<PAGE>
================================================================================
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission File Number 1-13355
SECURITY CAPITAL GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 36-3692698
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 Lincoln Avenue, Santa Fe, New Mexico 87501
(Address of principal executive offices) (Zip Code)
(505) 982-9292
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock as of July 31,
1998 was:
Class A Common Shares, $.01 par value--1,526,607 shares
Class B Common Shares, $.01 par value--45,440,862 shares
================================================================================
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
Page
Number(s)
---------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1998 (unaudited) and
December 31, 1997.......................................... 1
Consolidated Statements of Operations - Three and Six months
ended June 30, 1998 and 1997 (unaudited)................... 2
Consolidated Statement of Shareholders' Equity - Six months
ended June 30, 1998 (unaudited)............................ 3
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1997 (unaudited)......................... 4-5
Notes to Consolidated Financial Statements (unaudited)....... 6-17
Report of Independent Public Accountants..................... 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 19-29
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds.................... 30
Item 4. Submission of Matters to a Vote of Security Holders.......... 31
Item 6. Exhibits and Reports on Form 8-K............................. 32
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Investments, at equity:
ProLogis Trust $ 651,303 $ 660,078
Archstone Communities Trust 432,220 432,364
Security Capital Atlantic Incorporated 394,803 399,210
Security Capital U.S. Realty 887,285 909,581
Security Capital Global Realty 192,988 --
Strategic Hotel Capital Incorporated 372,610 196,694
Security Capital Preferred Growth Incorporated 85,037 60,821
---------- ----------
3,016,246 2,658,748
---------- ----------
Real estate, less accumulated depreciation, held by
Homestead Village Incorporated 961,766 709,229
Investments in publicly traded real estate securities, at market value 151,292 129,334
---------- ----------
Total real estate investments 4,129,304 3,497,311
Cash and cash equivalents 20,393 11,454
Other assets 146,686 105,474
---------- ----------
Total assets $4,296,383 $3,614,239
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit $ 301,080 $ 172,808
Mortgage notes payable 319,362 301,606
Convertible debt 323,024 323,024
Long-term debt 499,600 --
Accounts payable and accrued expenses 101,562 73,543
Deferred income taxes 77,267 87,250
---------- ----------
Total liabilities 1,621,895 958,231
Minority interests 140,620 107,135
Shareholders' Equity:
Class A Shares, $.01 par value; 20,000,000 shares authorized;
1,592,265 and 2,045,601 shares issued and outstanding in
1998 and 1997, respectively 16 20
Class B Shares, $.01 par value; 229,861,000 shares authorized;
42,140,884 and 22,627,541 shares issued and outstanding in
1998 and 1997, respectively 421 226
Series A Preferred Shares, $.01 par value; 139,000 shares
issued and outstanding in 1997; stated liquidation
preference of $1,000 per share -- 139,000
Series B Preferred Shares, $.01 par value; 257,642 shares
issued and outstanding in 1998; stated liquidation
preference of $1,000 per share 257,642 --
Additional paid-in capital 2,413,380 2,509,175
Accumulated deficit (137,591) (99,548)
---------- ----------
Total shareholders' equity 2,533,868 2,548,873
---------- ----------
Total liabilities and shareholders' equity $4,296,383 $3,614,239
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME:
Equity in earnings (loss) of:
ProLogis Trust $ 9,633 $10,149 $ 21,332 $ 17,659
Archstone Communities Trust 7,489 10,702 20,723 25,326
Security Capital Atlantic Incorporated 7,135 6,177 14,676 11,964
Security Capital U.S. Realty (35,985) 18,197 (53,935) 35,098
Security Capital Global Realty (1,359) -- (1,359) --
Strategic Hotel Capital Incorporated 249 -- 916 --
Security Capital Preferred Growth
Incorporated 172 -- 630 --
Services Division revenues from related parties 30,522 30,664 48,309 57,943
Homestead Village room revenue 34,067 13,547 61,238 24,499
Increase (decrease) in appreciation of
investments (8,545) 3,532 (9,379) 3,361
Other income, net 6,218 1,573 12,876 2,861
-------- ------- -------- --------
49,596 94,541 116,027 178,711
-------- ------- -------- --------
EXPENSES:
Services Division expenses 19,299 34,824 31,646 56,148
Homestead Village rental expenses 14,045 5,739 26,298 10,378
Interest expense 17,292 29,171 30,091 57,248
General, administrative and other 15,103 11,175 26,663 23,617
Depreciation and amortization 8,001 3,448 14,848 6,143
-------- ------- -------- --------
73,740 84,357 129,546 153,534
-------- ------- -------- --------
Earnings (loss) before income taxes and
minority interests (24,144) 10,184 (13,519) 25,177
Provision for income taxes:
Current 4,687 -- 7,385 --
Deferred (10,818) 7,778 (9,983) 16,223
-------- ------- -------- --------
Total income tax expense (benefit) (6,131) 7,778 (2,598) 16,223
-------- ------- -------- --------
Minority interests in net earnings of subsidiaries 593 780 1,052 1,373
-------- ------- -------- --------
Net earnings (loss) (18,606) 1,626 (11,973) 7,581
Less Preferred Share dividends 23,464 2,607 26,070 5,213
-------- ------- -------- --------
Net earnings (loss) attributable to
common shares $(42,070) $ (981) $(38,043) $ 2,368
======== ======= ======== ========
Weighted-average Class B Shares outstanding
Basic 121,569 64,853 122,454 63,099
======== ======= ======== ========
Diluted 121,569 64,853 122,454 67,767
======== ======= ======== ========
Per share net earnings (loss) attributable to
common shares:
Basic $ (0.35) $ (0.02) $ (0.31) $ 0.04
======== ======= ======== ========
Diluted $ (0.35) $ (0.02) $ (0.31) $ 0.03
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1998
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------
Class A Class B Preferred Stock at
---------------------- ---------------------- Liquidation Value Additional Total
Shares Shares at Shares Shares at ------------------ Paid-in Accumulated Shareholders'
Outstanding Par Value Outstanding Par Value Series A Series B Capital Deficit Equity
----------- --------- ----------- --------- -------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997 2,045,601 $20.455 22,627,541 $226.275 $ 139,000 $ -- $2,509,175 $ (99,548) $2,548,873
Conversion of Class A
Shares to Class B Shares (455,585) (4.555) 22,779,191 227.792 -- -- (223) -- --
Exercise of stock options
and warrants 673 0.007 30,792 0.308 -- -- 1,256 -- 1,257
Issuance of Series B
Preferred Shares -- -- (3,296,640) (32.966) (139,000) 257,642 (98,766) (19,843) --
Repurchase of Class A
Shares (317) (0.003) -- -- -- -- (404) -- (404)
Issuance of Class A Shares 1,893 0.019 -- -- -- -- 2,514 -- 2,514
Cost of raising capital -- -- -- -- -- -- (172) -- (172)
Net loss -- -- -- -- -- -- -- (11,973) (11,973)
Preferred Share dividends -- -- -- -- -- -- -- (6,227) (6,227)
--------- ------- ---------- -------- --------- -------- ---------- --------- ----------
