section 2.1 The Mergers................................................. 4
Section 2.2 Warrant Issuance............................................ 5
Section 2.3 The Rights Offering......................................... 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ATLANTIC.................... 6
Section 3.1 Organization and Qualification.............................. 6
Section 3.2 Capitalization.............................................. 6
Section 3.3 Issuance of Securities...................................... 6
Section 3.4 Authority; Non-Contravention; Approvals..................... 6
Section 3.5 Registration Statements and Proxy Statement and Prospectus.. 7
Section 3.6 Disclosure, Financial Statements and Absence of Certain
Changes................................................................ 8
Section 3.7 Absence of Undisclosed Liabilities.......................... 8
Section 3.8 Brokers and Finders......................................... 8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SCG.......................... 8
Section 4.1 Organization and Qualification.............................. 8
Section 4.2 Capitalization.............................................. 8
Section 4.3 Issuance of Securities...................................... 9
Section 4.4 Authority; Non-Contravention; Approvals..................... 9
Section 4.5 Financial Statements........................................ 10
Section 4.6 Absence of Certain Changes or Events........................ 10
Section 4.7 Registration Statements and Proxy Statement and
Prospectuses........................................................... 10
Section 4.8 Taxes....................................................... 11
Section 4.9 Absence of Undisclosed Liabilities.......................... 12
Section 4.10 Litigation................................................. 12
Section 4.11 No Violation of Law........................................ 12
Section 4.12 Insurance.................................................. 12
Section 4.13 Employee Benefit Plans..................................... 13
Section 4.14 Intellectual Property...................................... 13
Section 4.15 Labor...................................................... 13
Section 4.16 Brokers and Finders........................................ 13
Section 4.17 Investment Company Act..................................... 14
Section 4.18 Adequacy of SCG Consideration.............................. 14
Section 4.19 Investment in Securities................................... 14
Section 4.20 Title to Assets; No Real Property.......................... 14
Section 4.21 Projections................................................ 14
ARTICLE V CONDUCT OF BUSINESSES PENDING THE MERGER CLOSING................ 15
Section 5.1 Conduct of Businesses....................................... 15
Section 5.2 Conduct of Business of ATLANTIC............................. 16
ARTICLE VI ADDITIONAL AGREEMENTS.......................................... 17
Section 6.1 Access to Information....................................... 17
Section 6.2 Proxy Statement and Registration Statement.................. 17
Section 6.3 Shareholders' Approval...................................... 17
Section 6.4 Affiliate Agreements........................................ 18
Section 6.5 Exchange.................................................... 18
Section 6.6 Expenses.................................................... 18
Section 6.7 Agreement to Cooperate...................................... 18
Section 6.8 Public Statements........................................... 18
</TABLE>
I-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 6.9 Corrections to the SCG Warrant Registration Statement and
SCG Warrant Prospectus................................................. 18
Section 6.10 Voting of Shares........................................... 19
Section 6.11 Confidentiality............................................ 19
Section 6.12 Personnel.................................................. 20
Section 6.13 Prorations................................................. 20
Section 6.14 Tax Matters................................................ 21
Section 6.15 Standstill................................................. 22
ARTICLE VII CONDITIONS.................................................... 22
Section 7.1 Conditions to Each Party's Obligations...................... 22
Section 7.2 Conditions to Obligations of ATLANTIC....................... 23
Section 7.3 Conditions to Obligations of SCG............................ 24
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................ 24
Section 8.1 Termination................................................. 24
Section 8.2 Effect of Termination....................................... 25
Section 8.3 Amendment................................................... 25
Section 8.4 Waiver...................................................... 25
ARTICLE IX SURVIVAL AND REMEDY; INDEMNIFICATION........................... 25
Section 9.1 Indemnification............................................. 25
Section 9.2 Limitation of Indemnification............................... 26
Section 9.3 Notice of Claims; Assumption of Defense..................... 26
Section 9.4 Settlement or Compromise.................................... 26
Section 9.5 Failure of Indemnifying Party to Act........................ 26
Section 9.6 Survival.................................................... 26
Section 9.7 Waiver of Counterclaims for Indemnification................. 27
ARTICLE X GENERAL PROVISIONS.............................................. 27
Section 10.1 Notices.................................................... 27
Section 10.2 Interpretation............................................. 28
Section 10.3 Miscellaneous.............................................. 28
Section 10.4 Counterparts............................................... 28
Section 10.5 Parties in Interest........................................ 28
Section 10.6 No Presumption Against Drafter............................. 28
</TABLE>
EXHIBITS
EXHIBIT I AGREEMENT AND PLAN OF MERGER
EXHIBIT II WARRANT AGREEMENT
EXHIBIT III WARRANT ISSUANCE AGREEMENT
EXHIBIT IV AMENDED AND RESTATED ATLANTIC INVESTOR AGREEMENT
EXHIBIT V ADMINISTRATIVE SERVICES AGREEMENT
EXHIBIT VI LICENSE AGREEMENT
EXHIBIT VII PROTECTION OF BUSINESS
EXHIBIT VIII OPINION OF MAYER, BROWN & PLATT
SCHEDULES
SCHEDULE 3.2(b) SUBSCRIPTIONS, OPTIONS, ETC.
SCHEDULE 3.4(b) ATLANTIC REQUIRED CONSENTS
SCHEDULE 4.4(b) SCG REQUIRED CONSENTS
SCHEDULE 4.10 SCG SUBSIDIARY LITIGATION
SCHEDULE 4.14 SCG SUBSIDIARIES' INTELLECTUAL PROPERTY
SCHEDULE 4.20 ASSETS AND PERSONNEL
SCHEDULE 7.1 AGREEMENTS TO BE TERMINATED
I-ii
<PAGE>
MERGER AND ISSUANCE AGREEMENT
THIS MERGER AND ISSUANCE AGREEMENT (this "Agreement"), is entered into as of
March 24, 1997 by and between Security Capital Atlantic Incorporated, a
Maryland corporation ("ATLANTIC"), and Security Capital Group Incorporated, a
Maryland corporation ("SCG").
WHEREAS, the Board of Directors of each of SCG and ATLANTIC have approved
this Agreement and the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein; and
WHEREAS, it is intended that pursuant to this Agreement, among other things,
SCG will cause its subsidiaries engaged in the conduct of the businesses of
managing the portfolio of and the properties owned by ATLANTIC to be merged
with and into a subsidiary of ATLANTIC in exchange for certain securities of
ATLANTIC.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Affiliate Agreement" shall have the meaning set forth in Section 6.4.
"Affiliate Group" shall have the meaning set forth in Section 4.8.
"Agreement and Plan of Merger" shall have the meaning set forth in
Section 2.1.
"ATLANTIC 10-K" shall have the meaning set forth in Section 3.6.
"ATLANTIC Board" shall mean the Board of Directors of ATLANTIC.
"ATLANTIC Common Shares" shall mean the shares of common stock, $.01 par
value per share, of ATLANTIC.
"ATLANTIC Financial Statements" shall have the meaning set forth in
Section 3.6.
"ATLANTIC Prospectus" shall mean the prospectus, as amended and
supplemented, relating to the offering of ATLANTIC Common Shares pursuant
to Section 2.3, which will form a part of the ATLANTIC Registration
Statement.
"ATLANTIC Registration Statement" shall mean the registration statement
on Form S-11 of ATLANTIC, of which the ATLANTIC Prospectus will form a
part, which has been or will be filed with the Commission in order to
register the offering of ATLANTIC Common Shares pursuant to Section 2.3.
"ATLANTIC Required Statutory Approvals" shall have the meaning set forth
in Section 3.4(c).
"ATLANTIC Shareholders' Approval Record Date" shall mean the record date
for determination of the holders of ATLANTIC Common Shares entitled to vote
with respect to obtaining the ATLANTIC Shareholders' Approval.
"ATLANTIC Shareholders' Approval" shall have the meaning set forth in
Section 6.3.
"ATLANTIC Special Committee" shall have the meaning set forth in Section
7.2(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Confidential Material" shall have the meaning set forth in Section
6.11(a).
<PAGE>
"Current Market Price" of the ATLANTIC Common Shares and the SCG Class B
Common Shares for any day shall mean the last reported sales price on such
day, or, if no sale takes place on such day, the average of the reported
closing bid and asked prices on such day, in either case as reported on the
New York Stock Exchange or, if such security is not listed or admitted for
trading on the New York Stock Exchange, on the principal national
securities exchange on which such security is listed or admitted for
trading or, if not listed or admitted for trading on any national
securities exchange, on the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotations System or, if
such security is not quoted on such National Market System, the average of
the closing bid and asked prices on such day in the over-the-counter market
as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System or, if bid and asked prices for such security
on such day shall not have been reported through the National Association
of Securities Dealers, Inc. Automated Quotations System, in the case of the
ATLANTIC Common Shares, the average of the bid and asked prices on such day
as furnished by any New York Stock Exchange member firm regularly making a
market in ATLANTIC Common Shares selected for such purpose by a Co-Chairman
of the Board of ATLANTIC or the ATLANTIC Board, or, in the case of the SCG
Class B Common Shares, the fair market value of the SCG Class B Common
Shares as determined in good faith by the SCG Board.
"Employee Benefit Plans" shall have the meaning set forth in Section
4.13.
"Employees" shall have the meaning set forth in Section 4.13.
"Environmental Laws" means the Resource Conservation and Recovery Act and
the Comprehensive Environmental Response Compensation and Liability Act and
other federal laws governing the environment as in effect on the date of
this Agreement together with their implementing regulations as of the date
of this Agreement, and all state, regional, county, municipal and other
local laws, regulations and ordinances as in effect on the date hereof that
are equivalent or similar to the federal laws recited above or that purport
to regulate Hazardous Materials.
"Exchange" shall mean the New York Stock Exchange, another national
securities exchange or the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotations System.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean the average of the daily Current Market
Prices of an ATLANTIC Common Share during the five (5) consecutive Trading
Days commencing six Trading Days prior to the ATLANTIC Shareholders'
Approval Record Date.
"Hazardous Materials" shall mean (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become
friable, polychlorinated biphenyls and, only to the extent it exists at
levels which are considered hazardous to human health, radon gas and (b)
any chemicals, materials or substances defined as or included in the
definition of "hazardous substances," "toxic substances," "toxic
pollutants," "contaminants" or "pollutants" or words of similar import,
under any applicable Environmental Laws.
"Indemnified Parties" shall have the meaning set forth in Section 9.1.
"Indemnifying Parties" shall have the meaning set forth in Section 9.1.
"Intellectual Property" shall mean all United States and foreign patents,
patent applications, patent licenses, trade names, trademarks, trade name
and trademark registrations (and applications therefor), copyrights and
copyright registrations (and applications therefor), trade secrets,
inventions, processes, designs, know-how and formulae.
"Losses" shall have the meaning set forth in Section 9.1.
"Merger Closing" shall have the meaning set forth in Section 2.1.
I-2
<PAGE>
"Post-Closing Accrual Statement" shall have the meaning set forth in
Section 6.13.
"Property Management Agreement" shall have the meaning set forth in
Section 5.1(a).
"Property Manager" shall mean SCG Realty Services Atlantic Incorporated,
a Delaware corporation.
"Prorated Items" shall have the meaning set forth in Section 6.13.
"Providing Party" shall have the meaning set forth in Section 6.11(a).
"Proxy Statement" shall mean the definitive ATLANTIC proxy statement,
including the SCG Warrant Prospectus, to be filed with the Commission (i)
as a proxy statement by ATLANTIC and (ii) as a part of the SCG Warrant
Registration Statement by SCG.
"Receiving Party" shall have the meaning set forth in Section 6.11(a).
"REIT Management Agreement" shall have the meaning set forth in Section
5.1(a).
"REIT Manager" shall mean Security Capital (Atlantic) Incorporated, a
Nevada corporation.
"Related Agreements" shall mean each of the agreements, instruments and
documents contemplated to be entered into in connection with this
Agreement, including, without limitation, the Agreement and Plan of Merger,
the Warrant Issuance Agreement, the Warrant Agreement, the Amended and
Restated ATLANTIC Investor Agreement, the Administrative Services
Agreement, the License Agreement and the Affiliate Agreements.
"Representatives" shall have the meaning set forth in Section 6.11(a).
"Rights Offering Amount" shall have the meaning set forth in Section 2.3.
"Rights Offering Closing Date" shall mean the third business day
following the Rights Offering Expiration Date.
"Rights Offering Expiration Date" shall have the meaning set forth in
Section 2.3.
"SCG Board" shall mean the Board of Directors of SCG.
"SCG Class B Common Shares" shall mean the shares of Class B common
stock, $.01 par value per share, of SCG.
"SCG Financial Statements" shall have the meaning set forth in Section
4.5.
"SCG Proxy Statement" shall mean the definitive proxy statement mailed to
shareholders of SCG with respect to the meeting of shareholders of SCG to
be held in connection with the transactions contemplated by this Agreement.
"SCG Required Statutory Approvals" shall have the meaning set forth in
Section 4.4(c).
"SCG Shareholders' Approval" shall have the meaning set forth in Section
6.3.
"SCG Subsidiaries" shall mean the REIT Manager and the Property Manager.
"SCG Warrant Prospectus" shall mean the prospectus relating to the
Warrant Issuance pursuant to Section 2.2 which will form a part of the SCG
Warrant Registration Statement and the Proxy Statement.
"SCG Warrant Registration Statement" shall mean the registration
statement on Form S-4 of SCG, of which the Proxy Statement and the SCG
Warrant Prospectus will form a part, to be filed with the Commission in
order to register the Warrant Issuance pursuant to Section 2.2.
"SCG Warrants" shall have the meaning set forth in Section 2.2.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiary Financial Statements" shall have the meaning set forth in
Section 4.5.
I-3
<PAGE>
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, income, gross receipts, excise, property,
sales, withholding, social security, occupation, use, service, service use,
license, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall
include any interest, fines, penalties or additional amounts attributable
or imposed on or with respect to any such taxes, charges, fees, levies or
other assessments.
"Tax Returns" shall mean any return, report or other document or
information required to be supplied to a taxing authority in connection
with Taxes.
"Termination Date" shall have the meaning set forth in Section 8.1(b).
"Trading Day" shall mean any day on which the ATLANTIC Common Shares are
traded on the New York Stock Exchange, or if such securities are not listed
or admitted for trading on the New York Stock Exchange, on the principal
national securities exchange on which such securities are listed or
admitted, or if not listed or admitted for trading on any national
securities exchange, on the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotations System, or if
such securities are not quoted on such National Market System, in the
applicable securities market in which the securities are traded.
"Warrant Agreement" shall mean the Warrant Agreement between SCG and The
First National Bank of Boston, as warrant agent, substantially in the form
of Exhibit II hereto.
"Warrant Issuance" shall have the meaning set forth in Section 2.2.
"Warrant Issuance Agreement" shall mean the Warrant Issuance Agency
Agreement substantially in the form of Exhibit III hereto.
"Warrant Issuance Date" shall mean the date established by the Board of
Directors of SCG as the date on which the SCG Warrants shall be delivered
to the issuance agent pursuant to the Warrant Issuance Agreement, which
date shall be within 30 days following the Warrant Issuance Record Date.
"Warrant Issuance Record Date" shall have the meaning set forth in
Section 2.2.
ARTICLE II
THE MERGERS, WARRANT ISSUANCE AND RIGHTS OFFERING
Section 2.1 The Mergers. The events set forth in this Section 2.1 shall be
effected, upon the terms and subject to the conditions of this Agreement, as
soon as practicable after this Agreement and the transactions contemplated
hereby are approved by the shareholders of each of ATLANTIC and SCG (the
"Merger Closing"). It is the intention of the parties that each of the events
set forth in this Section 2.1 shall occur simultaneously. ATLANTIC and SCG
shall each take all actions necessary to cause the SCG Subsidiaries to be
merged with and into a subsidiary of ATLANTIC, which subsidiary shall be a
"qualified REIT subsidiary" of ATLANTIC within the meaning of Section
856(i)(2) of the Code, on the terms and conditions set forth in the agreement
and plan of merger substantially in the form of Exhibit I hereto (the
"Agreement and Plan of Merger"). ATLANTIC shall issue that number of ATLANTIC
Common Shares in connection with the mergers described in this Section 2.1
equal to the number obtained by dividing $54,608,549 by the Fair Market Value
of an ATLANTIC Common Share; provided, however, that in the event that the
Fair Market Value of an ATLANTIC Common Share is less than $20.6367, then the
number of ATLANTIC Common Shares issuable in connection with the mergers
described in this Section 2.1 shall be 2,646,186; and provided, further, that
in the event that the Fair Market Value of an ATLANTIC Common Share is more
than $25.8633, then the number of ATLANTIC Common Shares issuable in
connection with the mergers described in this Section 2.1 shall be 2,111,430.