Balances at June 30, 1998 1,592,265 $15.923 42,140,884 $421.409 $ -- $257,642 $2,413,380 $(137,591) $2,533,868
========= ======= ========== ======== ========= ======== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
---------------------
Six Months Ended
June 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ (11,973) $ 7,581
Adjustments to reconcile net earnings (loss) to cash flows
provided by operating activities:
Deferred income tax expense (benefit) (9,983) 16,223
Minority interests 1,052 1,373
Equity in earnings of unconsolidated investees (2,983) (90,047)
Distributions from unconsolidated investees 71,471 49,257
Change in unrealized appreciation of investments 9,379 (5,510)
Depreciation and amortization 14,848 6,143
Other 1,926 15,817
Increase in other assets (22,672) (9,734)
Increase in accrued interest on convertible debt -- 7,747
Increase (decrease) in accounts payable and accrued expenses 22,847 (3,720)
--------- ---------
Net cash flows provided (used) by operating activities 73,912 (4,870)
--------- ---------
Investing Activities:
Real estate investments (260,196) (131,199)
Investment in shares of:
Security Capital U.S. Realty (31,639) (74,852)
Security Capital Global Realty (123,575) --
Strategic Hotel Capital Incorporated (87,500) (22,642)
Security Capital Preferred Growth Incorporated (25,000) (5,000)
Purchases of publicly traded real estate securities, net (7,276) (90,073)
Purchase of Strategic Hotel Capital Incorporated
convertible debt (87,500) --
Purchase of Homestead Village Incorporated warrants -- (18,654)
Advances on notes receivable from affiliate (70,300) --
Other (29,008) (19,281)
--------- ---------
Net cash flows used in investing activities $(721,994) $(361,701)
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
---------------------
Six months ended
June 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 785,772 $ 261,000
Payments on lines of credit (657,500) (187,500)
Proceeds from long-term debt offering 499,600 --
Proceeds from mortgage notes payable 17,014 93,250
Proceeds from issuance of convertible debt -- 98,097
Proceeds from issuance of common shares, net of expenses 3,599 102,180
Proceeds from issuance of common shares to minority interest
holders 33,485 516
Preferred dividends paid (6,227) (5,213)
Debt issuance costs (18,164) (630)
Other (558) (807)
--------- ---------
Net cash flows provided by financing activities 657,021 360,893
--------- ---------
Net increase (decrease) in cash and cash equivalents 8,939 (5,678)
Cash and cash equivalents, beginning of period 11,454 19,323
--------- ---------
Cash and cash equivalents, end of period $ 20,393 $ 13,645
========= =========
Non-Cash Financing Activities:
Receipt of Security Capital Global Realty
shares in satisfaction of indebtedness $ 70,772 $ --
========= =========
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued $ 257,642 $ --
Series A Preferred Shares retired (139,000) --
Fair value of Class B Common Shares retired (98,799) --
Series A Preferred dividend recorded (19,843) --
--------- ---------
$ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
Security Capital Group Incorporated (Security Capital) is a real estate
research, investment and operating management company. Its strategy is to create
the optimal organization to lead and profit from global real estate
securitization. Security Capital has invested in various operating and other
entities (the Capital Division) (see note 2) and provides various capital
management and financial services through a Services Division (see note 3). The
Capital Division invests in real estate-related companies with the objective of
generating capital appreciation and growing dividends. The Services Division
provides research, operational and capital deployment oversight, capital
management, capital markets, accounting and administrative services for the
companies in which Security Capital and its affiliates have invested.
The consolidated financial statements of Security Capital as of June 30, 1998,
are unaudited and, pursuant to the rules of the Securities and Exchange
Commission (SEC), certain information and footnote disclosures normally included
in financial statements have been omitted. While management of Security Capital
believes that the disclosures presented are adequate, these interim consolidated
financial statements should be read in conjunction with Security Capital's 1997
audited consolidated financial statements contained in Security Capital's 1997
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 Security Capital's consolidated financial
statements for the interim periods presented. Certain reclassifications have
been made in the 1997 consolidated financial statements and notes to
consolidated financial statements for the interim periods presented in order to
conform to the 1998 presentation. The results of operations for the six-month
period ended June 30, 1998, 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.
6
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(2) REAL ESTATE INVESTMENTS
Security Capital holds investments at June 30, 1998, through its wholly-owned
subsidiary, SC Realty Incorporated (SC Realty), as follows:
<TABLE>
<CAPTION>
% Ownership as of Security Capital
------------------------- $'s Invested for the
June 30, December 31, Six Months Ended
Investment Type of Entity 1998 1997 June 30, 1998
- ---------------------------------- -------------------- --------- ------------ --------------------
<S> <C> <C> <C> <C>
ProLogis Trust--formerly Security Industrial REIT 40.6% 42.5% $ --
Capital Industrial Trust (PROLOGIS)
Archstone Communities Trust-- Multi-family REIT 32.3% 33.1%(a) --
formerly Security Capital Pacific Trust
(ARCHSTONE)
Security Capital Atlantic Incorporated Multi-family REIT 49.9% 49.9%(a) --
(ATLANTIC)
Security Capital U.S. Realty U.S. real estate 34.3% 32.9% 31,639,000
(SC-USREALTY) investments
Security Capital Global Realty Global real estate 34.6% --(b) 194,347,000
(SC-GR) investments
Homestead Village Incorporated Extended-stay lodging 69.8% 65.0% 129,108,000
(Homestead)
Security Capital U.S. Real Estate U.S. real estate 93.4% 98.3% --
Shares (SC-US) investment fund
Strategic Hotel Capital Incorporated Upscale hotels 31.2% 39.5% 175,000,000
(SHC)
Security Capital Preferred Growth Preferred stock 12.8% 12.9% 25,000,000
Incorporated (SC-PG) investments in real
estate companies
Security Capital European Real Estate Europe real estate 100% 100% --
Shares (SC-E) investment fund
</TABLE>
(a) In July 1998 ARCHSTONE and ATLANTIC consummated their merger. Pursuant to
the merger transaction, ATLANTIC was merged with and into ARCHSTONE, which
continues its existence under the name "Archstone Communities Trust"
(ARCHSTONE) and is traded on the NYSE under the symbol "ASN". In accordance
with the terms of the merger, each outstanding ATLANTIC common share was
converted into the right to receive one ARCHSTONE common share and each
outstanding ATLANTIC Series A preferred share was converted into the right
to receive one comparable ARCHSTONE Series C preferred share. Upon
consummation of the merger, Security Capital owned approximately 38.2% of
ARCHSTONE's common shares and continues to be ARCHSTONE's largest
shareholder.
7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(b) SC-GR is a newly formed European based company that will own strategic
control positions in fully integrated real estate operating companies
mainly in Europe or the Asia-Pacific region. In April 1998 SC-GR completed
a $1,500,000,000 equity subscription offering, of which Security Capital
and its subsidiaries subscribed for $518,258,000 of common shares. Security
Capital accounts for its investment in SC-GR by the equity method.
Security Capital received dividends from its investees for the three and six
months ended June 30, 1998 and 1997 as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
-------- ------ -------- --------
<S> <C> <C> <C> <C>
PROLOGIS $15,884 $11,526 $30,107 $23,051
ARCHSTONE 10,433 8,903 20,867 17,804
ATLANTIC 9,542 8,402 19,083 16,806
SC-US 964 2,488 4,728 2,488
SC-PG 867 -- 1,414 --
------- ------- ------- -------
$37,690 $31,319 $76,199 $60,149
======= ======= ======= =======
</TABLE>
Presented below is the summary earnings information for Security Capital's
equity investees for the six months ended June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
PROLOGIS ARCHSTONE ATLANTIC SHC
-------------------- -------------------- ------------------ --------
1998 1997 1998 1997 1998 1997 1998
---------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental, room revenue and other
income, net $ 176,518 $148,669 $193,787 $169,674 $101,061 $81,912 $217,039
Expenses 105,471 89,389 136,440 126,333 74,436 60,163 210,566
--------- -------- -------- -------- -------- ------- --------
Net earnings before minority
interest 71,047 59,280 57,347 43,341 26,625 21,749 6,473
Minority interest share of
net earnings 2,054 1,835 -- -- 450 -- 3,937
--------- -------- -------- -------- -------- ------- --------
Net earnings from operations 68,993 57,445 57,347 43,341 26,175 21,749 2,536
Gain on disposition of
depreciated real estate 4,278 -- 15,484 37,207 5,360 259 --
--------- -------- -------- -------- -------- ------- --------
Net earnings 73,271 57,445 72,831 80,548 31,535 22,008 2,536
Less Preferred Share
dividends 21,874 17,659 9,469 9,840 2,156 -- --
--------- -------- -------- -------- -------- ------- --------
Net earnings attributable
to common shares $ 51,397 $ 39,786 $ 63,362 $ 70,708 $ 29,379 $22,008 $ 2,536
========= ======== ======== ======== ======== ======= ========
Security Capital share of net
earnings $ 21,332 $ 17,659 $ 20,723 $ 25,326 $ 14,676 $11,964 $ 916
========= ======== ======== ======== ======== ======= ========
SC-USREALTY SC-GR SC-PG
-------------------- -------- ----------
1998 1997 1998 1998
--------- -------- -------- ----------
Net investment income $ 41,107 $ 26,344 $(3,941) $ 15,369
Realized gains on publicly traded investments 30,562 13,620 -- --
Increase (decrease) in appreciation of investments (212,905) 66,200 -- $ (10,464)
Elimination of a related party transaction (20,426) -- -- --
--------- -------- -------- ---------
Adjusted net earnings (loss) $(161,662) $106,164 $(3,941) $ 4,905
========= ======== ======= =========
Security Capital share of adjusted net earnings (loss) $ (53,935) $ 35,098 $(1,359) $ 630
========= ======== ======= =========
</TABLE>
8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A condensed consolidating balance sheet of Security Capital as of June 30, 1998,
follows (in thousands):
<TABLE>
<CAPTION>
SC-US
Security Capital (a) Homestead (b) and SC-E (b) Consolidated (c)
-------------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Investments, at equity $3,512,285 $ -- $ -- $3,016,246
Net real estate investments -- 968,034 -- 961,766
Investments in publicly traded real estate
securities, at market value 25,070 -- 126,222 151,292
Cash and other assets 106,694 85,637 3,745 167,079
---------- ---------- -------- ----------
Total assets $3,644,049 $1,053,671 $129,967 $4,296,383
========== ========== ======== ==========
Lines of credit $ 123,000 $ 178,080 $ -- $ 301,080
Long-term debt 822,624 319,362 -- 1,141,986
Other liabilities 130,865 64,166 2,265 178,829
---------- ---------- -------- ----------
Total liabilities 1,076,489 561,608 2,265 1,621,895
Minority interests -- -- -- 140,620
Shareholders' equity 2,567,560 492,063 127,702 2,533,868
---------- ---------- -------- ----------
Total liabilities and
shareholders' equity $3,644,049 $1,053,671 $129,967 $4,296,383
========== ========== ======== ==========
</TABLE>
- ----------------
(a) Includes Homestead, SC-US and SC-E on the equity method.
(b) Reflects the carrying amount prior to elimination entries.
(c) Consolidated amounts include effect of elimination entries.
9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A condensed consolidating statement of operations for Security Capital for the
six months ended June 30, 1998, follows (in thousands):
<TABLE>
<CAPTION>
SC-US
Security Capital (a) Homestead (b) and SC-E (b) Consolidated (c)
-------------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Equity in earnings of investees $ 1,186 $ -- $ -- $ 2,983
Services Division revenues from
related parties 51,162 -- -- 48,309
Room revenue -- 61,238 -- 61,238
Other income 8,195 1,121 (4,639) 3,497
-------- ------- ------- --------
60,543 62,359 (4,639) 116,027
-------- ------- ------- --------
Services Division expenses 31,646 -- -- 31,646
Rental expenses -- 26,298 -- 26,298
Interest expense 22,986 7,119 -- 30,091
General, administrative and other 17,635 10,021 872 26,663
Depreciation and amortization 1,833 13,859 -- 14,848
-------- ------- ------- --------
74,100 57,297 872 129,546
-------- ------- ------- --------
Earnings (loss) before income taxes and
minority interests (13,557) 5,062 (5,511) (13,519)
Income tax benefit (2,598) -- -- (2,598)
Minority interests -- -- -- 1,052
-------- ------- ------- --------
Net earnings (loss) (10,959) 5,062 (5,511) (11,973)
Less Preferred Share dividends 26,070 -- -- 26,070
-------- ------- ------- --------
Net earnings (loss) attributable to
common shares $(37,029) $ 5,062 $(5,511) $(38,043)
======== ======= ======= ========
</TABLE>
(a) Includes Homestead, SC-US and SC-E on the equity method.
(b) Reflects the carrying amount prior to elimination entries.
(c) Consolidated amounts include effect of elimination entries.