I-4
<PAGE>
Section 2.2 Warrant Issuance. SCG shall issue (the "Warrant Issuance")
warrants to purchase SCG Class B Common Shares (the "SCG Warrants") to holders
of ATLANTIC Common Shares (other than those owned by SCG) as of the Warrant
Issuance Record Date on the terms and in the manner described below. The SCG
Warrants shall each (i) be exercisable for one SCG Class B Common Share, (ii)
have an exercise price per SCG Class B Common Share equal to the Current
Market Price of an SCG Class B Common Share on the Warrant Issuance Date,
(iii) shall expire 12 months from the date of issuance and (iv) shall have
such other terms and conditions as set forth in the Warrant Agreement. The
record date for determining the holders entitled to participate in the Warrant
Issuance (the "Warrant Issuance Record Date") shall be the close of business
on the date designated by SCG, which date shall be within the 28-day period
following the Rights Offering Closing Date and which date shall be consistent
with any restrictions in the ruling or opinion described in Section 7.1(d).
SCG shall issue an aggregate number of SCG Warrants determined by dividing
$46,926,322 by the Current Market Price of an SCG Class B Common Share on the
Warrant Issuance Date. The number of SCG Warrants to be issued to each such
holder shall be determined by multiplying (a) the aggregate number of SCG
Warrants to be issued by (b) the number obtained by dividing (i) the aggregate
number of ATLANTIC Common Shares held of record by the holder as of the close
of business on the Warrant Issuance Record Date, by (ii) the total number of
ATLANTIC Common Shares outstanding (other than those owned by SCG) as of the
close of business on the Warrant Issuance Record Date. No certificates or
scrip representing fractional SCG Warrants shall be issued in connection with
the Warrant Issuance. The Warrant Issuance Agreement shall contain appropriate
provision to aggregate and sell all fractional SCG Warrants and remit the net
proceeds to the ATLANTIC shareholders who would otherwise be entitled to such
fractions. The Warrant Issuance shall be made pursuant to and in accordance
with the procedures set forth in the Warrant Issuance Agreement. The Warrant
Issuance shall not occur unless and until all of the conditions set forth in
this Agreement have been satisfied or waived and the mergers described in
Section 2.1 have been consummated.
Section 2.3 The Rights Offering. ATLANTIC shall distribute as a dividend to
each holder of record of ATLANTIC Common Shares, as of the close of business
on the ATLANTIC Shareholders' Approval Record Date, rights to purchase
ATLANTIC Common Shares entitling such holder to subscribe for and purchase
ATLANTIC Common Shares during the period commencing on the date the ATLANTIC
Prospectus is mailed to such holders and expiring on the close of business on
the date of the Merger Closing (the "Rights Offering Expiration Date"). The
issuance of such rights and the issuance of ATLANTIC Common Shares upon
exercise of such rights shall be registered under the ATLANTIC Registration
Statement and ATLANTIC shall use its best efforts to cause the rights to be
tradeable on the Exchange on which the ATLANTIC Common Shares are listed. Each
holder of ATLANTIC Common Shares shall receive one (1) right for every one (1)
ATLANTIC Common Share held of record by such holder as of the ATLANTIC
Shareholders' Approval Record Date. The exercise price per ATLANTIC Common
Share for such rights shall be equal to the amount determined by the ATLANTIC
Board (or a duly authorized committee thereof); provided, that in the event
that the Fair Market Value of an ATLANTIC Common Share is more than $25.8633,
then the exercise price per ATLANTIC Common Share shall be $25.8633; and
provided, further, that the exercise price per ATLANTIC Common Share shall in
no event (other than as described in the preceding proviso) be less than 94%
of the Fair Market Value of an ATLANTIC Common Share. ATLANTIC shall make
available for issuance in the rights offering, up to a maximum number of
ATLANTIC Common Shares equal to the difference between (X) the amount
determined by dividing (A) the number of ATLANTIC Common Shares issuable
pursuant to Section 2.1 by (B) the percentage of all outstanding ATLANTIC
Common Shares owned by SCG on the ATLANTIC Shareholders' Approval Record Date
(the amount determined pursuant to this clause (X) being the "Rights Offering
Amount") and (Y) the number of ATLANTIC Common Shares issuable to SCG pursuant
to Section 2.1. Each holder shall be entitled to acquire one (1) ATLANTIC
Common Share by paying the exercise price as determined above and surrendering
that number of rights (rounded down to the nearest whole right) equal to the
amount determined by dividing the aggregate number of ATLANTIC Common Shares
outstanding on the ATLANTIC Shareholders' Approval Record Date by the Rights
Offering Amount. SCG agrees that it shall not exercise or sell or otherwise
transfer any rights issued to it pursuant to this Section 2.3 and SCG shall
not purchase or otherwise acquire any rights. Any ATLANTIC Common Shares that
are not subscribed for by shareholders may be offered to other
I-5
<PAGE>
shareholders pursuant to an oversubscription privilege and, if not fully
subscribed for by shareholders, may be sold to third parties. The REIT Manager
shall, at its own expense, engage an affiliate of SCG to assist ATLANTIC in
selling ATLANTIC Common Shares to third parties.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ATLANTIC
ATLANTIC represents and warrants to SCG as follows:
Section 3.1 Organization and Qualification. ATLANTIC is duly organized,
validly existing and in good standing under the laws of the State of Maryland
and has the requisite power, corporate or otherwise, and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted and as it is proposed by it to be conducted, including,
without limitation, the conduct of the businesses currently conducted by the
SCG Subsidiaries. ATLANTIC is qualified to do business and is in good standing
in each jurisdiction in which the properties owned, leased or operated by it
or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified and in good standing
would not reasonably be expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of ATLANTIC. True, accurate and complete
copies of each of the articles of incorporation and bylaws of ATLANTIC as in
effect on the date hereof, including all amendments thereto and proposed
amendments thereof, have heretofore been delivered to SCG.
Section 3.2 Capitalization.
(a) The authorized shares of ATLANTIC consists of 250,000,000 shares of
which 37,891,580 ATLANTIC Common Shares are issued and outstanding as of the
date hereof. All of the issued and outstanding ATLANTIC Common Shares are
validly issued, fully paid and nonassessable and free of preemptive rights.
(b) Except as contemplated by this Agreement and the Related Agreements or
as set forth in Schedule 3.2(b), as of the date hereof, there are no
outstanding subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, instrument or
other agreement that are presently exercisable obligating ATLANTIC to issue,
deliver or sell, or cause to be issued, delivered or sold, additional ATLANTIC
Common Shares or obligating ATLANTIC to grant, extend or enter into any such
agreement or commitment; provided, however, that the foregoing shall not apply
to the adoption by ATLANTIC of any incentive plan providing for grants of
options or restricted shares to directors and employees nor to any grant of
options or restricted shares thereunder. There are no voting trusts, proxies
or other agreements or understandings to which ATLANTIC is a party or by which
ATLANTIC is bound with respect to the voting of any ATLANTIC Common Shares.
Section 3.3 Issuance of Securities. The ATLANTIC Common Shares issuable to
SCG hereunder, when issued in accordance with the provisions of this Agreement
and the Related Agreements, will be duly and validly authorized and issued and
will be fully paid and nonassessable. The ATLANTIC Common Shares issuable upon
exercise of rights issued pursuant to Section 2.3, when issued in accordance
with the provisions of this Agreement and the Related Agreements, will be duly
and validly authorized and issued and will be fully paid and nonassessable.
Section 3.4 Authority; Non-Contravention; Approvals.
(a) ATLANTIC has full power, corporate or otherwise, and authority to enter
into this Agreement and the Related Agreements to which it is a party and,
subject to ATLANTIC Shareholders' Approval and ATLANTIC Required Statutory
Approvals, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Related Agreements to which
it is a party, and the consummation by ATLANTIC of the transactions
contemplated hereby and thereby, have been duly authorized by the ATLANTIC
I-6
<PAGE>
Board and no other proceedings on the part of ATLANTIC are necessary to
authorize the execution and delivery of this Agreement or the Related
Agreements and the consummation by ATLANTIC of the transactions contemplated
hereby and thereby, except for ATLANTIC Shareholders' Approval and the
obtaining of ATLANTIC Required Statutory Approvals. This Agreement has been
duly and validly executed and delivered by ATLANTIC, and, assuming the due
authorization, execution and delivery hereof by SCG, constitutes a valid and
binding agreement of ATLANTIC enforceable against ATLANTIC in accordance with
its terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, (ii) general equitable
principles and (iii) to the extent this Agreement or any of the Related
Agreements contains indemnification provisions for violations of federal or
state securities laws, as enforceability of such provisions may be limited
under federal and state securities laws.
(b) The execution and delivery of this Agreement and the Related Agreements
by ATLANTIC, to the extent it is a party thereto, do not, and the consummation
by ATLANTIC of the transactions contemplated hereby and thereby will not,
violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the assets of ATLANTIC under any of the
terms, conditions or provisions of, (i) subject to obtaining ATLANTIC
Shareholders' Approval, ATLANTIC's articles of incorporation or bylaws, (ii)
subject to obtaining ATLANTIC Required Statutory Approvals and ATLANTIC
Shareholders' Approval, any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
governmental authority applicable to ATLANTIC or any of its properties or
(iii) except as set forth on Schedule 3.4(b) hereto, any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which
ATLANTIC is now a party or by which ATLANTIC or any of its properties may be
bound, excluding from the foregoing clauses (ii) and (iii) such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances that would not, in the
aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of ATLANTIC.
(c) Except for (i) the filing of the ATLANTIC Registration Statement, the
Proxy Statement and the SCG Warrant Registration Statement with the Commission
pursuant to the Securities Act and the Exchange Act, and the declaration of
the effectiveness of the ATLANTIC Registration Statement and the SCG Warrant
Registration Statement by the Commission and filings with various state blue
sky authorities, (ii) any required filings by ATLANTIC pursuant to Section 2.1
and (iii) any required filings with or approvals from applicable federal or
state housing authorities (the filings and approvals referred to in clauses
(i) through (iii) are collectively referred to as the "ATLANTIC Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this
Agreement and the Related Agreements by ATLANTIC or the consummation by
ATLANTIC of the transactions contemplated hereby or thereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of ATLANTIC.
Section 3.5 Registration Statements and Proxy Statement and Prospectuses.
None of the information to be supplied by ATLANTIC for inclusion or
incorporation by reference in the SCG Warrant Prospectus and the Proxy
Statement will, at the time it becomes effective, at the time of the mailing
of the SCG Warrant Registration Statement and any amendments thereof or
supplements thereto, and at the time of the meeting of shareholders of
ATLANTIC to be held in connection with the transactions contemplated by this
Agreement, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply as to form in all
material respects with all applicable laws, including the provisions
I-7
<PAGE>
of the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder. No representation is made by ATLANTIC with respect to
information supplied by SCG, or derived therefrom, for inclusion in the SCG
Warrant Registration Statement.
Section 3.6 Disclosure, Financial Statements and Absence of Certain Changes.
ATLANTIC's Annual Report on Form 10-K for the year ended December 31, 1996
(the "ATLANTIC 10-K"), and each other report or document filed after December
31, 1996 by ATLANTIC with the Commission under the Exchange Act, taken
together, do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. ATLANTIC's audited consolidated financial
statements contained in the ATLANTIC 10-K (the "ATLANTIC Financial
Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis and fairly present the
consolidated financial position of ATLANTIC and its subsidiaries as of the
dates set forth therein and the results of their operations and cash flows for
the periods set forth therein. Since December 31, 1996, there has not been any
material adverse change or any event (other than general economic or market
conditions) which would reasonably be expected to result in a material adverse
change, individually or in the aggregate, in the business, operations,
properties, assets, liabilities, condition (financial or other), results of
operations or prospects of ATLANTIC.
Section 3.7 Absence of Undisclosed Liabilities. ATLANTIC did not have, at
December 31, 1996, and has not incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature
(other than ordinary and recurring operating expenses), (a) except
liabilities, obligations or contingencies which are accrued or reserved
against in the ATLANTIC Financial Statements with respect to December 31, 1996
or reflected in the notes thereto and (b) except for any liabilities,
obligations or contingencies which (i) would not, in the aggregate, be
reasonably expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of ATLANTIC or (ii) have been discharged or paid in
full prior to the date hereof.
Section 3.8 Brokers and Finders. ATLANTIC has not employed any broker,
finder or other intermediary in connection with the transactions contemplated
by this Agreement which would be entitled to any brokerage, finder's or
similar fee or commission in connection with this Agreement or the
transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SCG
SCG represents and warrants to ATLANTIC as follows:
Section 4.1 Organization and Qualification. SCG and each of the SCG
Subsidiaries is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and each has the requisite power,
corporate or otherwise, and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted and as it
is proposed by it to be conducted. Each SCG Subsidiary is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so
qualified and in good standing would not reasonably be expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of any such
SCG Subsidiary. True, accurate and complete copies of each of the articles of
incorporation and bylaws of SCG and the certificate of incorporation and
bylaws of each SCG Subsidiary as in effect on the date hereof, including all
amendments thereto and proposed amendments and restatements thereof, have
heretofore been delivered to ATLANTIC.
Section 4.2 Capitalization.
(a) The authorized stock of each of the REIT Manager and the Property
Manager consists of 1,000 shares of common stock all of which are issued and
outstanding. All of the issued and outstanding shares of common stock of the
REIT Manager and the Property Manager are owned by SCG, or a wholly owned
subsidiary of SCG,
I-8
<PAGE>
and are validly issued, fully paid and nonassessable. SCG, or one of its
wholly owned subsidiaries, owns good and marketable title to the issued and
outstanding shares of common stock of each of the SCG Subsidiaries, in each
case, free and clear of all liens, encumbrances, claims, security interests
and defects.
(b) There are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement obligating SCG or any subsidiary of SCG to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of either SCG Subsidiary or obligating SCG or any subsidiary of SCG to
grant, extend or enter into any agreement or commitment with respect to any of
the foregoing. There are no voting trusts, proxies or other agreements or
understandings to which SCG or any subsidiary of SCG is a party or is bound
with respect to the voting of any shares of either SCG Subsidiary. Neither of
the SCG Subsidiaries owns, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, business association,
joint venture or other entity.
Section 4.3 Issuance of Securities. Subject to receiving the SCG
Shareholders' Approval, the SCG Warrants when issued in accordance with the
provisions of this Agreement and the Related Agreements will constitute valid
and binding agreements of SCG enforceable against SCG in accordance with their
terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally and (ii) general
equitable principles. Subject to receiving the SCG Shareholders' Approval, the
SCG Class B Common Shares issuable upon exercise of the SCG Warrants, when
issued upon exercise of SCG Warrants and in accordance with the Warrant
Agreement, will be duly and validly authorized and issued and will be fully
paid and nonassessable.
Section 4.4 Authority; Non-Contravention; Approvals.
(a) SCG and each of the SCG Subsidiaries has full power, corporate or
otherwise, and authority to enter into this Agreement and the Related
Agreements to which it is a party and, subject to SCG Shareholders' Approval
and SCG Required Statutory Approvals, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Related Agreements to which they are parties, and the consummation by
SCG and the SCG Subsidiaries of the transactions contemplated hereby and
thereby, have been duly authorized by the SCG Board and the board of the
relevant SCG Subsidiary, and no other corporate proceedings on the part of SCG
or either SCG Subsidiary are necessary to authorize the execution and delivery
of this Agreement or the Related Agreements and the consummation by SCG and
the SCG Subsidiaries of the transactions contemplated hereby and thereby,
except for SCG Shareholders' Approval and the obtaining of SCG Required
Statutory Approvals. This Agreement has been duly and validly executed and
delivered by SCG, and, assuming the due authorization, execution and delivery
hereof by ATLANTIC, constitutes a valid and binding agreement of SCG
enforceable against SCG in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, (ii) general equitable principles and (iii) to
the extent this Agreement or any of the Related Agreements contains
indemnification provisions for violations of federal or state securities laws,
as enforceability of such provisions may be limited under federal and state
securities laws. As of the date of this Agreement, neither of the SCG
Subsidiaries is in violation of its charter, bylaws or other organizational
documents.