10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) SERVICES DIVISION REVENUES FROM RELATED PARTIES
Services Division fees for the six months ended June 30, 1998 and 1997 were
earned from the following sources (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
REIT management fees $ -- $28,386
Property management fees -- 16,425
Global Capital Management Group fees 21,581 10,554
Financial Services Group fees 29,008 3,312
Real Estate Research fees 573 346
------- -------
Total Services Division revenues 51,162 59,023
Less amounts eliminated in consolidation (2,853) (1,080)
------- -------
Consolidated Services Division revenues $48,309 $57,943
======= =======
</TABLE>
(4) INDEBTEDNESS
Lines of Credit:
Borrowings outstanding on Security Capital's and Homestead's revolving bank
lines of credit at June 30, 1998, totaled $123,000,000 and $178,080,000,
respectively.
Security Capital has a $650,000,000 unsecured revolving line of credit with
Wells Fargo Bank, National Association, (Wells Fargo), as agent for a group of
lenders. The agreement is effective through April 6, 2000, with an option to
renew for successive one-year periods with the approval of lenders. Borrowings
bear interest at the LIBOR rate plus a margin (1.00% as of June 30, 1998) based
upon Security Capital's credit rating or a Base Rate (defined as the higher of
Wells Fargo prime rate or the Federal Funds rate plus .50%).
Commitment fees range from 0.125% to 0.20% per annum based on the average
unfunded line of credit balance. The line is guaranteed by SC Realty which is a
wholly owned subsidiary of Security Capital.
The line of credit limits distributions to 50% of Security Capital's cash flow
available for distribution and dividends paid on Security Capital's 257,642
Series B Convertible Redeemable Voting Preferred Stock (Series B Preferred
Shares), if no event of default has occurred and is continuing. During a non-
monetary default, no such payments other than dividends paid on Security
Capital's Series B Preferred Shares shall be permitted. In the event of a
monetary default, all distributions would be prohibited.
11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Homestead's lines of credit as of June 30, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Fee on average
Amount Maturity Interest rate range unfunded balances Collateral
- ----------------- ----------------- ------------------------------ ------------------ -----------------------
<S> <C> <C> <C> <C>
$ 150,000,000 April 24, 1999 Eurodollar rate plus 1.5% to 0.375% Real estate
2.5% or the higher of prime
plus 0.5% to 1.5% or the
federal funds rate plus 1% to
2%
$ 50,000,000 April 24, 1999 Eurodollar rate plus 2.75% 0.5% $30,000,000 unsecured
or the higher of prime until September 30,
plus 1.75% or the Federal 1998/$20,000,000
Funds rate plus 2.25% secured by real estate
$ 200,000,000 February 23, 1999 Eurodollar rate plus 1% 0.25% Subscription receivable
to 1.25% or prime to prime from Security Capital
plus 0.25% for $200,000,000 of
convertible sub-
ordinated debentures
</TABLE>
Each line of credit requires maintenance of certain financial covenants.
Security Capital, SC Realty and Homestead were in compliance with all such
covenants at June 30, 1998.
Senior Unsecured Notes:
On June 23, 1998, Security Capital issued the following long-term debt, all of
which was outstanding as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
6.95% Senior Unsecured Notes, due June 15, 2005, original
principal of $200,000,000, net of original issue discount.
Interest is payable on June 15 and December 15 of each
year, commencing December 15, 1998. $ 199,787
7.15% Senior Unsecured Notes, due June 15, 2007, original
principal of $100,000,000, net of original issue discount.
Interest is payable on June 15 and December 15 of each
year, commencing December 15, 1998. 99,813
7.70% Senior Unsecured Notes, due June 15, 2028, original
principal of $200,000,000. Interest is payable on June 15
and December 15 of each year, commencing December 15, 1998. 200,000
---------
$ 499,600
=========
</TABLE>
All of the foregoing Notes are redeemable at any time at the option of Security
Capital, 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.
12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Under the terms of the indenture, Security Capital may incur additional debt
only if, after giving effect to the debt being incurred, (i) the ratio of debt
to adjusted total assets, as defined in the indenture, does not exceed 50%, and
(ii) the fixed charge coverage ratio, as defined in the indenture, for the four
preceding fiscal quarters is not less than 1.5 to 1.0. In addition, Security
Capital may not at any time permit its consolidated tangible net worth, as
defined in the indenture, to be less than $1,500,000,000. At June 30, 1998,
Security Capital was in compliance with all debt covenants contained in the
Indenture.
Homestead Convertible Mortgage Notes Payable:
On July 6, 1998 Homestead entered into a mortgage loan purchase agreement with
ATLANTIC and Merrill Lynch Mortgage Capital Inc. (MLMC) whereby the $98,000,000
of Homestead convertible mortgage notes held by ATLANTIC were modified to, among
other things, eliminate their convertibility feature in exchange for a payment
of $21,400,000 from Homestead to ATLANTIC. Homestead funded the payment with the
proceeds received from the sale of $24,000,000 of 7.5% convertible subordinated
debentures. Also pursuant to the mortgage loan purchase agreement ATLANTIC sold
such amended notes to MLMC for $98,000,000. On August 7, 1998, Homestead
converted the $98,000,000 of mortgage notes and the $24,000,000 of 7.5%
convertible subordinated debentures into a $122,000,000 mortgage of a newly
formed special purpose subsidiary of Homestead. The $122,000,000 mortgage note
matures June 30, 1999 and provides for interest only monthly payments of LIBOR
plus 1.70% through September 30, 1998, LIBOR plus 2.0% through November 30,
1998, and LIBOR plus 2.25% thereafter, with options to extend.
The transaction results in an extinguishment of debt measured as the difference
between the $98,000,000 carrying amount of the original mortgage notes to
ATLANTIC and the amount paid to extinguish the debt, including transaction
costs. Such loss on extinguishment of debt approximates $25,000,000 and will
be recorded as an extraordinary item in the third quarter of 1998.
13
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Interest:
Presented below are the interest costs incurred by Security Capital and its
consolidated subsidiaries for the three and six months ended June 30, 1998 and
1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------------- ------------ ------------- ----------
<S> <C> <C> <C>
Total interest incurred $24,945 $38,298 $44,248 $109,698
======= ======= ======= ========
Capitalized interest included in total
interest incurred $ 7,653 $ 9,127 $14,157 $ 52,450
======= ======= ======= ========
Interest paid in cash $30,799 $48,958 $34,065 $ 50,517
======= ======= ======= ========
Amortization of deferred financing costs
included in interest expense $ 1,535 $ 783 $ 2,799 $ 1,425
======= ======= ======= ========
</TABLE>
(5) SHAREHOLDERS' EQUITY
Conversion of Shares:
As of January 1, 1998, at the option of the holder, each share of Class A common
stock, par value $.01 per share (Class A Common Shares), can be converted into
50 shares of Class B common stock, par value $.01 per share (Class B Common
Shares). Class B Common Shares are not convertible into Class A Common Shares.
As of June 30, 1998, 455,585 Class A Common Shares have been converted into
22,779,191 Class B Common Shares.
Warrants:
Security Capital issued registered warrants to acquire $250,000,000 of Class B
Common shares (8,928,572 warrants) to the common and convertible preferred
shareholders of PROLOGIS, ARCHSTONE and ATLANTIC, and limited partnership unit
holders of PROLOGIS as of September 16, 1997. The exercise price of a warrant is
$28 per Class B Common Share, and the warrants will expire on September 18,
1998. As of June 30, 1998, 88,623 warrants have been exercised.
Series B Preferred Shares:
On May 12, 1998, Security Capital issued 257,642 shares of Series B Preferred
Shares, par value $.01 per share to Commerzbank Aktiengesellshaft,
(Commerzbank), in exchange for 139,000 Series A Preferred Shares and 3,293,288
Class B Common Shares held by Commerzbank. Security Capital also paid a cash
dividend to Commerzbank on the Series A Preferred Shares for the period from
April 1, 1998, to May 12, 1998, of $1,216,250.
14
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Series B Preferred Shares have a liquidation preference of $1,000 per share
for an aggregate preference of $257,642,000 plus any accrued and unpaid
dividends. Subject to certain adjustments, each Series B Preferred Share is
convertible, at the option of the holder at any time, into 25.641026 Class B
Common Shares (a conversion price of $39.00 per share). The Series B Preferred
Shares are initially convertible into a total of 6,606,205 Class B Common
Shares. The Series B Preferred Shares are entitled to receive cumulative
preferential cash distributions at the rate of 7.0% per annum. The Series B
Preferred Shares are redeemable, at the option of Security Capital, after May
12, 2003, at a redemption price equal to $1,000 per share plus any accrued and
unpaid dividends.
The exchange of the Series B Preferred Shares for the Series A Preferred Shares
and 3,293,288 Class B Common Shares was based on the fair value of these
securities at the date of the Exchange Agreement. For financial accounting
purposes, the fair value of the Series B Preferred Shares issued ($257,642,000)
less the sum of (a) the carrying value of the Series A Preferred Shares
($139,000,000) and (b) the fair value of the Class B Shares ($98,799,000) was
recorded as a dividend ($19,843,000).
Per Share Data:
Security Capital adopted SFAS No. 128, Earnings per Share, effective December
15, 1997. Previously reported earnings per share data have been restated to
conform to SFAS No. 128.
The following is a reconciliation of the denominators used to calculate basic
and diluted earnings per Class B Common Share under SFAS No. 128 for the periods
indicated (in thousands, except per common share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
======== ======== ======== ========
<S> <C> <C> <C> <C>
Net income (loss) attributable to Common Shares $(42,070) $ (981) $(38,043) $ 2,368
======== ========= ======== ========
Weighted-average Class B Common Shares
outstanding - Basic 121,569 64,853 122,454 63,099
Increase in shares which would result from:
Exercise of options -- -- -- 4,688
-------- -------- -------- --------
Adjusted weighted-average Class B Common Shares
outstanding - Diluted 121,569 64,853 122,454 67,767
======== ======== ======== ========
Per share net earnings (loss) attributable to Class B
Common Shares:
Basic $ (0.35) $ (0.02) $ (0.31) $ 0.04
======== ======== ======== ========
Diluted $ (0.35) $ (0.02) $ (0.31) $ 0.03
======== ======== ======== ========
</TABLE>
For all periods, the 2016 Convertible Debentures and the Series B Preferred
Shares are not assumed converted for the purpose of calculating diluted earnings
per Class B Common Share as the effect is anti-dilutive, and for loss periods
the conversion of options and warrants is not assumed as the effect is anti-
dilutive.
15
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(6) DERIVATIVE FINANCIAL INSTRUMENTS
Security Capital has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Security Capital uses
derivatives to manage well-defined risk associated with interest rate
fluctuations on anticipated transactions.
In May 1998, in anticipation of the June 1998 debt offering (see Note 4),
Security Capital entered into the following forward treasury lock transactions:
<TABLE>
<CAPTION>
Trade Date Reference Treasury Notional Amount
------------ -------------------- ---------------
<S> <C> <C>
May 22, 1998 6.125% of Nov. 2027 $187,500,000
May 22, 1998 6.5% of May 2005 75,000,000
May 26, 1998 5.625% of May 2008 112,500,000
------------
$375,000,000
============
</TABLE>
These contracts were terminated on June 18, 1998, resulting in deferred losses
totaling $9,500,000. These losses are being amortized into interest expense over
the life of the related Senior Unsecured Notes which have a weighted average
maturity of 16.6 years. As of June 30, 1998, Security Capital has no derivative
financial contracts outstanding.
(7) COMMITMENTS AND CONTINGENCIES
Security Capital and its affiliates have committed to invest up to $518,258,000
in equity securities of SC-GR (see Note 2). As of June 30, 1998, $194,300,000
had been funded by Security Capital.
At June 30, 1998, Homestead had approximately $153,000,000 of unfunded
commitments for developments under construction.
In connection with a line of credit agreement entered into by Homestead in June
1998, Security Capital committed, during the eight month term of the line of
credit, to retain its ownership of Homestead common shares and to purchase up to
$200,000,000 of subordinated convertible debentures of Homestead under certain
circumstances (which amount may be reduced if Security Capital purchases other
Homestead securities). Homestead has pledged this investment obligation of
Security Capital as security under Homestead's June 1998 line of credit.
(8) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement 133 is effective for fiscal years beginning
after June 15, 1999, but may be implemented for fiscal quarters beginning after
June 15, 1998. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Security Capital has not yet
quantified the impacts of adopting Statement 133
16
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
on its financial statements and has not determined the timing of or method of
our adoption of Statement 133.
In April 1998 the Accounting Standards Executive Committee issued Statement of
Position 98-5 (SOP 98-5) "Reporting on the Costs of Start-Up Activities"
establishing accounting standards requiring the expensing of organizational,
pre-opening, and start-up costs. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Restatement of financial statements for
earlier periods is prohibited. Upon adoption, any material unamortized
organizational, pre-opening and start-up costs will be required to be written
off and charged to 1999 operations as a cumulative effect of adoption of an
accounting standard. Security Capital and its subsidiaries are in the process of
evaluating SOP 98-5 and will adopt the standard in the first quarter of its 1999
fiscal year. The impact of adoption of SOP 98-5 on Security Capital's results of
operation and financial position has not been quantified.