(b) The execution and delivery of this Agreement and the Related Agreements
by SCG and each SCG Subsidiary, to the extent it is a party thereto, do not,
and the consummation by SCG and the SCG Subsidiaries of the transactions
contemplated hereby and thereby will not, violate, conflict with or result in
a breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the assets of
either of the SCG Subsidiaries under any of the terms, conditions or
provisions of (i) subject to obtaining SCG Shareholders' Approval, SCG's or
such SCG Subsidiary's articles of incorporation or bylaws, (ii) subject to
obtaining SCG Required Statutory Approvals and SCG Shareholders' Approval, any
I-9
<PAGE>
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to SCG or either SCG Subsidiary or any of the assets of either of
the SCG Subsidiaries, (iii) the certificate of incorporation or bylaws of an
SCG Subsidiary or (iv) except as set forth on Schedule 4.4(b) hereto, any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of
any kind to which SCG or either SCG Subsidiary is now a party or by which SCG
or either SCG Subsidiary or any of the assets of either of the SCG
Subsidiaries may be bound, excluding from the foregoing clauses (ii) and (iv)
such violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would
not, in the aggregate, be reasonably expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of either of the SCG
Subsidiaries.
(c) Except for (i) the filing of the Proxy Statement and the SCG Warrant
Registration Statement with the Commission pursuant to the Securities Act and
the Exchange Act, and the declaration of the effectiveness of the SCG Warrant
Registration Statement by the Commission and filings with various state blue
sky authorities, (ii) any required filings by SCG or an SCG Subsidiary
pursuant to Section 2.1 and (iii) any required filings by SCG of amendments to
its articles of incorporation (the filings and approvals referred to in
clauses (i) through (iii) are collectively referred to as the "SCG Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this
Agreement and the Related Agreements by SCG or either SCG Subsidiary or the
consummation by SCG or either SCG Subsidiary of the transactions contemplated
hereby or thereby, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals which, if not made or obtained,
as the case may be, would not, in the aggregate, be reasonably expected to
have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
either of the SCG Subsidiaries.
Section 4.5 Financial Statements. The audited financial statements of SCG
for the years ended December 31, 1994, 1995 and 1996 (the "SCG Financial
Statements" have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as otherwise set
forth in such financial statements) and fairly present the financial position
of SCG as of the dates presented and the results of its operations and cash
flows for the periods presented. The unaudited balance sheet of each SCG
Subsidiary as at February 28, 1997 and Statements of Funds From Operations for
the years ending December 31, 1995 and 1996 (the "Subsidiary Financial
Statements") fairly present the financial position of each SCG Subsidiary as
of the dates presented and the results of their respective operations for the
periods presented.
Section 4.6 Absence of Certain Changes or Events. Since December 31, 1996,
there has not been any material adverse change or any event (other than
general economic or market conditions) which would reasonably be expected to
result in a material adverse change, individually or in the aggregate, in the
business, operations, properties, assets, liabilities, condition (financial or
other), results of operations or prospects of SCG or of either of the SCG
Subsidiaries. Each of the SCG Subsidiaries have conducted their respective
businesses in the ordinary course during the periods covered by the Subsidiary
Financial Statements.
Section 4.7 Registration Statements and Proxy Statement and Prospectuses.
None of the information to be supplied by SCG for inclusion or incorporation
by reference in the SCG Warrant Registration Statement will, at the time it
becomes effective, at the time of the mailing of the SCG Warrant Prospectus
and the Proxy Statement and any amendments thereof or supplements thereto, and
at the time of the meeting of shareholders of ATLANTIC to be held in
connection with the transactions contemplated by this Agreement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The SCG Warrant Registration Statement will comply as to form in
all material respects with all applicable laws, including the provisions of
the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder. No representation is made by SCG with respect to
information supplied by ATLANTIC, or derived therefrom, for inclusion in the
SCG Warrant Registration Statement.
I-10
<PAGE>
Section 4.8 Taxes.
(a) Each SCG Subsidiary has duly and timely filed with the appropriate
governmental authorities all Tax Returns required to be filed by it (either
separately or as a member of any affiliated group within the meaning of
Section 1504 of the Code or any similar group defined under a similar
provision of state, local or foreign law (an "Affiliated Group")) for all
periods ending on or prior to the Merger Closing, except to the extent of any
Tax Returns for which an extension of time for filing has been properly filed.
Each such return and filing is true and correct in all respects. All Taxes
owed by either SCG Subsidiary have been paid (whether or not shown on a Tax
Return). No material issues have been raised in any examination by any taxing
authority with respect to the businesses and operations of SCG or either of
the SCG Subsidiaries which (i) reasonably could be expected to result in an
adjustment to the liability for Taxes for such period examined or (ii), by
application of similar principles, reasonably could be expected to result in
an adjustment to the liability for Taxes for any other period not so examined.
All Taxes which each SCG Subsidiary is required by law to withhold or collect,
including without limitation Taxes required to have been withheld in
connection with amounts paid or owning to any employee, independent
contractor, creditor, stockholder, or other third party and sales, gross
receipts and use taxes, have been duly withheld or collected and, to the
extent required, have been paid over to the proper governmental authorities or
are held in separate bank accounts for such purpose. There are no liens for
Taxes upon the assets of SCG or either of the SCG Subsidiaries except for
statutory liens for Taxes not yet due.
(b) None of SCG, the SCG Subsidiaries or the Affiliated Group has filed for
an extension of a statute of limitations with respect to any Tax and no
governmental authorities have requested an extension of the statute of
limitations with respect to any Tax. The Tax Returns of SCG, each SCG
Subsidiary and the Affiliated Group are not being and have not been examined
by any taxing authority for any past year or periods. None of SCG, the SCG
Subsidiaries or the Affiliated Group is a party to any pending action or any
formal or informal proceeding by any taxing authority for a deficiency,
assessment or collection of Taxes, and no claim for any deficiency, assessment
or collection of Taxes has been asserted, or, to the best knowledge of SCG,
threatened against it, including claims by any taxing authority in a
jurisdiction where SCG and the SCG Subsidiaries do not file tax returns that
any of them is or may be subject to taxation in that jurisdiction.
(c) Each SCG Subsidiary has properly accrued on its respective Subsidiary
Financial Statements all Taxes due for which such SCG Subsidiary may be liable
in its own right (including, without limitation, by reason of being a member
of an Affiliated Group or as a transferee of the assets of, or successor to,
any corporation, person, association, partnership, joint venture or other
entity. Each SCG Subsidiary has established (and until the Closing shall
continue to establish and maintain) on its books and records reserves that are
adequate for the payment of all Taxes not yet due and payable.
(d) Neither SCG Subsidiary (i) has filed a consent under Section 341(f) of
the Code concerning collapsible corporations, (ii) is a party to any Tax
allocation or sharing agreement other than a tax sharing agreement between an
SCG Subsidiary and SCG, which such agreement will be terminated as of the
Closing Date, and (iii) has been a member of an Affiliated Group filing a
consolidated federal income Tax Return other than a group, the common parent
of which is SCG.
(e) The Affiliated Group of which each SCG Subsidiary is a member has duly
and timely filed all Tax Returns that it was required to file for each taxable
period during which any SCG Subsidiary was a member of the group. All such Tax
Returns were true, complete and correct in all respects and all Taxes owed by
the Affiliated Group, whether or not shown on any Tax Return, have been paid
for each taxable period during which any SCG Subsidiary was a member of the
group.
(f) Neither SCG Subsidiary has any liability for the Taxes of any person
other than SCG or such SCG Subsidiary (A) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign law), (B) as a
transferee or successor, (C) by contract, or (D) otherwise.
I-11
<PAGE>
(g) Neither SCG Subsidiary has made any payments, is obligated to make any
payments, or is a party to an agreement that could obligate it to make any
payments that will not be deductible under Section 280G of the Code. Each SCG
Subsidiary has disclosed to the IRS all positions taken on its federal income
tax returns which could give rise to a substantial understatement of tax under
Section 6662 of the Code.
Section 4.9 Absence of Undisclosed Liabilities. SCG did not have, at
December 31, 1996, and has not incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature
(other than ordinary and recurring operating expenses) with respect to any of
the assets of either of the SCG Subsidiaries, and neither SCG Subsidiary had,
at December 31, 1996, and none has incurred since that date, any liabilities
or obligations (whether absolute, accrued, contingent or otherwise) of any
nature (other than ordinary and recurring operating expenses) (a) except
liabilities, obligations or contingencies which are accrued or reserved
against in the SCG Financial Statements or the Subsidiary Financial Statements
or reflected in the notes thereto and (b) except for any liabilities,
obligations or contingencies which (i) would not, in the aggregate, be
reasonably expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of SCG or either of the SCG Subsidiaries or (ii) have
been discharged or paid in full prior to the date hereof.
Section 4.10 Litigation. Except as set forth on Schedule 4.10, there are no
claims, suits, actions or proceedings pending or, to the best of SCG's
knowledge, threatened, against, relating to or affecting either of the SCG
Subsidiaries or any of the assets of either of the SCG Subsidiaries before or
by any court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that could reasonably be expected, either alone
or in the aggregate with all such claims, actions or proceedings, to affect
materially and adversely the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of either
of the SCG Subsidiaries. Neither SCG Subsidiary is subject to any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator which
prohibits or restricts the consummation of the transactions contemplated
hereby or by any of the Related Agreements or would have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of either of the SCG
Subsidiaries.
Section 4.11 No Violation of Law. Neither of the SCG Subsidiaries is in
violation of or has been given notice or been charged with any violation of
any law, statute, order, rule, regulation, ordinance or judgment (including,
without limitation, any applicable Environmental Laws) of any governmental or
regulatory body or authority, except for violations which, in the aggregate,
would not reasonably be expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of either of the SCG Subsidiaries. No
investigation or review of either of the SCG Subsidiaries by any governmental
or regulatory body or authority is pending or, to the best knowledge of SCG,
threatened, nor has any governmental or regulatory body or authority indicated
to SCG or either SCG Subsidiary an intention to conduct the same. Each of the
SCG Subsidiaries and each of its officers and employees has all permits,
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct its business as
presently conducted and as proposed by such SCG Subsidiary to be conducted,
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not reasonably be expected to have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of either of the SCG Subsidiaries.
Section 4.12 Insurance. SCG or the SCG Subsidiaries maintain insurance
coverage for each SCG Subsidiary and their respective assets of the types, and
in amounts, typical of similar companies engaged in the respective businesses
in which such SCG Subsidiary is engaged. All such insurance policies are in
full force and effect, and with respect to all policies, none of SCG nor
either SCG Subsidiary is delinquent in the payment of any premiums thereon,
and no notice of cancellation or termination has been received with respect to
any such policy. All such policies are sufficient for compliance with all
requirements of law and of all agreements to which
I-12
<PAGE>
either of the SCG Subsidiaries is a party or otherwise bound and are valid,
outstanding, collectable, and enforceable policies and will remain in full
force and effect through their respective policy periods ending after the
Merger Closing (assuming payment of any applicable premiums arising after the
Merger Closing). Neither SCG nor either SCG Subsidiary has received written
notice within the last 12 months from any insurance company or board of fire
underwriters of any conditions, defects or inadequacies that would materially
adversely affect the insurability of, or cause any material increase in the
premiums for insurance covering, either of the SCG Subsidiaries or any of the
assets of either of the SCG Subsidiaries that have not been cured or repaired
to the satisfaction of the party issuing the notice.
Section 4.13 Employee Benefit Plans. SCG has previously provided or made
available to ATLANTIC a copy of each written employee benefit plan maintained
by SCG and/or its affiliates ("Employee Benefit Plans") that provides
retirement, pension, health care, long-term disability income, workers
compensation, life insurance and any other postretirement benefits that, as of
the date hereof, covers any employee of an SCG Subsidiary ("Employees") and a
copy of each plan, contract, or arrangement constituting an employment or
severance agreement with any director or Employee of an SCG Subsidiary. Each
Employee Benefit Plan complies and has been administered in form and in
operation in all material respects with all applicable requirements of law and
no notice has been issued by any governmental authority questioning or
challenging such compliance. Neither the execution or delivery of this
Agreement or any of the Related Agreements nor the consummation of the
transactions contemplated hereby or thereby constitutes or will constitute an
event under any Employee Benefit Plan or any such employment or severance
agreement that may result in any payment by ATLANTIC or any SCG Subsidiary,
any restriction or limitation upon the assets of any Employee Benefit Plan,
any acceleration of payment or vesting, increase in benefits or compensation,
or forgiveness of any loan or other commitment to ATLANTIC or an SCG
Subsidiary.
Section 4.14 Intellectual Property. Schedule 4.14 is a true and complete
list of all of the Intellectual Property used in the conduct of the businesses
of the SCG Subsidiaries. All the Intellectual Property listed on Schedule 4.14
is either owned or being licensed by one of the SCG Subsidiaries. With respect
to the Intellectual Property indicated on Schedule 4.14 as being owned by one
of the SCG Subsidiaries, the respective SCG Subsidiary indicated as owning
such Intellectual Property owns all right, title and interest in such
Intellectual Property, free and clear of all liens, encumbrances, claims,
security interests and defects. With respect to the Intellectual Property
indicated on Schedule 4.14 as being licensed by one of the SCG Subsidiaries,
the respective SCG Subsidiary indicated as licensing such Intellectual
Property (i) has the right under the applicable license agreement to use the
relevant Intellectual Property in the manner in which it is being used in the
conduct of the business of the SCG Subsidiary and (ii) is in compliance with
all terms and conditions of each such license agreement except where such
failure to be in compliance could not reasonably be expected to have any
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of either
SCG Subsidiary. None of the Intellectual Property has been or is the subject
of any pending adverse claim, or to the best knowledge of SCG, any threatened
litigation or claim of infringement based on the use thereof by either one of
the SCG Subsidiaries or a third party. Neither SCG nor either of the SCG
Subsidiaries has received any notice contesting SCG's or the SCG Subsidiaries'
right to use any of the Intellectual Property and, to the knowledge and SCG,
neither of the SCG Subsidiaries has infringed upon or misappropriated any
intellectual property rights of third parties.
Section 4.15 Labor. None of SCG or any of the SCG Subsidiaries is a party
to, or bound by, an collective bargaining agreement, contract or other
understanding with a labor union or labor union organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of SCG, threatened against the SCG Subsidiaries. To the knowledge of
SCG, there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of either SCG Subsidiary.
Section 4.16 Brokers and Finders. SCG has not employed any broker, finder or
other intermediary in connection with the transactions contemplated by this
Agreement which would be entitled to any brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
I-13
<PAGE>
Section 4.17 Investment Company Act. None of SCG and the SCG Subsidiaries
and as of the date of the Merger Closing they will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
nor an "investment adviser" within the meaning of the Investment Advisers Act
of 1940, as amended.
Section 4.18 Adequacy of SCG Consideration. Except for the Intellectual
Property described on Schedule 4.14, no part of the respective businesses
conducted by the SCG Subsidiaries is conducted through any entity other than
the respective SCG Subsidiary.
Section 4.19 Investment in Securities.
(a) SCG understands that (i) no Federal or state agency has passed upon the
ATLANTIC Common Shares to be issued in connection with the mergers described
in Section 2.1 or made any finding or determination as to the fairness of
SCG's investment therein or the terms of the offer and the sale thereof
pursuant to this Agreement and the Related Agreements and (ii) SCG must bear
the economic risk of its investment in the ATLANTIC Common Shares to be issued
in connection with the mergers described in Section 2.1 for an indefinite
period of time because such shares will not be registered under the Securities
Act or any state securities laws, and, therefore, cannot be sold or
transferred unless either they are subsequently registered under the
Securities Act and applicable state securities laws or an exemption from such
registrations is available.
(b) The ATLANTIC Common Shares to be issued in connection with the mergers
described in Section 2.1 are being acquired for SCG's own account and not with
any view toward the resale or distribution thereof, or with any present
intention of selling or distributing any such shares.
(c) SCG has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of an investment in the
ATLANTIC Common Shares to be issued in connection with the mergers described
in Section 2.1.
(d) SCG has carefully reviewed all documents that it has requested copies
of, has been furnished with all other materials that it considers relevant to
an investment in the ATLANTIC Common Shares to be issued in connection with
the mergers described in Section 2.1 and has had a full opportunity to ask
questions of and receive answers from ATLANTIC or a person or persons acting
on behalf of ATLANTIC concerning the terms and conditions of an investment in
the ATLANTIC Common Shares to be issued in connection with the mergers
described in Section 2.1.
Section 4.20 Title to Assets; No Real Property. Set forth on Schedule 4.20
is a complete list of all of the assets currently owned by each SCG Subsidiary
which are materially important in the conduct of its business as it is being
currently conducted and a list of all officers and key employees of each such
SCG Subsidiary. The SCG Subsidiaries have good, valid and marketable title to,
or a leasehold interest in, (a) all of their material properties and assets
(tangible and intangible) reflected in the Subsidiary Financial Statements,
except as indicated in the notes thereto and except for properties and assets
disposed of in the ordinary course of business, and (b) all of the material
properties and assets purchased by an SCG Subsidiary since the date of such
financial statements, except for properties and assets disposed of in the
ordinary course of business, in each case subject to no lien, claim, or
encumbrance other than (i) liens reflected in such financial statements, (ii)
liens for current Taxes, assessments or governmental charges or levies not yet
due and delinquent, and (iii) liens that could not reasonably be expected to
have any material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
either SCG Subsidiary. Neither SCG Subsidiary owns, in whole or in part, or
holds as record title holder, or is the holder of any mortgage or deed of
trust with respect to, any real property.
Section 4.21 Projections. The projections prepared by SCG and furnished to
ATLANTIC have been prepared in good faith and with all available information
regarding the current operations of ATLANTIC and the SCG Subsidiaries and the
operations of ATLANTIC as proposed to be conducted and are based upon
I-14
<PAGE>
assumptions which SCG believes to be reasonable. However, no representation or
warranty is made by SCG that the results set forth in such projections or the
assumptions underlying such projections will in fact be realized. SCG has
previously caused Ernst & Young LLP to deliver to ATLANTIC a report verifying
the mathematical accuracy of the methodology used by SCG in preparing the
projections. All of the information supplied by SCG to Ernst & Young LLP for
purposes of preparing such report has been provided or made available to
ATLANTIC or, if not so provided or made available, is consistent with the
information set forth in the projections in all material respects.
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER CLOSING
Section 5.1 Conduct of Businesses of SCG Subsidiaries. After the date hereof
and prior to the Merger Closing or earlier termination of this Agreement,
except as ATLANTIC shall otherwise agree in writing or as may be otherwise
specifically contemplated by this Agreements and the Related Agreements, SCG
shall cause each of the SCG Subsidiaries to:
(a) conduct the businesses conducted by it in the ordinary and usual
course of business and consistent with past practice and, as to the REIT
Manager, the requirements of the Second Amended and Restated REIT
Management Agreement dated as of June 30, 1996, between ATLANTIC and it
(the "REIT Management Agreement"), and as to the Property Manager, each of
the management agreements between ATLANTIC and it (collectively, the
"Property Management Agreement");
(b) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, capital stock of an SCG
Subsidiary of any class or any debt or equity securities convertible into
or exchangeable for such stock or amend or modify the terms and conditions
of any of the foregoing;
(c) not (i) incur or become contingently liable with respect to any
additional indebtedness for borrowed money, (ii) take any action which
would jeopardize ATLANTIC's status as a real estate investment trust under
the Code, (iii) sell or otherwise dispose of any of its assets, (iv) prepay
or cause to be prepaid any principal amount outstanding with respect to
indebtedness for borrowed money or (vi) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(d) use reasonable efforts to preserve intact its businesses,
organization and goodwill, keep available the services of its present
officers and employees and preserve the goodwill and business relationships
with all lessees, operators, suppliers, distributors, customers and others
having business relationships with it and ATLANTIC and not engage in any
action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
(e) confer with one or more representatives of ATLANTIC when requested to
report on material operational matters and the general status of ongoing
operations of its respective businesses;
(f) maintain, in full force and effect, with all premiums due thereon
paid, policies of insurance covering all of its respective insurable assets
and businesses in amounts and as to foreseeable risks usually insured
against by persons operating similar businesses under valid and enforceable
policies of insurance issued by nationally recognized insurers;
(g) except as may be required to distribute earnings and profits, not
declare, set aside or pay any dividends on, or make any other distributions
in respect of, any of their capital stock, or purchase, redeem or otherwise
acquire any shares of their capital stock;
(h) not acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association, or other business organization or division thereof;
I-15
<PAGE>
(i) not acquire or agree to acquire any assets that are material,
individually or in the aggregate, to either of the SCG Subsidiaries, or
make or agree to make any capital expenditures except in the ordinary
course of business consistent with past practice;
(j) not adopt or amend in any material respect any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any present or former director or
employee or, other than increases for individuals (other than officers and
directors) in the ordinary course of business consistent with past
practice, increase the compensation of fringe benefits of any present or
former director or employee; and not pay any benefit not required by an
existing plan, arrangement or agreement, or grant any new or modified
severance or termination arrangement or increase or accelerate any benefits
payable under its severance or termination pay policies;
(k) not take any action that would, or is reasonably likely to, result in
any of its or ATLANTIC's representations and warranties in this Agreement
becoming untrue, or in any of the conditions to the Merger set forth in
Article VII not being satisfied;
(l) not pay, discharge or satisfy any claims (including claims of
shareholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction, of (i) liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as
in effect on the date hereof, (ii) liabilities reflected or reserved
against in, or contemplated by, the Subsidiary Financial Statements, or
waive, release, grant, or transfer any rights of material value or modify
or change in any material respect any existing license, lease, contract or
other documents, other than as contemplated by this Agreement or in the
ordinary course of business consistent with past practice;
(m) not (i) adopt a plan of complete or partial liquidation; (ii) adopt
any amendment to its charter or bylaws; (iii) enter into any contract,
agreement or arrangement involving more than $500,000 annually, except for
agreements entered into in the ordinary course of business and with prior
written consent; (iv) authorize or enter into any agreement relating to
property management services to be provided by it to a third party property
owners on other than customary terms; (v) modify or change in any material
respect any existing material agreements, except in the ordinary course and
consistent with past practice; (vi) engage in any conduct the nature of
which is materially different that the business in which it is currently
engaged; or (vi) enter into any agreement providing for acceleration of
payment or performance or other consequences as a result of a change of
control of it; and
(n) not authorize any of, or commit or agree to take any of, the
foregoing actions set forth in subsections (b), (c), and (g) through (m).
Section 5.2 Conduct of Business of ATLANTIC. After the date hereof and prior
to the Merger Closing or earlier termination of this Agreement, except as SCG
shall otherwise agree in writing or as may be otherwise specifically
contemplated by this Agreement and the Related Agreements, ATLANTIC shall:
(a) conduct the businesses conducted by it in the ordinary and usual
course of business and consistent with past practice;
(b) not take any action which would jeopardize its status as a real
estate investment trust under the Code; and
(c) operate in compliance with the terms and conditions of the Investor
Agreement, dated October 28, 1993, between ATLANTIC and SCG, as amended or
supplemented.
I-16
<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access to Information. Each of the parties shall afford to the
other party hereto and such other party's accountants, counsel, financial
advisors and other representatives full access, during normal business hours
throughout the period prior to the Merger Closing or earlier termination of
this Agreement, to all properties, books, contracts, commitments and records
(including, but not limited to, Tax Returns) of such party and, in the case of
SCG, of the SCG Subsidiaries, as appropriate, and, during such period, each
shall furnish promptly to the other (a) a copy of each report, schedule and
other document filed or received pursuant to the requirements of federal or
state securities laws or filed with the Commission in connection with the
transactions contemplated by this Agreement and (b) such other information
concerning their respective businesses, properties and personnel which are the
subject of this Agreement or the Related Agreements as shall be reasonably
requested; provided that no investigation pursuant to this Section 6.1 shall
affect any representation or warranty made herein or the conditions to the
obligations of the respective parties hereto to consummate the transactions
contemplated hereby or thereby. Each party shall promptly advise each other
party in writing of any change or the occurrence of any event after the date
of this Agreement or the Related Agreements having, or which, insofar as can
reasonably be foreseen, in the future may have, any material adverse effect on
the business, operations, properties, assets, condition (financial or other),
results of operations or prospects of such party or, in the case of SCG,
either of the SCG Subsidiaries.
Section 6.2 Proxy Statement and Registration Statement. SCG shall file with
the Commission as soon as is reasonably practicable after the date hereof the
SCG Warrant Registration Statement. SCG shall also take any action required to
be taken under applicable state blue sky or securities laws in connection with
the issuance of securities pursuant to Sections 2.2. To the extent the
ATLANTIC Registration Statement shall not have been filed and/or declared
effective prior to the date of this Agreement, ATLANTIC shall (i) file as soon
as is reasonably practicable after the date hereof the ATLANTIC Registration
Statement and use all reasonable efforts to have the ATLANTIC Registration
Statement declared effective by the Commission as promptly as practicable,
(ii) use all reasonable efforts to continue the effectiveness of the ATLANTIC
Registration Statement and (iii) keep available for issuance under the
ATLANTIC Registration Statement such number of shares as would be required to
satisfy rights issued pursuant to Section 2.3 assuming that each shareholder
of ATLANTIC (other than SCG) elects to subscribe for the maximum number of
shares for which it is entitled to subscribe. To the extent the ATLANTIC
Registration Statement shall have been filed and declared effective prior to
the date of this Agreement, ATLANTIC shall use all reasonable efforts to
continue the effectiveness of the ATLANTIC Registration Statement and shall
keep available for issuance under the ATLANTIC Registration Statement such
number of shares as would be required to satisfy rights issued pursuant to
Section 2.3 assuming that each shareholder of ATLANTIC (other than SCG) elects
to subscribe for the maximum number of shares for which it is entitled to
subscribe. ATLANTIC shall also take any action required to be taken under
applicable state blue sky or securities laws in connection with the issuance
of securities pursuant to Sections 2.1 and 2.3. ATLANTIC and SCG shall
promptly furnish to each other all information, and take such other actions as
may reasonably be requested in connection with any action by any of them in
connection with this Section 6.2 and shall cooperate with one another and use
their respective best efforts to facilitate the expeditious consummation of
the transactions contemplated by this Agreement and the Related Agreements.
Section 6.3 Shareholders' Approval. Each of ATLANTIC and SCG shall promptly
take such action as may be required by its declaration of trust or articles of
incorporation, as applicable, its bylaws and applicable law and promptly seek,
and use its best efforts to obtain, the requisite shareholder approval of this
Agreement and the transactions contemplated hereby, including amendments to
ATLANTIC's declaration of trust necessary to consummate the transactions
contemplated hereby and any amendments to SCG's articles of incorporation
necessary to consummate the transactions contemplated hereby (as appropriate,
the "ATLANTIC Shareholders' Approval" and "SCG Shareholders' Approval"). The
ATLANTIC Board and SCG Board shall recommend to their respective shareholders
the approval of this Agreement and of the transactions contemplated by this
Agreement; provided, however, that prior to the respective meetings of
shareholders of ATLANTIC and SCG,
I-17
<PAGE>
the ATLANTIC Board or SCG Board, as the case may be, may withdraw, modify or
amend such recommendation to the extent that the ATLANTIC Board or the
ATLANTIC Special Committee or the SCG Board, as the case may be, deems it
necessary to do so in the exercise of its fiduciary obligations to ATLANTIC or
SCG, as the case may be, after being so advised by nationally recognized
counsel not having an interest in the transactions contemplated by this
Agreement or the Related Agreements.
Section 6.4 Affiliate Agreements. ATLANTIC shall use its best efforts to
cause each principal executive officer, director and each other person who is
an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145
under the Securities Act, of ATLANTIC to execute and deliver to SCG on or
prior to the Warrant Issuance Date a written agreement (an "Affiliate
Agreement") to the effect that such person will not offer to sell, sell or
otherwise dispose of any SCG Warrants (or the SCG Class B Common Share
issuable upon exercise thereof) issued in the Warrant Issuance and received by
such person, except, in each case, pursuant to an effective registration
statement or in compliance with Rule 145, as amended from time to time, or in
a transaction which, in the opinion of legal counsel satisfactory to SCG, is
exempt from the registration requirements of the Securities Act.
Section 6.5 Exchange. SCG shall use its best efforts to effect, at or before
the Warrant Issuance Date, authorization for listing or quotation of the SCG
Warrants on the New York Stock Exchange or another Exchange upon official
notice of issuance of the SCG Warrants pursuant to the Warrant Issuance.
Section 6.6 Expenses. All costs and expenses incurred in connection with
this Agreement, the Related Agreements and the transactions contemplated
hereby and thereby shall be paid by the party incurring such expenses;
provided, however, that (i) all costs and expenses of the ATLANTIC Special
Committee (including fees and expenses of counsel and its financial advisors),
and all fees and expenses in connection with filing, printing and distributing
the ATLANTIC Registration Statement, the ATLANTIC Prospectus and the Proxy
Statement shall be paid by ATLANTIC and (ii) all costs and expenses in
connection with filing, printing and distributing the SCG Warrant Registration
Statement and the SCG Warrant Prospectus and all fees and expenses in
connection with the listing of the SCG Warrants (and the SCG Class B Common
Shares issuable upon exercise thereof) on any Exchange shall be paid by SCG.
Section 6.7 Agreement to Cooperate. Subject to the terms and conditions
herein provided, each of the parties hereto shall cooperate and use its
respective best efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Related Agreements,
including using its best efforts to identify and obtain all necessary or
appropriate waivers, consents and approvals to effect all necessary
registrations, filings and submissions (including, but not limited to,
ATLANTIC Required Statutory Approvals, SCG Required Statutory Approvals and
any filings under federal and state securities laws) and to lift any
injunction or other legal bar to the transactions contemplated hereby and
thereby (and, in such case, to proceed with such transactions as expeditiously
as possible), subject, however, to obtaining ATLANTIC Shareholders' Approval
and SCG Shareholders' Approval.
Section 6.8 Public Statements. The parties hereto shall consult with each
other prior to issuing any press release or any written public statement with
respect to this Agreement and the Related Agreements or the transactions
contemplated hereby and thereby and shall not issue any such press release or
written public statement prior to review and approval by the other party,
except that prior review and approval shall not be required if, in the
reasonable judgment of the party seeking to issue such release or public
statement, prior review and approval would prevent the timely dissemination of
such release or announcement in violation of any applicable law, rule or
regulation or rule or policy of the New York Stock Exchange or another
Exchange.
Section 6.9 Corrections to the SCG Warrant Registration Statement and SCG
Warrant Prospectus. Prior to the date of ATLANTIC Shareholders' Approval, each
of ATLANTIC and SCG shall correct promptly any information provided by it to
be used specifically in the SCG Warrant Registration Statement or the ATLANTIC
Registration Statement, or incorporated by reference into either such
document, that shall have become false or misleading in any material respect
and shall take all steps necessary to file with the Commission and have
I-18
<PAGE>
declared effective or cleared by the Commission any amendment or supplement to
the SCG Warrant Registration Statement or the ATLANTIC Registration Statement
so as to correct the same and to cause the SCG Warrant Registration Statement
and the ATLANTIC Registration Statement as so corrected to be disseminated to
the shareholders of ATLANTIC, in each case to the extent required by
applicable law.
Section 6.10 Voting of Shares. SCG will vote all ATLANTIC Common Shares
owned by it in favor of the approval and adoption of this Agreement, the
Related Agreements and the transactions contemplated hereby and thereby;
provided, however, that SCG shall not be obligated to vote any ATLANTIC Common
Shares in favor of such matters in the event that the ATLANTIC Board, the
ATLANTIC Special Committee or the SCG Board withdraws, modifies or amends its
recommendation pursuant to Section 6.3.
Section 6.11 Confidentiality
(a) As used herein, "Confidential Material" means, with respect to either
party hereto (the "Providing Party"), all information, whether oral, written
or otherwise, furnished to the other party hereto (the "Receiving Party") or
the Receiving Party's directors, officers, partners, Affiliates (as defined in
Rule 12b-2 under the Exchange Act), employees, agents or representatives
(collectively, "Representatives"), by the Providing Party and all reports,
analyses, compilations, studies and other material prepared by the Receiving
Party or its Representatives (in whatever form maintained, whether
documentary, computer storage or otherwise) containing, reflecting or based
upon, in whole or in part, any such information. The term "Confidential
Material" does not include information which (i) is or becomes generally
available to the public other than as a result of a disclosure by the
Receiving Party, its Representatives or anyone to whom the Receiving Party or
any of its Representatives transmit any Confidential Material in violation of
this Agreement, (ii) is or becomes known or available to the Receiving Party
on a nonconfidential basis from a source (other than the Providing Party or
one of its Representatives) who is not, to the knowledge of the Receiving
Party after reasonable inquiry, prohibited from transmitting the information
to the Receiving Party or its Representatives by a contractual, legal,
fiduciary or other obligation or (iii) is contained in the ATLANTIC
Registration Statement, the ATLANTIC Prospectus, the Proxy Statement, the SCG
Warrant Registration Statement or the SCG Warrant Prospectus.