17
<PAGE>
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have reviewed the accompanying consolidated balance sheet of Security Capital
Group Incorporated and subsidiaries (see note 1) as of June 30, 1998, and the
related consolidated statements of operations for the three and six-month
periods ended June 30, 1998 and 1997, the consolidated statement of
shareholders' equity for the six-month period ended June 30, 1998 and the
consolidated statements of cash flows for the six-month periods ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Management of the Company. We were furnished with the reports of other
accountants on their reviews of the financial statements of Archstone
Communities Trust, Security Capital Atlantic Incorporated and Homestead Village
Incorporated (June 30, 1997), whose total assets represent 19.2% of the total
assets of Security Capital Group Incorporated and subsidiaries as of June 30,
1998 and whose income represent 20.7% and 34.6% of the total income in the
consolidated statements of operations of Security Capital Group Incorporated and
subsidiaries for the six-month periods ended June 30, 1998 and 1997,
respectively.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware of
any material modifications that should be made to the financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Group Incorporated
and subsidiaries as of December 31, 1997, and, in our report dated March 18,
1998, we expressed an unqualified opinion on that statement based on our audit
and reports of other auditors. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997, is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Chicago, Illinois
August 14, 1998
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with Security Capital's
consolidated financial statements and the notes thereto in Item 1 of this
report. See Security Capital's 1997 Form 10-K for a discussion of various risk
factors associated with forward looking statements made in this document.
Overview
Security Capital is a real estate research, investment and operating management
company. Security Capital obtains income from four sources: (1) the Capital
Division's share of earnings in its investees; (2) Global Capital Management
Group revenues; (3) Financial Services Group revenues consisting of accounting
and administrative services fees and capital markets fees; and (4) Real Estate
Research Group revenues. Revenues from the Global Capital Management Group, the
Financial Services Group and the Real Estate Research Group are all included in
the Services Division and are only reflected in Security Capital's consolidated
financial statements if they were earned from investees not consolidated in the
financial statements. Services Division revenues earned from consolidated
investees (Homestead, Security Capital U.S. Real Estate Shares and Security
Capital European Real Estate Shares) are eliminated in Security Capital's
consolidated financial statements.
Results of Operations
Three and Six Months Ended June 30, 1998 Compared to the Three and Six Months
Ended June 30, 1997
Sale of REIT and Property Managers
Prior to September 1997, certain Security Capital Services Division subsidiaries
managed the operations (REIT Managers) of and provided property management
services (Property Managers) to various REITs (PROLOGIS, ARCHSTONE and ATLANTIC)
in which the Capital Division was the principal owner. Effective September 9,
1997, Security Capital exchanged the REIT and Property Managers for additional
shares of PROLOGIS (3,692,024 shares), ARCHSTONE (3,295,533 shares) and ATLANTIC
(2,306,591 shares).
ARCHSTONE and ATLANTIC Merger
In July 1998 ARCHSTONE and ATLANTIC consummated their merger. Pursuant to
the merger transaction, ATLANTIC was merged with and into ARCHSTONE, which
continues its existence under the name "Archstone Communities Trust" (ARCHSTONE)
and is traded on the NYSE under the symbol "ASN". In accordance with the terms
of the merger, each outstanding ATLANTIC common share was converted into the
right to receive one ARCHSTONE common share and each outstanding ATLANTIC Series
A preferred share was converted into the right to receive one comparable
ARCHSTONE Series C preferred share. Upon consummation of the merger, Security
Capital owned approximately 38.2% of ARCHSTONE's common shares and continues to
be ARCHSTONE's largest shareholder.
Capital Division Investments
Dividends Received
Security Capital's dividends received increased 20% and 27% for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. The increase results primarily from (a) the
19
<PAGE>
purchase of additional shares in PROLOGIS and SC-US; (b) additional shares
received from PROLOGIS, ARCHSTONE and ATLANTIC in the mergers; and (c) an
increase in the per share dividend rates of its investees.
Equity in Earnings of Investees
Security Capital includes in its earnings its share of the earnings of its
investees, SC-USREALTY, SC-US and SC-E, who, in accordance with generally
accepted accounting principles, include unrealized gains or losses on their
investments in their earnings. This component of earnings or loss fluctuates
with changes in the prevailing market prices for the shares of the real estate
companies in which they invest. This does not have an impact on cash flow, but
the general declines in real estate security prices during 1998 has had a
significant adverse impact on Security Capital's equity in earnings of its
investees.
Presented below is Security Capital's equity in earnings (loss) of affiliates
for the three and six months ended June 30, 1998 and 1997, and Security
Capital's common share ownership interest in affiliates as of June 30, 1998 and
1997 ($'s in millions):
<TABLE>
<CAPTION>
Equity in Earnings (loss) % Ownership
-------------------------------------- ---------------
Three Months Ended Six Months Ended
June 30, June 30, June 30,
------------------ ----------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PROLOGIS $ 9.6 $10.1 $21.3 $17.7 40.6% 44.1%
ARCHSTONE 7.5 10.7 20.7 25.3 32.3% 34.5%
ATLANTIC 7.1 6.2 14.7 11.9 49.9% 51.3%
SC-USREALTY (36.0) 18.2 (53.9) 35.1 34.3% 31.8%
SC-GR (1.3) -- (1.3) -- 34.6% --
SHC .2 -- .9 -- 31.2% 49.7%
SC-PG .2 -- .6 -- 12.8% 20.8%
------ ----- ----- -----
$(12.7) $45.2 $ 3.0 $90.0
====== ===== ===== =====
</TABLE>
The increase in Security Capital's equity in PROLOGIS' earnings for the six
months ended June 30, 1998, is primarily due to an increase in distribution
space owned and leased by PROLOGIS (97.3 million square feet at June 30, 1998,
compared to 85.3 million square feet at June 30, 1997) and increased rental
rates on renewal leases for previously occupied space and an overall decrease in
operating and general and administrative expenses. The decrease in Security
Capital's equity in PROLOGIS' earnings for the three months ended June 30, 1998,
is primarily due to increased depreciation expense, preferred share dividends
and weighted average common shares outstanding.
The decrease in Security Capital's equity in ARCHSTONE's earnings, for the three
and six months ended June 30, 1998, compared to the same periods in 1997, is due
to a decrease in gains on dispositions of real estate, partially offset by an
increase in net operating income primarily due to an increase in operating units
and a decrease in general and administrative expenses.
The increase in Security Capital's equity in ATLANTIC's earnings, for the three
and six months ended June 30, 1998, compared to the same periods in 1997, is
primarily related to an increase in net operating income due to an increase in
operating units and a decrease in general and administrative expenses.
The decrease in Security Capital's share of SC-USREALTY's earnings for the three
and six months ended June 30, 1998, compared to the same periods in 1997, is
primarily due to a decrease in unrealized appreciation of investments ($120.1
million for the second quarter and $212.9 million for the first six
20
<PAGE>
months of 1998) due to the declines in the market value of REIT stocks
generally, including those owned by SC-USREALTY. SC-USREALTY's realized gains on
special opportunity investments increased by $9.0 million for the second quarter
of 1998 and $16.9 million for the first six months of 1998 compared to the same
periods in 1997. In addition, SC-USREALTY's net investment income (defined as
dividends and other investment income net of administrative expenses, advisor
fees, taxes and interest) increased by $0.6 million for the quarter and $14.8
million for the first six months of 1998 as compared to the same periods in
1997.
The decline in the real estate equity markets in 1998 may impact the ability of
operating affiliates of Security Capital to access the equity markets, which
could adversely impact their ability to maintain their historical growth rates.
However, this should be partially mitigated by the affiliates' ability to
maximize the performance of their portfolio of operating properties.
Room Revenue and Rental Expenses from Homestead
Homestead room revenue increased $36.7 million to $61.2 million for the six
months ended June 30, 1998, from $24.5 million for the same period in 1997 and
increased $20.6 million to $34.1 million for the three months ended June 30,
1998, from $13.5 million for the same period in 1997. Homestead rental expenses
were $26.3 million for the six months ended June 30, 1998, compared to $10.4
million for the same period in 1997 and $14.0 million for the three months ended
June 30, 1998, compared to $5.7 million for the same period in 1997. Homestead's
58 property openings from the end of the first quarter of 1997 through the end
of the second quarter of 1998 was the primary reason for both the increase in
room revenue and rental expenses. The slight decrease in property operating
income margin to 57.1% is due to the lease up phase associated with property
openings.
Services Division Revenues
The components of Services Division revenues were as follows (dollars in
millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ---------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Global Capital Management $11.7 $ 5.8 $21.6 $10.6
Financial Services 18.5 2.1 26.1 2.2
REIT and property management fees -- 22.5 -- 44.8
Real Estate Research 0.3 0.2 0.6 0.3
----- ----- ----- -----
$30.5 $30.6 $48.3 $57.9
===== ===== ===== =====
</TABLE>
The decrease in Services Division revenues for the three and six months ended
June 30, 1998, compared to 1997 was primarily attributable to the September 9,
1997, sale of the PROLOGIS, ATLANTIC and ARCHSTONE REIT Managers and Property
Managers substantially offset by: (i) the growth in assets managed by Global
Capital Management (shown in the following table), generating increased advisory
and management fees and (ii) an increase in capital markets services, corporate
administrative services and real estate research services revenue.
21
<PAGE>
The following table reflects the assets under management by the Global Capital
Management Group as of June 30, 1998, and 1997 (in millions):
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
SC-USREALTY $3,156.5 $2,145.6
SC-GR 584.1 --
SC-PG 636.1 24.1
Investment Funds 155.8 107.3
-------- --------
$4,532.5 $2,277.0
======== ========
</TABLE>
Growth in Services Division revenues is expected to come primarily from
management and advisory revenues earned by the Global Capital Management Group
and fees earned by the Financial Services Group and the Real Estate Research
Group. The decline in real estate security stock prices may make it more
difficult to attract assets to the company's investment funds and investees
which could, in turn, impact future revenue growth for the Global Capital
Management Group or the Financial Services Group. Any reduced growth could be
partially offset by increases in other Services revenues as Security Capital
continues to expand in this area, although no assurance of this growth can be
given.
Increase (decrease) in appreciation of investments
The decrease in appreciation of investments of $12.1 million and $12.7 million
for the three and six months ended June 30, 1998, respectively, compared to the
same periods in 1997, is due to the decrease in the market value of SC-US's
investments.
Other Income, net
Other income increased $10.0 million to $12.9 million for the six months ended
June 30, 1998, from $2.9 million for the same period in 1997 and increased $4.6
million to $6.2 million for the three months ended June 30, 1998, from $1.6
million for the same period in 1997. The increase is primarily due to interest
income on SHC debentures and an increase in realized gains on investments.
At June 30, 1998, SC-US had investments at cost and fair market value of
approximately $107.6 million and $110.6 million, respectively. At June 30, 1998,
SC-E had investments at cost and fair market value of approximately $15.4
million and $15.7 million, respectively.
22
<PAGE>
Services Division Expenses
Services Division expenses decreased by $24.5 million for the six months ended
June 30, 1998, to $31.6 million from $56.1 million for the same period in 1997,
and decreased by $15.5 million for the three months ended June 30, 1998, to
$19.3 million for the same period in 1997. These decreases primarily resulted
from the sale of the REIT and property management companies which incurred $18.3
million and $39.3 million of expenses for the three and six months ended June
30, 1997, respectively; this decrease was substantially offset by increased
expenses related to Global Capital Management activity, and financial services
activity for the three and six months ended June 30, 1998, compared to the three
and six months ended June 30, 1997.
General, Administrative and Other
General, administrative and other expenses increased by $3.0 million for the six
months ended June 30, 1998, to $26.6 million, from $23.6 million for the same
period in 1997 and increased by $3.9 million for the three months ended June 30,
1998, to $15.1 million, from $11.2 million for the same period in 1997. These
increases result primarily from additional personnel and related costs,
primarily focused on the creation and guidance of new business.
Interest Expense
Interest expense for the six months ended June 30, 1998, and 1997 is summarized
as follows (dollars in millions):
<TABLE>
<CAPTION>
Security Capital Homestead Total
----------------- ------------------- ----------------
1998 1997 1998 1997 1998 1997
-------- ------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Convertible Debentures $10.5 $54.6 $ -- $ -- $ 10.5 $ 54.6
Lines of credit 12.1 2.6 4.8 -- 16.9 2.6
Senior unsecured notes 0.8 -- -- -- 0.8 --
Mortgage notes payable -- -- 16.0 52.5 16.0 52.5
Capitalized interest (0.4) -- (13.7) (52.5) (14.1) (52.5)
----- ----- ------ ------ ------ ------
Total $23.0 $57.2 $ 7.1 $ -- $ 30.1 $ 57.2
===== ===== ====== ====== ====== ======
Interest expense for the three months ended June 30, 1998 and 1997 is
summarized as follows (dollars in millions):
Security Capital Homestead Total
---------------- --------------- ---------------
1998 1997 1998 1997 1998 1997
----- ----- ------ ------ ------ ------
Convertible Debentures $ 5.2 $27.9 $ -- $ -- $ 5.2 $ 27.9
Lines of credit 7.4 1.3 3.1 -- 10.5 1.3
Senior unsecured notes 0.8 -- -- -- 0.8 --
Mortgage notes payable -- -- 8.4 9.2 8.4 9.2
Capitalized interest (0.2) -- (7.4) (9.2) (7.6) (9.2)
----- ----- ------ ------ ------ ------
Total $13.2 $29.2 $ 4.1 $ -- $ 17.3 $ 29.2
===== ===== ====== ====== ====== ======
</TABLE>
Interest expense on the Convertible Debentures decreased primarily due to the
conversion of $715.8 million principal amount of 2014 Convertible Debentures to
Class A Shares in the fourth quarter of 1997.