(b) Subject to paragraph (c) below or except as required by applicable laws,
regulations or legal process, the Confidential Material will be kept
confidential and will not, without the prior written consent of the Providing
Party, be disclosed by the Receiving Party or its Representatives, in whole or
in part, and will not be used by the Receiving Party or its Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Related Agreements and the transactions contemplated hereby or
thereby or evaluating, negotiating or advising with respect to such matters.
Moreover, the Receiving Party agrees to transmit Confidential Material to its
Representatives only if and to the extent that such Representatives need to
know the Confidential Material for purposes of such transactions and are
informed by the Receiving Party of the confidential nature of the Confidential
Material and of the terms of this Section 6.11. In any event, the Receiving
Party will be responsible for any actions by its Representatives which are not
in accordance with the provisions hereof.
(c) In the event that the Receiving Party, its Representatives or anyone to
whom the Receiving Party or its Representatives supply the Confidential
Material are requested (by oral questions, interrogatories, requests for
information or documents, subpoena, civil or criminal investigative demand,
any informal or formal investigation by any government or governmental agency
or authority or otherwise in connection with legal process) to disclose any
Confidential Material, the Receiving Party agrees (i) to immediately notify
the Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legal available steps to resist or narrow such request and (iii) if
disclosure of such information is required, to furnish only that portion of
the Confidential Material which, in the opinion of the Receiving Party's
counsel, the Receiving Party is legally compelled to disclose and to cooperate
with any action by the Providing Party to obtain an appropriate protective
order or other reliable assurance that confidential treatment will be accorded
the Confidential Material (it being agreed that the Providing Party shall
reimburse the Receiving Party for all reasonable out-of-pocket expenses
incurred by the Receiving Party in connection with such cooperation).
I-19
<PAGE>
(d) In the event of the termination of this Agreement in accordance with its
terms, promptly upon request from the Providing Party, the Receiving Party
shall, except to the extent prohibited by applicable laws, regulations or
legal process, redeliver to the Providing Party or destroy all tangible
Confidential Material and will not retain any copies, extracts or other
reproductions thereof in whole or in part. Any such destruction shall be
certified in writing to the Providing Party by an authorized officer of the
Receiving Party supervising the same. Notwithstanding the foregoing, the
Receiving Party and one Representative designated by the Receiving Party shall
be permitted to retain one permanent file copy of each document constituting
Confidential Material to be used only in connection with litigation arising
from the transactions contemplated by this Agreement.
Section 6.12 Personnel.
(a) SCG Liability for Employee Obligations. SCG shall indemnify and hold
harmless ATLANTIC for any and all obligations, debts or liabilities relating
to or arising from any Employee's employment with SCG or an SCG Subsidiary,
which obligation, debt or liability arises prior to the Merger Closing date.
SCG shall honor or cause its insurance carriers to honor all claims for
benefits by the Employees under each Employee Benefit Plan with respect to
claims incurred by the Employees or their covered dependents before the Merger
Closing date.
(b) Employee Benefit Plans. ATLANTIC shall establish or cause to be
established employee benefit plans for the respective Employees who become
employees of ATLANTIC or any subsidiary thereof after the Merger Closing that
are substantially similar to the Employee Benefit Plans, which plans shall
recognize service of the Employees with ATLANTIC and SCG and their affiliates
to the same extent such service has been recognized under the Employee Benefit
Plans. The medical plans established by ATLANTIC shall recognize any
deductibles and copayments Employees have made under the SCG medical plan in
the current plan year.
(c) Nonassumption of Employee Benefit Plan Liability. ATLANTIC shall not
incur any liability with respect to an Employee Benefit Plan.
Section 6.13 Prorations. No later than ninety (90) days after the date of
the Merger Closing, SCG shall prepare and deliver a statement (a "Post-Closing
Accrual Statement") prorating all of the items listed in this Section 6.13
("Prorated Items") through the date of the Merger Closing. SCG shall be liable
for or entitled to the benefit of the Prorated Items to the extent the
Prorated Items relate to any time period up to the date of the Merger Closing,
and ATLANTIC shall be liable for or entitled to the benefit of the Prorated
Items to the extent Prorated Items relate to periods from and subsequent to
the date of the Merger Closing. Prorated Items shall be settled between SCG
and ATLANTIC in cash. The Prorated Items are as follows:
(a) all Taxes relating to the businesses of the SCG Subsidiaries which
shall have accrued and become payable prior to the date of the Merger
Closing shall be paid by SCG. All Taxes which shall be (or should be)
accrued but unpaid or which have been paid in advance shall be properly
prorated as of the date of the Merger Closing between SCG and ATLANTIC. In
connection with such proration of Taxes, in the event that actual tax
figures are not available at the time of delivery of the Post-Closing
Accrual Statement, the taxes to be prorated shall be based upon the actual
taxes for the preceding year for which actual tax amounts are available and
such taxes shall be reprorated upon request of either party made within
sixty (60) days of the date that the actual amounts become available,
provided that the actual amount is at least 5% more or 5% less than the
amount on which the original proration was based, and appropriate payment
shall be made within thirty (30) days after such reproration;
(b) rents, taxes and other items payable by either of the SCG
Subsidiaries under any agreement;
(c) the amount of any license or registration fees with respect to any
licenses or registrations of either of the SCG Subsidiaries;
(d) the amount of charges for water, telephone, electricity and other
utilities and fuel;
(e) all accrued vacation, termination and severance pay and accrued
sickness benefits for all Employees including related, social security
taxes, unemployment compensation taxes, workers compensation taxes and
premiums and other employment taxes relating to the same;
I-20
<PAGE>
(f) all other operating expenses, including without limitation insurance
premiums and amounts payable to service providers, of the SCG Subsidiaries;
(g) all management fees, commissions and other fees and income of the SCG
Subsidiaries; and
(h) all other items not specifically described in subsections (a)-(g)
above which are normally prorated in connection with similar transactions.
In addition to the Prorated Items, the Post-Closing Accrual Statement shall
also reflect any payments made by SCG or either of the SCG Subsidiaries prior
to Merger Closing with respect to any Prorated Items. SCG agrees to furnish
ATLANTIC with such documents and other records as ATLANTIC reasonably requests
in order to confirm all adjustment and proration calculations reflected on the
Post-Closing Accrual Statement.
Section 6.14 Tax Matters.
(a) Tax Reporting. The parties agree that they will report, and will cause
the SCG Subsidiaries and the surviving corporation in the mergers pursuant to
Section 2.1 to report, the Merger on all Tax Returns and other filings as tax-
free reorganizations under Section 368(a) of the Code.
(b) Tax Sharing Agreements. Any Tax sharing agreement between SCG and an SCG
Subsidiary will be terminated as of the Merger Closing and will have no
further effect for any taxable year.
(c) Returns for Periods Through the Closing Date. SCG will include the
income of each of the SCG Subsidiaries (including any deferred income
triggered into income by Section 1.1502-13 of the Treasury Regulations and any
excess loss accounts taken into income under Section 1.1502-19 of the Treasury
Regulations) on the SCG consolidated Tax Returns for all periods through the
Merger Closing and pay any Taxes attributable to such income. Each SCG
Subsidiary will furnish Tax information to SCG for inclusion in SCG's
consolidated Tax Returns for the period which includes the date of the Merger
Closing in accordance with each SCG Subsidiary's past custom and practice. SCG
will allow ATLANTIC a reasonable opportunity to review and comment upon such
Tax Returns (including any amended returns) prior to their being filed to the
extent that they relate to any SCG Subsidiary. Without the consent of
ATLANTIC, SCG will take no position on such returns that relate to any SCG
Subsidiary that would be inconsistent with prior positions taken by SCG. The
income of each SCG Subsidiary will be apportioned to the period up to and
including the Merger Closing date and the period after the Merger Closing date
by closing the books of each SCG Subsidiary as of the end of the Merger
Closing date.
(d) Cooperation. SCG and ATLANTIC will cooperate fully with each other in
connection with (i) the preparation and filing of any Federal, state or local
tax returns that include the business and operations of the SCG Subsidiaries
for any period prior to and including the date of the Merger Closing, and (ii)
any audit examination by any government taxing authority of the returns
referred to in clause (i). Such cooperation shall include, without limitation,
the furnishing or making available of records, books of account or other
materials of the SCG Subsidiaries necessary or helpful for the defense against
assertions of any taxing authority as to any tax returns which include
operations of the SCG Subsidiaries for any period prior to and including the
date of the Merger Closing.
(e) Claims. In a case in which ATLANTIC or its subsidiaries receives any
inquiry, whether oral or written, from any taxing authority relating to any
matter which could result in the indemnification of ATLANTIC by SCG under
Section 9.1, ATLANTIC will promptly give SCG written notice (the "Tax Inquiry
Notice") of such inquiry. If such Tax Inquiry Notice is not given to SCG
within 30 days after the receipt by ATLANTIC or its subsidiaries of such an
inquiry and ATLANTIC's failure to give such Tax Inquiry Notice materially and
substantially adversely affects the ability of SCG to contest any claim made
by such taxing authority, SCG shall not be liable to ATLANTIC under Section
9.1 for such claim.
(f) Notice 88-19 Election. ATLANTIC will make an election to be subject to
rules similar to the rules of Section 1374 of the Code in accordance with
Internal Revenue Service Notice 88-19, 1988-1 C.B. 486, or any future
applicable administrative rules or treasury regulations.
I-21
<PAGE>
(g) Settlement or Compromise. ATLANTIC will not settle or otherwise
compromise any claim or issue subject to indemnification under Section 9.1
without SCG's prior written consent, which SCG shall not unreasonably
withhold. Nothing contained herein shall require ATLANTIC to contest a claim
if ATLANTIC shall waive the payment by SCG of any amount that might otherwise
be payable by SCG pursuant to Section 9.1 hereof in respect of such claim.
Section 6.15 Standstill. SCG agrees that, during the period beginning on the
Closing Date and ending 180 days thereafter, it will not sell or cause to be
sold any ATLANTIC Common Shares beneficially owned by SCG.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Each Party's Obligations. The respective
obligation of each party to effect the transactions contemplated hereby and by
the Related Agreements shall be subject to the fulfillment at or prior to the
Merger Closing of the following conditions:
(a) The other party shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Merger Closing, and the representations and warranties of each such
other party shall be true and correct in all material respects on and as of
(i) the date made and (ii) the Merger Closing date with the same effect as
if made on that date; and each party shall have received a certificate of
an executive officer of each such party to that effect;
(b) This Agreement, the Related Agreements and the transactions
contemplated hereby and thereby shall have been approved by the affirmative
vote of a majority of the ATLANTIC Common Shares and the SCG shareholders'
Approval shall have been obtained;
(c) The ATLANTIC Registration Statement and the SCG Warrant Registration
Statement shall each have become effective in accordance with the
provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
for that purpose shall have been initiated or threatened by the Commission;
(d) ATLANTIC and SCG shall have received a study from Arthur Andersen LLP
or another nationally recognized independent certified public accounting
firm concluding that the accumulated earnings and profits for the SCG
Subsidiaries as of December 31, 1996 and the projected earnings and profits
of the SCG Subsidiaries for the period beginning January 1, 1997 and ending
on the Merger Closing date are in the aggregate less than $5,000,000;
(e) Each of ATLANTIC and SCG shall have received a favorable opinion of
Mayer, Brown & Platt (substantially in the form set forth in Exhibit VIII
hereto) to the effect that the mergers described in Section 2.1 each will
qualify as a reorganization within the meaning of Section 368 of the Code
and that each of ATLANTIC, the SCG Subsidiaries, and the subsidiary of
ATLANTIC that shall be the surviving corporation in such mergers will be a
party to the reorganization within the meaning of Section 368(b) of the
Code will constitute a transaction subject to the reorganization provisions
of the Code and related provisions;
(f) ATLANTIC and SCG shall have received (i) an opinion from Mayer, Brown
& Platt (substantially in the form set forth in Exhibit VIII hereto) that
the performance of this Agreement will not jeopardize the status of
ATLANTIC as a "real estate investment trust" under the Code or (ii) a
favorable ruling from the Internal Revenue Service to the effect that the
Warrant Issuance will be respected for federal income tax purposes as a
direct issuance of the SCG Warrants by SCG to the shareholders of ATLANTIC
and an opinion from Mayer, Brown & Platt (substantially in the form set
forth in Exhibit VIII hereto) that the performance of this Agreement will
not jeopardize the status of ATLANTIC as a "real estate investment trust"
under the Code;
I-22
<PAGE>
(g) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the
transactions contemplated by this Agreement and the Related Agreements
shall have been issued and remain in effect (each party agreeing to use its
best efforts to have any such injunction, order or decree lifted);
(h) All governmental consents, orders and approvals legally required for
the consummation of the transactions contemplated by this Agreement and the
Related Agreements shall have been obtained and be in effect at the Merger
Closing (including ATLANTIC Required Statutory Approvals and SCG Required
Statutory Approvals), and all consents, orders and approvals legally
required for the consummation of the transactions contemplated by this
Agreement and the Related Agreements shall have been obtained;
(i) Each of the parties shall have acquired all material consents
required from third parties necessary to consummate the transactions
contemplated by this Agreement;
(j) All agreements set forth on Schedule 7.1 shall have been terminated
effective as of the Closing; and
(k) SCG shall have forgiven all indebtedness owing to it from each SCG
Subsidiary.
Section 7.2 Conditions to Obligations of ATLANTIC. Unless waived by
ATLANTIC, the obligation of ATLANTIC to effect the transactions contemplated
hereby and by the Related Agreements shall be subject to the fulfillment at or
prior to the Merger Closing of the following additional conditions:
(a) The Special Committee of the ATLANTIC Board (the "ATLANTIC Special
Committee") shall have received from J.P. Morgan Securities Inc., or
another investment banking firm satisfactory to the ATLANTIC Special
Committee, a written opinion to the effect that, as of the date of the
Proxy Statement and the SCG Warrant Prospectus, the consideration to be
received in the transactions contemplated by this Agreement and by the
Related Agreements is fair, from a financial point of view, to ATLANTIC and
its shareholders (other than SCG), and such opinion shall not have been
withdrawn, revoked or modified;
(b) SCG shall have executed and delivered to ATLANTIC an Amended and
Restated ATLANTIC Investor Agreement substantially in the form of Exhibit
IV hereto;
(c) SCG shall have executed and delivered to ATLANTIC an Administrative
Services Agreement substantially in the form of Exhibit V hereto;
(d) SCG Realty Services Incorporated shall have distributed all of the
outstanding shares of the Property Manager to its sole shareholder;
(e) SCG shall have executed and delivered to ATLANTIC a License Agreement
with respect to the name "Security Capital" substantially in the form of
Exhibit VI hereto;
(f) SCG shall have executed and delivered to ATLANTIC the Protection of
Business Agreement substantially in the form of Exhibit VII hereto;
(g) ATLANTIC shall have received a "comfort letter" from the independent
public accountants of SCG, dated as of the effective date of the SCG
Warrant Registration Statement, with respect to financial information of
SCG included or incorporated by reference in the Proxy Statement and the
SCG Warrant Registration Statement in form and substance reasonably
satisfactory to ATLANTIC and customary in scope and substance for "comfort
letters" delivered by independent public accountants in connection with
registration statements and proxy statements;
(h) The SCG Warrants to be issued pursuant to the Warrant Issuance shall
have been authorized, upon official notice of issuance, for listing or
quotation on the Exchange, if any, on which the SCG Class B Common Shares
are authorized for listing or quotation; and
(i) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement and by the
Related Agreements shall have any terms which in the reasonable judgment of
ATLANTIC, when taken together with the terms of all such consents, orders
or approvals, would materially impair the value to ATLANTIC and the
shareholders of ATLANTIC of the
I-23
<PAGE>
transactions contemplated by this Agreement and the Related Agreements
(including, without limitation, the value of the SCG Warrants to be
received by the shareholders of ATLANTIC pursuant to Section 2.2), and no
governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value to ATLANTIC and the shareholders of ATLANTIC of
the transactions contemplated by this Agreement and the Related Agreements
(including, without limitation, the value of the SCG Warrants to be
received by the shareholders of ATLANTIC pursuant to Section 2.2).
Section 7.3 Conditions to Obligations of SCG. Unless waived by SCG, the
obligation of SCG to effect the transactions contemplated hereby and by the
Related Agreements shall be subject to the fulfillment at or prior to the
Merger Closing of the additional following conditions:
(a) The Affiliate Agreements required to be executed and delivered by
affiliates of ATLANTIC pursuant to Section 6.4 shall have been executed and
delivered as required by Section 6.4;
(b) ATLANTIC shall have executed and delivered to SCG an Amended and
Restated ATLANTIC Investor Agreement substantially in the form of Exhibit
IV hereto;
(c) ATLANTIC shall have executed and delivered to SCG an Administrative
Services Agreement substantially in the form of Exhibit V hereto;
(d) ATLANTIC shall have executed and delivered to SCG a License Agreement
with respect to the name "Security Capital" substantially in the form of
Exhibit VI hereto;
(e) SCG shall have received a "comfort letter" from the independent
public accountants of ATLANTIC, dated as of the effective date of the SCG
Warrant Registration Statement, with respect to financial information of
ATLANTIC included or incorporated by reference in the Proxy Statement and
the SCG Warrant Registration Statement in form and substance reasonably
satisfactory to SCG and customary in scope and substance for "comfort
letters" delivered by independent public accountants in connection with
registration statements and proxy statements; and
(f) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement and by the
Related Agreements shall have any terms which in the reasonable judgment of
SCG, when taken together with the terms of all such consents, orders or
approvals, would materially impair the value to SCG of the transactions
contemplated by this Agreement and the Related Agreements (including,
without limitation, the value of the ATLANTIC Common Shares to be received
by SCG pursuant to Section 2.1), and no governmental authority shall have
promulgated any statute, rule or regulation which, when taken together with
all such promulgations, would materially impair the value to SCG and the
shareholders of SCG of the transactions contemplated by this Agreement and
the Related Agreements (including, without limitation, the value of the
ATLANTIC Common Shares to be received by SCG pursuant to Section 2.1).
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination. This Agreement may be terminated at any time prior
to the Merger Closing, whether before or after approval by the shareholders of
ATLANTIC and SCG:
(a) by mutual consent of each of the parties hereto;
(b) unilaterally by either of the parties hereto, so long as such party
has not breached any of its obligations hereunder (except for such breaches
as are immaterial), if the transactions contemplated hereby shall not have
been consummated on or before December 31, 1997 (the "Termination Date");
(c) unilaterally by either of the parties hereto (i) if the other party
(A) fails to perform any covenant or agreement in this Agreement in any
material respect, and does not cure the failure, in all material respects
within 15 business days after the terminating party delivers written notice
of the alleged failure or (B) fails
I-24
<PAGE>
to fulfill or complete a condition to the obligations of the terminating
party (which condition is not waived) by reason of a breach by the non-
terminating party of its obligations hereunder or (ii) if any condition to
the obligations of the terminating party is not satisfied (other than by
reason of a breach by that party of its obligations hereunder), and it
reasonably appears that the condition cannot be satisfied prior to the
Termination Date;
(d) unilaterally by SCG if ATLANTIC, through the ATLANTIC Board or
ATLANTIC Special Committee, either fails to recommend to ATLANTIC's
shareholders the approval of this Agreement and the transactions
contemplated hereby or withdraws, modifies or amends such recommendation;
and
(e) unilaterally by ATLANTIC if SCG, through the SCG Board, either fails
to recommend to SCG's shareholders the approval of this Agreement and the
transactions contemplated hereby or withdraws, modifies or amends such
recommendation.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement, as provided in Section 8.1, this Agreement shall forthwith become
void, and there shall be no further obligation on the part of any party hereto
or their respective officers or directors or (except as set forth in this
Section 8.2 and in Sections 6.6 and 6.11 and Article IX, which shall survive
such termination). Nothing in this Section 8.2 shall relieve any party from
liability for any breach of this Agreement. Upon any termination pursuant to
Section 8.1(d), ATLANTIC shall pay to SCG all of the documented, out-of-pocket
expenses incurred by SCG after the date hereof in connection with the
transactions contemplated by this Agreement. Upon any termination pursuant to
Section 8.1(e), SCG shall pay to ATLANTIC all of the documented, out-of-pocket
expenses incurred by ATLANTIC after the date hereof in connection with the
transactions contemplated by this Agreement.
Section 8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and in
compliance with applicable law; provided, however, this Agreement may not be
amended in any material respect following the ATLANTIC Shareholders' Approval
or SCG Shareholders' Approval.
Section 8.4 Waiver. At any time prior to the Merger Closing, each party
hereto may (a) extend the time for the performance of any of the obligations
or other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein except ATLANTIC Shareholders' Approval or the SCG
Shareholders' Approval. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE IX
SURVIVAL AND REMEDY; INDEMNIFICATION
Section 9.1 Indemnification. Each party hereto agrees to indemnify (each an
"Indemnifying Party") the other party hereto and each of such other party's
affiliates (each an "Indemnified Party" and collectively, the "Indemnified
Parties") against, and agrees to hold it and them harmless from, any and all
liabilities, losses, costs, damages, penalties or expenses (including, without
limitation, reasonable attorneys' fees and expenses and costs of investigation
and litigation) (collectively, "Losses") incurred or suffered by an
Indemnified Party arising out of or in connection with any breach of, or
inaccuracy in, (i) to the extent SCG is the Indemnifying Party, any of the
representations and warranties or agreements of SCG under this Agreement and
(ii) to the extent ATLANTIC is the Indemnifying Party, the representations and
warranties of the ATLANTIC set forth in Section 3.3 and Section 3.4(a) of this
Agreement. In addition, SCG agrees to indemnify ATLANTIC and each of
ATLANTIC's affiliates (other than SCG, but including, after the Merger
Closing, the surviving corporation in the merger pursuant to Section 2.1)
(ATLANTIC and such included affiliates being included within the terms
"Indemnified Party" and "Indemnified Parties" as used in the other sections of
this Article IX) against, and agrees to hold it and them harmless from, any
and all Losses incurred or suffered by it or them arising out of or in
connection with (X) any breach of, or inaccuracy in, any of the
representations and warranties of ATLANTIC set forth in this Agreement other
than those set forth in Section 3.3 or Section 3.4(a), (Y) any acts or
omissions
I-25
<PAGE>
of either of the SCG Subsidiaries in their respective capacities as REIT
Manager and Property Manager prior to the Merger Closing, but only to the
extent that such breach, inaccuracy, act, or omission arises out of or results
from the gross negligence, bad faith, or willful misconduct of either SCG
Subsidiary or (Z) any income tax liabilities arising pursuant to Treasury
Regulations section 1.1502-6 or any analogous state or local tax provisions.
Section 9.2 Limitation of Indemnification. An Indemnified Party shall not be
entitled to indemnification under this Article IX until the aggregate of all
Losses with respect to which such Indemnified Party would otherwise be
entitled to indemnification under this Article IX exceeds $250,000, in which
event the Indemnified Party shall be entitled to all such Losses including
such $250,000; provided, however, that none of the indemnification obligations
hereunder (other than for Losses arising in connection with a breach of the
representations and warranties set forth in Section 4.8 or under clause (Z) of
Section 9.1) shall exceed the Fair Market Value of the ATLANTIC Common Shares
received by SCG pursuant to Section 2.1.
Section 9.3 Notice of Claims; Assumption of Defense. The Indemnified Party
shall give prompt notice to the Indemnifying Party, in accordance with the
terms of Section 10.1 and in the case of a tax inquiry in compliance with the
terms of Section 6.14(e), of the assertion of any claim, or the commencement
of any suit, action or proceeding by any party in respect of which indemnity
may be sought hereunder, specifying with reasonable particularity the basis
therefor and giving the Indemnifying Party such information with respect
thereto as the Indemnifying Party may reasonably request. The Indemnifying
Party may, at its own expense, (a) participate in and (b) upon notice to the
Indemnified Party and upon the Indemnifying Party's written agreement that the
Indemnified Party is entitled to indemnification pursuant to Section 9.1 for
Losses arising out of such claim, suit, action or proceeding, at any time
during the course of any such claim, suit, action or proceeding, assume the
defense thereof; provided that (x) the Indemnifying Party's counsel is
reasonably satisfactory to the Indemnified Party and (y) the Indemnifying
Party shall thereafter consult with the Indemnified Party upon its reasonable
request from time to time with respect to such claim, suit, action or
proceeding; provided, however, that the Indemnified Party shall have the right
to retain its own counsel, with the reasonable fees and expenses to be paid by
the Indemnifying Party, if the Indemnified Party reasonably believes that
representation of it by the counsel retained by the Indemnifying Party would
be inappropriate due to actual or potential differing interest between the
Indemnified Party and any other party represented by such counsel in such
proceeding. If the Indemnifying Party assumes such defense, the Indemnified
Party shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party. Whether or not the Indemnifying Party
chooses to defend or prosecute any such claim, suit, action or proceeding, all
of the parties hereto shall cooperate in the defense or prosecution thereof.
Section 9.4 Settlement or Compromise. Any settlement or compromise made or
caused to be made by the Indemnified Party or the Indemnifying Party, as the
case may be, of any claim, suit, action or proceeding of the kind referred to
in Section 9.3 shall also be binding upon the Indemnifying Party or the
Indemnified Party, as the case may be, in the same manner as if a final
judgment or decree had been entered by a court of competent jurisdiction in
the amount of such settlement or compromise. No party shall settle or
compromise any such claim, suit, action or proceeding without the prior
written consent of the other party, which shall not be unreasonably withheld.
Section 9.5 Failure of Indemnifying Party to Act. In the event that the
Indemnifying Party does not elect to assume the defense of any claim, suit,
action or proceeding within a reasonable time of being notified by the
Indemnified Party, then any failure of the Indemnified Party to defend or to
participate in the defense of any such claim, suit, action or proceeding or to
cause the same to be done, shall not relieve the Indemnifying Party of its
obligations hereunder.
Section 9.6 Survival. The indemnification provided by this Article IX shall
be a continuing right to indemnification and shall survive the closing of the
transactions contemplated hereby and the expiration or termination of this
Agreement (i) for a period of two years following the Merger Closing with
respect to any indemnification not in connection with a breach of the
representations and warranties set forth in Section 4.8 and clause (Z) of
Section 9.1 and (ii) until the expiration of the statute of limitations (as it
may be extended) with
I-26
<PAGE>
respect to each tax year or period pertinent to the representations and
warranties set forth in Section 4.8 and clause (Z) of Section 9.1 with respect
to any indemnification in connection with a breach thereof; and the
Indemnified Party shall be entitled to bring an action thereon only if the
Indemnified Party has given the Indemnifying Party written notice within such
two-year period, or statute-of-limitations period, as the case may be.
Section 9.7 Waiver of Counterclaims for Indemnification. If and to the
extent that SCG, by virtue of being an Indemnifying Party hereunder, would
have a claim against any Indemnified Party for indemnification against Losses
under the REIT Management Agreement or Property Management Agreement, SCG
hereby waives and forever releases the Indemnified Parties from any such
claim.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent via a
recognized overnight courier with delivery confirmed in writing or sent via
facsimile to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) If to ATLANTIC, to:
Security Capital Atlantic Incorporated
Six Piedmont Center
Atlantic, Georgia 30305
Attention: Constance B. Moore
Fax: (404) 233-2379
with copies to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Edward J. Schneidman
Fax: (312) 701-7711
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, NW
Washington, D.C. 20004
Attention: J. Warren Gorrell, Jr.
Fax: (202) 657-5910
(b) If to SCG, to:
Security Capital Group Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attention: Jeffrey A. Klopf
Fax: (505) 988-8920
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Edward J. Schneidman
Fax: (312) 701-7711
I-27
<PAGE>
Section 10.2 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 10.3 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and thereof; (b) shall not be assigned by operation of law or
otherwise; and (c) shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Maryland (without
giving effect to the provisions thereof relating to conflicts of law).
Section 10.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 10.5 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 10.6 No Presumption Against Drafter. Each of the parties hereto has
jointly participated in the negotiation and drafting of this Agreement. In the
event of an ambiguity or a question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by each of the parties
hereto and no presumptions or burdens of proof shall arise favoring any party
by virtue of the authorship of any of the provisions of this Agreement.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
Security Capital Atlantic
Incorporated
/s/ Constance B. Moore
By: _________________________________
Constance B. Moore
Co-Chairman
Security Capital Group Incorporated
/s/ Jeffrey A. Klopf
By: _________________________________
Jeffrey A. Klopf
Senior Vice President
I-28
<PAGE>
ANNEX II
SECURITY CAPITAL ATLANTIC INCORPORATED
1997 LONG-TERM INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SECTION 1................................................................... 1
GENERAL................................................................... 1
1.1. Purpose........................................................... 1
1.2. Participation..................................................... 1
SECTION 2................................................................... 1
OPTIONS................................................................... 1
2.1. Definition........................................................ 1
2.2. Eligibility....................................................... 1
2.3. Price............................................................. 2
2.4. Exercise.......................................................... 2
2.5. Post-Exercise Limitations......................................... 2
2.6. Expiration Date................................................... 3
SECTION 3................................................................... 3
DIVIDEND EQUIVALENT UNITS................................................. 3
3.1. Award of Dividend Equivalent Units................................ 3
3.2. Terms and Conditions of Dividend Equivalent Units................. 3
SECTION 4................................................................... 4
SHARE PURCHASE PROGRAM.................................................... 4
4.1. Purchase of Shares................................................ 4
4.2. Matching Shares and Options....................................... 4
4.3. Restrictions on Shares............................................ 4
4.4. Purchase Loans.................................................... 4
SECTION 5................................................................... 5
SHARE AWARDS.............................................................. 5
5.1. Definition........................................................ 5
5.2. Eligibility....................................................... 5
5.3. Terms and Conditions of Awards.................................... 5
SECTION 6................................................................... 5
OPERATION AND ADMINISTRATION.............................................. 5
6.1. Effective Date.................................................... 5
6.2. Shares Subject to Plan............................................ 6
6.3. Individual Limits on Awards....................................... 6
6.4. Adjustments to Shares............................................. 6
6.5. Change in Control................................................. 7
6.6. Limit on Distribution............................................. 8
6.7. Liability for Cash Payments....................................... 9
6.8. Performance-Based Compensation.................................... 9
6.9. Withholding....................................................... 9
6.10. Transferability................................................... 9
6.11. Notices........................................................... 9
6.12. Form and Time of Elections........................................ 9
6.13. Agreement With Company............................................ 9
6.14. Limitation of Implied Rights...................................... 10
6.15. Evidence.......................................................... 10
6.16. Action by Company or Related Company.............................. 10
6.17. Gender and Number................................................. 10
6.18. Applicable Law.................................................... 10
</TABLE>
II-i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 7................................................................... 10
COMMITTEE................................................................. 10
7.1. Administration.................................................... 10
7.2. Selection of Committee............................................ 10
7.3. Powers of Committee............................................... 10
7.4. Delegation by Committee........................................... 11
7.5. Information to be Furnished to Committee.......................... 11
7.6. Liability and Indemnification of Committee........................ 11
SECTION 8................................................................... 11
AMENDMENT AND TERMINATION................................................. 11
</TABLE>
II-ii
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
1997 LONG-TERM INCENTIVE PLAN
SECTION 1
GENERAL
1.1. Purpose. The Security Capital Atlantic Incorporated 1997 Long-Term
Incentive Plan (the "Plan") has been established by Security Capital Atlantic
Incorporated (the "Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants (as defined in subsection 1.2), by means of
appropriate incentives, to achieve long-range goals;
(c) provide incentive compensation opportunities that are competitive
with those of other corporations and real estate investment trusts; and
(d) further identify Participants' interests with those of the Company's
other shareholders through compensation that is based on the value of the
Company's common shares;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term shareholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as
that term is defined in section 424(f) of the Internal Revenue Code of 1986,
as amended (the "Code")), with respect to the Company or any affiliate of the
Company which is designated as a Related Company by the Committee.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Committee (as described in Section 7) shall determine and designate, from time
to time, from among the Eligible Individuals (as defined below), those persons
who will be granted one or more awards under Sections 2, 3, 4 or 5 of the Plan
(an "Award"), and thereby become "Participants" in the Plan. In the discretion
of the Committee, and subject to the terms of the Plan, a Participant may be
granted any Award permitted under the provisions of the Plan, and more than
one Award may be granted to a Participant. Except as otherwise agreed by the
Company and the Participant, or except as otherwise provided in the Plan, an
Award under the Plan shall not affect any previous Award under the Plan or an
award under any other plan maintained by the Company or the Related Companies.
For purposes of the Plan, the term "Eligible Individual" shall mean any
employee of the Company or a Related Company; provided, however, that a member
of the Board of Directors of the Company (the "Board") who is not an employee
of the Company or a Related Company shall not be an "Eligible Individual".
SECTION 2
OPTIONS
2.1. Definitions. The grant of an "Option" under this Section 2 entitles the
Participant to purchase common shares of beneficial interest of the Company
("Shares") at a price fixed at the time the Option is granted, subject to the
terms of this Section. Options granted under this Section may be either
Incentive Share Options or Non-Qualified Share Options, as determined in the
discretion of the Committee. An "Incentive Share Option" is an Option that is
intended to satisfy the requirements applicable to an "incentive stock option"
described in section 422 of the Code. A "Non-Qualified Share Option" is an
Option that is not intended to be an Incentive Share Option.
2.2. Eligibility. The Committee shall designate the Participants to whom
Options are to be granted under this Section and shall determine the number of
Shares subject to each such Option. If the Committee grants
II-1
<PAGE>
Incentive Share Options, to the extent that the aggregate fair market value of
Shares with respect to which Incentive Share Options are exercisable for the
first time by any individual during any calendar year (under all plans of the
Company and all related companies within the meaning of section 424(f) of the
Code) exceeds $100,000, such options shall be treated as Non-Qualified Share
Options, to the extent required by section 422 of the Code.
2.3. Price. The determination and payment of the purchase price of a Share
under each Option granted under this Section shall be subject to the
following:
(a) The purchase price shall be established by the Committee at the time
the Option is granted; provided, however, that in no event shall such price
be less than the par value of a Share on such date; further, provided, in
no event shall the purchase price of a Share under an Incentive Share
Option be less than the Fair Market Value (defined below) of a Share at the
time the Option is granted.
(b) Subject to the following provisions of this subsection, the full
purchase price of each Share purchased upon the exercise of any Option
shall be paid at the time of such exercise (or such later date as may be
permitted by the Committee in the case of a cashless exercise) and, as soon
as practicable thereafter, a certificate representing the Shares so
purchased shall be delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or in Shares (valued at
Fair Market Value as of the day of exercise) that have been held by the
Participant at least six months, or in any combination thereof, as
determined by the Committee.
(d) The "Fair Market Value" of a Share as of any date shall be determined
in accordance with the following rules:
(i) If the Shares are at the time listed or admitted to trading on
any stock exchange, then the Fair Market Value shall be the average of
the highest and lowest sales price per Share on such date on the
principal exchange on which the Shares are then listed or admitted to
trading or, if no such sale is reported on that date, on the last
preceding date on which a sale was so reported.
(ii) If the Shares are not at the time listed or admitted to trading
on a stock exchange, the Fair Market Value shall be the average of the
lowest reported bid price and highest reported asked price of the
Shares on the date in question in the over-the-counter market, as such
prices are reported in a publication of general circulation selected by
the Committee and regularly reporting the market price of Shares in
such market.
(iii) If the Shares are not listed or admitted to trading on any
stock exchange or traded in the over-the-counter market, the Fair
Market Value shall be as determined by the Committee in good faith.
(iv) For purposes of determining the Fair Market Value of Shares that
are sold pursuant to a cashless exercise program, Fair Market Value
shall be the price at which such Shares are sold.
2.4. Exercise. Except as otherwise expressly provided in the Plan, an Option
granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
(a) The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service (subject
to paragraph (b) below), achievement of performance standards prior to
exercise of the Option or the achievement of Share ownership objectives by
the Participant. The Committee, in its sole discretion, may accelerate the
vesting of any Option under circumstances designated by it at the time the
Option is granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date
(as defined in subsection 2.6) applicable to that Option.
2.5. Post-Exercise Limitations. The Committee, in its discretion, may impose
such restrictions on Shares acquired pursuant to the exercise of an Option as
it determines to be desirable, including, without limitation, restrictions
relating to disposition of the shares and forfeiture restrictions based on
service, performance, Share ownership by the Participant and such other
factors as the Committee determines to be appropriate.
II-2
<PAGE>
2.6. Expiration Date. The "Expiration Date" with respect to an Option means
the date established as the Expiration Date by the Committee at the time of
the grant; provided, however, that unless determined otherwise by the
Committee, the Expiration Date with respect to any Option shall not be later
than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death,
Disability or Retirement, the one-year anniversary of such Date of
Termination; or
(c) if the Participant's Date of Termination occurs for reasons other
than Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the
period in which the reason for the cessation of services is a leave of absence
approved by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in the material and substantial duties of his regular
occupation, which condition is expected to be permanent. "Retirement" of a
Participant shall mean the occurrence of a Participant's Date of Termination
after providing at least five years of service to the Company or the Related
Companies and attaining age 60.
SECTION 3
DIVIDEND EQUIVALENT UNITS
3.1. Award of Dividend Equivalent Units. Unless determined otherwise by the
Committee, a Participant who is awarded an Option under the Plan (other than a
matching Option awarded under subsection 4.2) shall also be entitled to
receive "Dividend Equivalent Units" with respect to such Option, as follows:
(a) Annual crediting of Dividend Equivalent Units. As of the last day of
each calendar year, each Participant shall be credited with a number of
Dividend Equivalent Units equal to (i) the amount the Committee determines
to be the average dividend yield per Share for such calendar year, reduced
by the amount that the Committee determines to be the S&P 500 average
dividend yield for such year, multiplied by (ii) the number of Shares
underlying the Participant's outstanding Options that are entitled to
Awards under this Section 3 during such calendar year (reduced pro rata to
reflect Shares underlying such Options that were not outstanding on the
record date with respect to each dividend payment date during such year).
(b) Additional credits to reflect dividend payments on Dividend
Equivalent Units. As of the last day of each calendar year, each
Participant shall be credited with additional Dividend Equivalent Units
equal to (i) the amount the Committee determines to be the average dividend
yield per Share for such calendar year, multiplied by (ii) the number of
Dividend Equivalent Units outstanding during such calendar year (reduced
pro rata to reflect Dividend Equivalent Units that were not outstanding on
each dividend payment date during such year).
3.2. Terms and Conditions of Dividend Equivalent Units. Unless determined
otherwise by the Committee, Dividend Equivalent Units shall be subject to the
following terms and conditions:
(a) Dividend Equivalent Units shall vest in accordance with the vesting
schedule applicable to the Option with respect to which the Dividend
Equivalent Unit was awarded.
(b) Each vested Dividend Equivalent Unit shall entitle the holder thereof
to a Share on the last day of the calendar year in which occurs the first
of (i) the date the Participant exercises the Option with respect to which
the Dividend Equivalent Unit was awarded, or (ii) the date such Option
expires by its terms (whether
II-3
<PAGE>
by reason of termination of employment or otherwise); provided, however,
prior to the date the Shares would otherwise be payable, to the extent
permitted by the Committee, a Participant may irrevocably elect to defer
receipt of such Shares until the last date of a later calendar year, but in
no event later than the last day of the calendar year in which occurs the
tenth anniversary of the grant of the underlying Option. Any such deferral
election shall be made in such form and at such times as the Committee may
determine and shall be subject to such other terms, conditions and
limitations as the Committee may establish.
(c) All Dividend Equivalent Units which are not vested upon the
Participant's Date of Termination shall be forfeited.
(d) Settlement of all Dividend Equivalent Units shall be made in the form
of whole Shares. Any fractional Shares shall be settled in cash.
SECTION 4
SHARE PURCHASE PROGRAM
4.1. Purchase of Shares. The Committee may, from time to time, establish one
or more programs under which Participants will be permitted to purchase Shares
under the Plan and shall designate the Participants eligible to participate
under such Share purchase programs. The purchase price for Shares available
under such programs, and other terms and conditions of such programs, shall be
established by the Committee, provided that the purchase price may not be less
than par value.
4.2. Matching Shares and Options. Except as otherwise provided in subsection
4.1, any Share purchase program established by the Committee under this
Section may provide for the award of matching Shares or Options in the amount,
if any, determined by the Committee.
4.3. Restrictions on Shares. The Committee may impose such restrictions with
respect to Shares purchased under subsection 4.1, or matching Shares or
Options awarded pursuant to subsection 4.2, as the Committee determines to be
appropriate. Such restrictions may include, without limitation, restrictions
of the type that may be imposed with respect to Share Awards under Section 5.
4.4. Purchase Loans. In connection with the purchase of Shares under this
Section 4, the Committee, in its sole discretion, may determine that the
Company shall, at the Participant's election, make a loan (a "Loan") to the
Participant for all or a portion of the purchase price of the Shares
purchased. The Loan may be used only for the purpose of financing the
purchase, subject to the following:
(a) Each Loan shall be evidenced by a promissory note and pledge
agreement in such form as the Committee shall approve; provided, that the
note shall (i) provide full recourse to the Participant, (ii) provide for
interest at a rate to be determined by the Committee, (iii) be secured,
pursuant to a pledge agreement, by the purchased Shares, and (iv) comply
with all applicable laws, regulations and rules of the Board of Governors
of the Federal Reserve System and any other governmental agency having
jurisdiction.
(b) Each Loan shall provide for a term of no more than 10 years.
(c) All principal and interest outstanding under a Loan with respect to
any Participant will automatically become due and payable (i) 90 days after
the date the Participant terminates employment with the Company and Related
Companies for any reason other than death, Disability, Retirement or Cause
provided such termination is not following a Change in Control (ii) 365
days after the date on which the Participant's employment with the Company
and Related Companies terminates by reason of death, Disability or
Retirement, (iii) 180 days after the Participant's employment with the
Company and Related Companies terminates following a Change in Control of
the Company for reasons other than Cause, or (iv) immediately upon a sale
of the Shares which are pledged as collateral for the loan or if the
Participant's employment with the Company and Related Companies is
terminated for Cause.
(d) Each Loan shall contain such other terms, conditions and limitations
as may be determined by the Committee in its sole discretion.
II-4
<PAGE>
SECTION 5
SHARE AWARDS
5.1 Definition. Subject to the terms of this Section, a Share Award under
the Plan is a grant of Shares to a Participant, the earning, vesting or
distribution of which is subject to one or more conditions established by the
Committee. Such conditions may relate to events (such as performance or
continued employment) occurring before or after the date the Share Award is
granted, or the date the Shares are earned by, vested in or delivered to the
Participant. If the vesting of Share Awards is subject to conditions occurring
after the date of grant, the period beginning on the date of grant of a Share
Award and ending on the vesting or forfeiture of such Shares (as applicable)
is referred to as the "Restricted Period". To the extent that the vesting of a
Share Award is contingent on performance, the performance shall be measured
over a period of not less than one year. Share Awards may provide for delivery
of the shares of Shares at the time of grant or may provide for a deferred
delivery date. A Share Award may, but need not, be made in conjunction with a
cash-based incentive compensation program maintained by the Company and may,
but need not, be in lieu of cash otherwise awardable under such program.
5.2 Eligibility. The Committee shall designate the Participants to whom
Share Awards are to be granted and the number of Shares that are subject to
each such Award.
5.3 Terms and Conditions of Awards. Share Awards granted to Participants
under the Plan shall be subject to the following terms and conditions:
(a) Beginning on the date of grant (or, if later, the date of
distribution) of Shares comprising a Share Award, and including any
applicable Restricted Period, the Participant as owner of such Shares shall
have the right to vote such Shares.
(b) Payment of dividends with respect to Share Awards shall be subject to
the following:
(i) On and after the date that a Participant has a fully earned and
vested right to the Shares comprising a Share Award and the Shares have
been distributed to the Participant, the Participant shall have all
dividend rights (and other rights) of a shareholder with respect to
such Shares.
(ii) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Share Award, the Committee, in
its sole discretion, may award Dividend Rights with respect to such
shares.
(iii) On and after the date that a Participant has a fully earned and
vested right to the Shares comprising a Share Award, but before the
Shares have been distributed to the Participant, the Participant shall
be entitled to Dividend Rights with respect to such Shares, at the time
and in the form determined by the Committee.
(iv) A "Dividend Right" with respect to shares comprising a Share
Award shall entitle the Participant, as of each dividend payment date,
to an amount equal to the dividends payable with respect to a Share
multiplied by the number of such Shares. Dividend Rights shall be
settled in cash or in Shares valued at Fair Market Value as of the date
of settlement, as determined by the Committee, shall be payable at the
time determined by the Committee and shall be subject to such other
terms and conditions as the Committee may determine.
SECTION 6
OPERATION AND ADMINISTRATION
6.1 Effective Date. The Plan shall be effective as of the date it is adopted
by the Board; provided, however, that Awards granted under the Plan prior to
its approval by shareholders will be contingent on approval of the Plan by the
Company's shareholders. The Plan shall be unlimited in duration and, in the
event of Plan
II-5
<PAGE>
termination, shall remain in effect as long as any Shares awarded under it are
outstanding and not fully vested; provided, however, that no new Awards shall
be made under the Plan on or after the tenth anniversary of the date on which
the Plan is adopted by the Board.
6.2. Shares Subject to Plan. The Shares with respect to which Awards may be
made under the Plan shall be shares currently authorized but unissued or
currently held or subsequently acquired by the Company as treasury shares,
including shares purchased in the open market or in private transactions.
Subject to the provisions of subsection 6.4, the number of Shares which may be
issued with respect to Awards under the Plan shall not exceed 3,000,000 Shares
in the aggregate. Except as otherwise provided herein, any Shares subject to
an Award which for any reason expires or is terminated without issuance of
Shares (including Shares that are not issued because they are withheld to
satisfy tax withholding) shall again be available under the Plan.
6.3. Individual Limits on Awards. Notwithstanding any other provision of the
Plan to the contrary, no Participant shall receive any Award of an Option
under the Plan to the extent that the sum of:
(a) the number of Shares subject to such Award;
(b) the number of Shares subject to all other prior Awards of Options
under the Plan during the one-year period ending on the date of the Award;
and
(c) the number of Shares subject to all other prior share options granted
to the Participant under other plans or arrangements of the Company during
the one-year period ending on the date of the Award;
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the Shares subject to the Awards at the time of grant, regardless of
when the Awards become exercisable. Subject to the provisions of subsection
6.4, a Participant's "Individual Limit" shall be 500,000 Shares.
6.4. Adjustments to Shares.
(a) If the Company shall effect any subdivision or consolidation of Shares
or other capital readjustment, payment of stock dividend, stock split,
combination of shares or recapitalization or other increase or reduction of
the number of Shares outstanding without receiving compensation therefor in
money, services or property, then the Committee shall equitably adjust (i) the
number of Shares available under the Plan; (ii) the number of shares available
under any individual or other limits; (iii) the number of Shares subject to
outstanding Awards; and (iv) the per-share price under any outstanding Award
to the extent that the Participant is required to pay a purchase price per
share with respect to the Award.
(b) If the Company 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 the Company
receive any shares of stock or other securities or property, or the Company
shall distribute securities of another corporation to its shareholders, there
shall be substituted for the shares subject to outstanding Awards an
appropriate number of shares of each class of stock or amount of other
securities or property which were distributed to the shareholders of the
Company in respect of such shares, subject to the following:
(i) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would not be
fully consistent with the purposes of the Plan or the purposes of the
outstanding Awards under the Plan, the Committee may make such other
adjustments to the Awards to the extent that the Committee determines such
adjustments are consistent with the purposes of the Plan and of the
affected Awards.
(ii) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable transaction, but
only if the Committee gives reasonable advance notice of the cancellation
to each affected Participant, and only if either: (A) the Participant is
permitted to exercise all Awards that will be cancelled (without regard to
whether such Awards would otherwise be exercisable) for a reasonable period
prior to the effective date of the cancellation; or (B) the Participant
receives payment or other benefits that the Committee determines to be
reasonable compensation for the value of all cancelled Awards (without
regard to whether such Awards would otherwise be vested).
II-6
<PAGE>
(iii) Upon the occurrence of a reorganization of the Company or any other
event described in this paragraph (b), any successor to the Company shall
be substituted for the Company to the extent that the Company and the
successor agree to such substitution.
(c) Upon (or, in the discretion of the Committee, immediately prior to) the
sale to (or exchange with) a third party unrelated to the Company of all or
substantially all of the assets of the Company, all Awards shall be cancelled.
If Awards are cancelled under this paragraph, 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 all
Awards that will be cancelled (without regard to whether such Awards would
otherwise be exercisable) for a reasonable period prior to the effective
date of the cancellation; or
(ii) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value of all
cancelled Awards (without regard to whether such cancelled Awards would
otherwise be vested).
The foregoing provisions of this paragraph shall also apply to the sale of all
or substantially all of the assets of the Company to a related party, if the
Committee determines such application is appropriate. Notwithstanding the
foregoing provisions of this paragraph (c), in lieu of cancellation of
outstanding Awards, the Committee and the purchaser of all or substantially
all of the Company's assets may provide that an appropriate number of shares
or securities of the purchaser or its affiliates shall be substituted for
Shares with respect to outstanding Awards under the Plan, provided that such
substituted awards shall be comparable in value and contain terms and
conditions similar to the Awards.
(d) In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act in a
manner that it determines to be consistent with the purposes of the Plan and
of the affected Awards and, where applicable or otherwise appropriate, in a
manner that it determines to be necessary to preserve the benefits and
potential benefits of the affected Awards for the Participants and the
Company.
(e) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations
or other changes in the Company's capital structure or its business, any
merger or consolidation of the Company, any issue of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Company's
Shares or the rights thereof, the dissolution or liquidation of the Company,
any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or
otherwise.
(f) Except as expressly provided by the terms of this Plan, the issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property or for labor or services, either
upon direct sale, upon the exercise of rights or warrants to subscribe
therefor or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof, shall be made with respect to Awards then
outstanding hereunder.
(g) Awards under the Plan are subject to adjustment under this subsection
only during the period in which they are considered to be outstanding under
the Plan. For purposes of this subsection, an Award is considered
"outstanding" on any date if the Participant's ability to obtain all benefits
with respect to the Award is subject to limits imposed by the Plan (including
any limits imposed by the Agreement reflecting the Award). The determination
of whether an Award is outstanding shall be made by the Committee.
6.5. Change in Control. In the event that a Participant's employment is
terminated by the Company or the successor to the Company or an affiliated
entity which is his or her employer for reasons other than Cause following a
Change in Control of the Company (as defined below), all Options and related
Awards which have not otherwise expired shall become immediately exercisable
and all other Awards shall become fully vested. For purposes of the Plan, a
"Change in Control" means the happening of any of the following:
II-7
<PAGE>
(a) the shareholders of the Company approve a definitive agreement to
merge the Company into or consolidate the Company with another entity, sell
or otherwise dispose of all or substantially all of its assets or adopt a
plan of liquidation, provided, however, that a Change in Control shall not
be deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; and provided, further,
that any transaction described in this paragraph (a) with an "Affiliate" of
the Company (as defined in the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) shall not be treated as a Change in Control; or
(b) the "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 50% or more of the combined voting
power of the Company is acquired, other than from the Company, by any
"person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other
than any trustee or other fiduciary holding securities under an employee
benefit or other similar stock plan of the Company) provided, that any
purchase by Security Capital Group Incorporated or any of its affiliates of
securities representing 50% or more of the combined voting power of the
Company shall not be treated as a Change in Control; or
(c) at any time during any period of two consecutive years, individuals
who at the beginning of such period were members of the Board of Directors
of the Company cease for any reason to constitute at least a majority
thereof (unless the election, or the nomination for election by the
Company's shareholders, of each new Director was approved by a vote of at
least two-thirds of the Directors still in office at the time of such
election or nomination who were Directors at the beginning of such period).
If, upon a Change in Control, awards in other shares or securities are
substituted for outstanding Awards pursuant to Section 6.4, and immediately
following the Change in Control the Participant becomes employed by the
entity into which the Company merged, or the purchaser of substantially all
of the assets of the Company, or a successor to such entity or purchaser,
the Participant shall not be treated as having terminated employment for
purposes of this Section 6.5 until such time as the Participant terminates
employment with the merged entity or purchaser (or successor), as
applicable.
For purposes of this subsection, a Participant's employment shall be deemed to
be terminated by the Company or the successor to the Company or an affiliated
entity if the Participant terminates employment after (i) a substantial
adverse alteration in the nature of the Participant's status or
responsibilities from those in effect immediately prior to the Change in
Control, or (ii) a material reduction in the Participant's annual base salary
and target bonus, if any, as in effect immediately prior to the Change in
Control.
6.6. Limit on Distribution. Distribution of Shares or other amounts under
the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any Shares under the Plan or make any other
distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and
16(b) of the Exchange Act, the Committee may, at any time, add such
conditions and limitations to any Award to such Participant, or any feature
of any such Award, as the Committee, in its sole discretion, deems
necessary or desirable to comply with Section 16(a) or 16(b) and the rules
and regulations thereunder or to obtain any exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of Shares, the transfer of such Shares may be effected
on a non-certificated basis, to the extent not prohibited by applicable law
or the rules of any stock exchange.
II-8
<PAGE>
6.7. Liability for Cash Payments. Subject to the provisions of this Section,
each Related Company shall be liable for payment of cash due under the Plan
with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant. Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.
6.8. Performance-Based Compensation. To the extent that the Committee
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the
time an Award is granted, take such steps and impose such restrictions with
respect to such Award as it determines to be necessary to satisfy such
requirements including, without limitation:
(a) The establishment of performance goals that must be satisfied prior
to the payment or distribution of benefits under such Awards.
(b) The submission of such Awards and performance goals to the Company's
shareholders for approval and making the receipt of benefits under such
Awards contingent on receipt of such approval.
(c) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms of
the Plan and Agreement reflecting the Awards have been satisfied.
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the
Plan because the Awards constitute Options, the Committee may, at the time the
Award is granted, conform the Awards to alternative methods of satisfying the
requirements applicable to Performance-Based Compensation.
6.9. Withholding. All Awards and other payments under the Plan are subject
to withholding of all applicable taxes, which withholding obligations may be
satisfied, with the consent of the Committee, through the surrender of Shares
which the Participant already owns or to which a Participant is otherwise
entitled under the Plan; provided, however, previously-owned Shares that have
been held by the Participant less than six months or Shares to which the
Participant is entitled under the Plan may only be used to satisfy the minimum
tax withholding required by applicable law.
6.10. Transferability. Awards under the Plan are not transferable except as
designated by the Participant by will or by the laws of descent and
distribution or, to the extent provided by the Committee, pursuant to a
qualified domestic relations order (within the meaning of the Code and
applicable rules thereunder). To the extent that the Participant who receives
an Award under the Plan has the right to exercise such Award, the Award may be
exercised during the lifetime of the Participant only by the Participant.
Notwithstanding the foregoing provisions of this subsection, the Committee may
permit Awards under the Plan to be transferred to or for the benefit of the
Participant's family (including, without limitation, to a trust or partnership
for the benefit of a Participant's family), subject to such limits as the
Committee may establish. In no event shall an Incentive Share Option be
transferable to the extent that such transferability would violate the
requirements applicable to such option under Code section 422.
6.11. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee may, by advance written notice
to affected persons, revise such notice procedure from time to time. Any
notice required under the Plan (other than a notice of election) may be waived
by the person entitled to notice.
6.12. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.
6.13. Agreement With Company. At the time of an Award to a Participant under
the Plan, the Committee may require a Participant to enter into an agreement
with the Company (the "Agreement") in a form specified
II-9
<PAGE>
by the Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
6.14. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the Plan,
acquire any right in or title to any assets, funds or property of the Company
or any Related Company whatsoever, including, without limitation, any specific
funds, assets, or other property which the Company or any Related Company, in
its sole discretion, may set aside in anticipation of a liability under the
Plan. A Participant shall have only a contractual right to the amounts, if
any, payable under the Plan, unsecured by any assets of the Company and any
Related Company. Nothing contained in the Plan shall constitute a guarantee by
the Company or any Related Company that the assets of such companies shall be
sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no
Award under the Plan shall confer upon the holder thereof any right as a
shareholder of the Company prior to the date on which he fulfills all service
requirements and other conditions for receipt of such rights and Shares are
registered in his name.
6.15. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
6.16. Action by Company or Related Company. Any action required or permitted
to be taken by the Company or any Related Company shall be by resolution of
its board of directors or directors, as applicable, or by action of one or
more members of the board (including a committee of the board) who are duly
authorized to act for the board or (except to the extent prohibited by
applicable law or the rules of any stock exchange) by a duly authorized
officer of the Company.
6.17. Gender and Number. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and
the plural shall include the singular.
6.18. Applicable Law. The provisions of the Plan shall be construed in
accordance with the laws of the State of Maryland, without giving effect to
choice of law principles.
SECTION 7
COMMITTEE
7.1. Administration. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 7.
7.2. Selection of Committee. So long as the Company is subject to section 16
of the Exchange Act, the Committee shall be selected by the Board and shall
consist of not fewer than two members of the Board or such greater number as
may be required for compliance with Rule 16b-3 issued under the Exchange Act,
none of whom shall be eligible to receive Awards under the Plan.
7.3. Powers of Committee. The authority to manage and control the operation
and administration of the Plan shall be vested in the Committee, subject to
the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select individuals to receive Awards, to
determine the time or times of receipt, to determine the types of Awards
and the number of Shares covered by the Awards, to establish the terms,
conditions, performance criteria, restrictions, and other provisions of
such Awards, and to cancel or suspend Awards. In making such Award
determinations, the Committee may take into account the nature of services
rendered by the respective employee, the individual's present and potential
contribution to the Company's success and such other factors as the
Committee deems relevant.
II-10
<PAGE>
(b) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the
Plan will be structured to conform to the requirements applicable to
Performance-Based Compensation, and to take such action, establish such
procedures, and impose such restrictions at the time such Awards are
granted as the Committee determines to be necessary or appropriate to
conform to such requirements.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to
the Plan, to determine the terms and provisions of any agreements made
pursuant to the Plan and to make all other determinations that may be
necessary or advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any Award,
such determination shall be made at the time the Award is made, except that
the Committee may reserve the authority to have such determination made by
the Committee in the future (but only if such reservation is made at the
time the Award is granted and is expressly stated in the Agreement
reflecting the Award).
7.4. Delegation by Committee. Except to the extent prohibited by applicable
law or the rules of any stock exchange or NASDAQ (if appropriate), the
Committee may allocate all or any portion of its responsibilities and powers
to any one or more of its members and may delegate all or any part of its
responsibilities and powers to any person or persons selected by it. Any such
allocation or delegation may be revoked by the Committee at any time.
7.5. Information to be Furnished to Committee. The Company and Related
Companies shall furnish the Committee such data and information as may be
required for it to discharge its duties. The records of the Company and
Related Companies as to an employee's or Participant's employment (or other
provision of services), termination of employment (or cessation of the
provision of services), leave of absence, reemployment and compensation shall
be conclusive on all persons unless determined to be incorrect. Participants
and other persons entitled to benefits under the Plan must furnish the
Committee such evidence, data or information as the Committee considers
desirable to carry out the terms of the Plan.
7.6. Liability and Indemnification of Committee. No member or authorized
delegate of the Committee shall be liable to any person for any action taken
or omitted in connection with the administration of the Plan unless
attributable to his own fraud or willful misconduct; nor shall the Company or
any Related Company be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a Director or
employee of the Company or Related Company. The Committee, the individual
members thereof, and persons acting as the authorized delegates of the
Committee under the Plan, shall be indemnified by the Company against any and
all liabilities, losses, costs and expenses (including legal fees and
expenses) of whatsoever kind and nature which may be imposed on, incurred by
or asserted against the Committee or its members or authorized delegates by
reason of the performance of a Committee function if the Committee or its
members or authorized delegates did not act dishonestly or in willful
violation of the law or regulation under which such liability, loss, cost or
expense arises. This indemnification shall not duplicate but may supplement
any coverage available under any applicable insurance.
SECTION 8
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 6.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the
date such amendment is adopted by the Board.
II-11
<PAGE>
ANNEX III
OPINION OF J.P. MORGAN SECURITIES INC.
August 6, 1997
Special Committee of the Board of Directors
Security Capital Atlantic Incorporated
Six Piedmont Center
Sixth Floor
Atlanta, Georgia 30305
Attention: Ned Holmes
Chairman
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to Security Capital Atlantic Incorporated (the "Company") and its
shareholders (other than Security Capital Group Incorporated ("SCG")) of the
consideration to be received in the proposed transactions (the "Transaction")
contemplated by the Merger and Issuance Agreement, dated as of March 24, 1997,
as amended, (the "Agreement"), between the Company and SCG and by the Related
Agreements (as defined in the Agreement). Pursuant to the Agreement, Security
Capital (Atlantic) Incorporated and SCG Realty Services Atlantic Incorporated
(together, the "Management Companies") will be merged with and into a
subsidiary of the Company, and the Company will issue such number of shares of
its common stock as calculated pursuant to a formula contained in the
Agreement. In addition, SCG will issue to the Company's shareholders such
number of warrants to purchase Class B Common Shares of SCG as calculated
pursuant to a formula contained in the Agreement.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) the
Proxy Statement of the Company and the Prospectus of SCG, with respect to
Transaction (the "Proxy Statement"); (iii) certain information concerning the
business of the Management Companies and the Company and certain publicly
available information concerning certain other companies engaged in businesses
comparable to those of the Management Companies and the Company; (iv) publicly
available terms of certain transactions involving companies comparable to the
Management Companies and the Company and the consideration received in
connection with such transactions; (v) the audited financial statements of the
Company for the fiscal year ended December 31, 1995; and (vi) certain internal
financial analyses and forecasts concerning the Management Companies and the
Company prepared by management of the Management Companies and the Company.
In addition, we have held discussions with certain members of the management
of the Company, SCG and the Management Companies with respect to certain
aspects of the Transaction, the past and current business operations of the
Company and the Management Companies, the financial condition and future
prospects and operations of the Company and the Management Companies, the
effects of the Transaction on the financial condition and future prospects of
the Company, and certain other matters we believed necessary or appropriate to
our inquiry.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Company, SCG and the
Management Companies or otherwise reviewed by us, and we have not assumed any
responsibility or liability therefor. We have not conducted any valuation or
appraisal of any assets or liabilities, nor have any such valuations or
appraisals been provided to us. In relying on financial analyses and forecasts
provided to us, we have assumed that they have been reasonably prepared based
on assumptions reflecting the best currently available estimates and judgments
by management as to the expected future results of operations and financial
condition of the Company and the Management Companies to which such analyses
or forecasts relate. We have
III-1
<PAGE>
also assumed that the Transaction will have the tax consequences described in
the Proxy Statement and in materials furnished to us by representatives of the
Company, and that the other conditions contemplated by the Agreement will be
consummated as described in the Agreement and the Proxy Statement. We have
relied as to all legal matters relevant to rendering our opinion upon the
advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of the date hereof.
It should be understood that subsequent developments may affect this opinion
and that we do not have any obligation to update, revise, or reaffirm this
opinion. We are expressing no opinion herein as to the price at which the
Company's or SCG's securities will trade at any future time.
In addition, we were not requested to and did not provide advice concerning
the structure, the specific amount of the consideration, or any other aspects
of the Transaction, or to provide services other than the delivery of this
opinion. We did not participate in negotiations with respect to the terms of
the Transaction and related transactions. Consequently, we have assumed that
such terms are the most beneficial terms from the Company's perspective that
could under the circumstances be negotiated among the parties to such
transactions.
We will receive a fee from the Company for the delivery of this opinion. We
and our affiliates maintain banking, capital markets, advisory and other
business relationships with the Company and SCG and its affiliates, including
Morgan Guaranty Trust Company of New York acting as the agent bank under the
Company's existing commercial bank facility. In the ordinary course of their
businesses, our affiliates may actively trade the debt and equity securities
of the Company or SCG for their own account or for the accounts of customers
and, accordingly, they may at any time hold long or short positions in such
securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be received in the proposed transactions
contemplated by the Agreement and by the Related Agreements is fair, from a
financial point of view, to the Company and its shareholders (other than SCG).
This letter is provided to the Special Committee of the Board of Directors
of the Company in connection with and for the purposes of its evaluation of
the Transaction. This opinion does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote with respect
to the Transaction. This opinion may not be disclosed, referred to, or
communicated (in whole or in part) to any third party for any purpose
whatsoever except with our prior written consent in each instance. This
opinion may be reproduced in full in any registration statement or proxy or
information statement mailed to shareholders of the Company but may not
otherwise be disclosed publicly in any manner without our prior written
approval and must be treated as confidential.
Very truly yours,
J.P. Morgan Securities Inc.
/s/ Jon Zehner
By: _________________________________
Jon Zehner
Managing Director
III-2