The increase in Security Capital's line of credit interest expense is primarily
due to increased weighted average borrowings partially offset by decreased
average interest rates.
23
<PAGE>
Depreciation and Amortization
Depreciation and amortization increased by $8.7 million for the six months ended
June 30, 1998, to $14.8 million, from $6.1 million for the same period in 1997,
and increased by $4.6 million for the three months ended June 30, 1998, to $8.0
million, from $3.4 million for the same period in 1997. These increases
primarily resulted from additional Homestead property openings, partially offset
by decreased Services Division depreciation due to the sale of the REIT and
property management companies.
Provision for Income Taxes
The effective tax benefit rates for the three and six month periods ending June
30, 1998, were less than 35%. This reduced rate reflects the impact of the
unbenefited net deferred tax assets in consolidated subsidiaries. The effective
tax rates for the three and six month periods ending June 30, 1997, were greater
than 35% due to non-deductible charges, the effects of deconsolidating ATLANTIC,
and the impact of the net deferred tax assets in consolidated subsidiaries.
Preferred Share Dividends
The increase in preferred share dividends is due to a $19.8 million non-cash
dividend incurred in conjunction with the exchange of Series A Preferred Shares
and certain Class B Common Shares for new Series B Preferred Shares. See Note 5
to the Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Overview
Security Capital's investment activities consist primarily of investments in the
common shares of its Capital Division investees and research and capital
expenditures relating to expansion of its Services Division business. The
investment activities of Security Capital's investee operating companies consist
primarily of the acquisition and development of real estate, or strategic
ownership positions in companies which conduct such activities. Other affiliates
make portfolio investments in the securities of publicly traded real estate
companies and/or intermediate-term investments primarily in the convertible
securities of publicly-traded real estate operating companies. Security Capital
has historically financed its investment activities primarily through the sale
of stock and convertible securities, borrowings under its line of credit and, in
the second quarter of 1998, issuance of unsecured long-term debt.
Operating Activities
Cash provided by operating activities increased by $78.8 million during the
first six months of 1998 as compared to the first six months of 1997. This
increase is primarily due to a $22.2 million increase in distributions from
unconsolidated investees to $71.5 million for the six months ended June 30,
1998. The $56.6 million increase in net non-cash adjustments primarily related
to equity in earnings of unconsolidated investees, provision for deferred taxes,
the change in unrealized appreciation on investments, and depreciation and
amortization.
24
<PAGE>
Investing and Financing Activities
Security Capital's investment activities used approximately $461.8 million of
cash, and Homestead's used $260.2 million, for the six months ended June 30,
1998, as compared to $230.5 million and $131.2 million, respectively, for the
six months ended June 30, 1997. Security Capital's investment activities during
the six months ended June 30, 1998, primarily consisted of: (i) $194.3 million
invested by Security Capital in common shares of SC-GR; (ii) $175 million
invested by Security Capital in securities of SHC; and (iii) $92.5 million in
securities of various other affiliates, including SC-USREALTY, SC-PG and others.
Security Capital's investment activities during the six months ended June 30,
1997, consisted primarily of: (i) $140.4 million invested by Security Capital in
securities of various affiliates, and (ii) $90.1 million invested by Security
Capital in securities of publicly traded real estate securities.
Security Capital's financing activities provided net cash flow of $657.0 million
for the six months ended June 30, 1998, as compared to $360.9 million for the
six months ended June 30, 1997. Security Capital's financing activities in the
first six months of 1998 primarily consisted of: (i) net proceeds from the lines
of credit borrowings of $128.3 million; (ii) net proceeds from the issuance of
senior unsecured notes of $499.6 million and (iii) proceeds from the sale of
common stock to minority interest holders (Homestead) of $33.5 million. Security
Capital's financing activities in the first six months of 1997 primarily
consisted of: (i) net proceeds from the lines of credit borrowings of $73.5
million; (ii) $102.2 million of net proceeds from the issuance of common shares;
(iii) $98.1 million of net proceeds from the issuance of convertible debt; and
(iv) $93.3 million of proceeds from the issuance of mortgage notes payable by
Homestead.
As a result of its investing and financing activities, Security Capital has
total assets of $4.7 billion measured at fair value as of June 30, 1998, ($4.3
billion at cost), and $1.44 billion of outstanding debt (including $497.4
million of outstanding debt of Homestead).
Security Capital has committed, through June 30, 1999, to purchase up to $200
million of subordinated convertible debentures of Homestead. In addition,
Security Capital and its affiliates have committed to $518 million in equity
subscriptions to SC-GR, of which $194.3 million was funded in the second quarter
of 1998.
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) and funds currently available under its revolving line of
credit will be sufficient to enable Security Capital to satisfy its anticipated
cash requirements for operations and committed investments during 1998. In the
longer term, Security Capital intends to finance its business activities
(including investments in new business initiatives and additional investments in
existing affiliates) through its line of credit and future issuances of equity
and debt securities. In addition, Security Capital anticipates that its
operating affiliates 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. Security Capital does not guarantee
the obligations of its operating affiliates.
In September 1997, Security Capital distributed warrants to purchase $250
million of Class B Common Shares to the shareholders of PROLOGIS, ARCHSTONE and
ATLANTIC pursuant to the exchange of the REIT and property managers in 1997. The
exercise price of a warrant is $28 per Class B Common Share (compared to a
market price of $22 5/16 per share as of August 12, 1998) and such warrants
expire on September 18, 1998. It is unlikely that any significant amount of such
warrants will be exercised if Security Capital's stock price is below the
exercise price of the warrants.
Security Capital's consolidated investee had the following financing activities:
. In January 1998, Homestead completed a rights offering of common shares,
realizing $154.2 million of net proceeds.
25
<PAGE>
. Other resources to fund Homestead's development program consist of its
remaining capacity on its revolving line of credit facilities and to a lesser
extent, cash from operations in excess of operating needs.
. Also see "Lines of Credit--Homestead," below.
Lines of Credit
Security Capital
Security Capital has a $650 million revolving line of credit with Wells Fargo,
as agent for a syndicate of lenders. The line was increased from $400 million to
$700 million on April 6, 1998, and then on June 5, 1998, the line became
unsecured and was reduced to $650 million. The agreement is effective through
April 6, 2000, with an option to renew for successive one-year periods with the
approval of Wells Fargo and participating lenders. Borrowings bear interest at
the LIBOR rate plus 1%. Commitment fees range from 0.125% to 0.20% per annum
depending on the average unfunded line of credit balance. The line of credit is
guaranteed by SC Realty which is a wholly owned subsidiary of Security Capital.
The line of credit contains various financial and other covenants applicable to
Security Capital, including a minimum shareholders' equity test, a total
liabilities-to-net-worth ratio, a cash flow/fixed charge coverage ratio, a
secured debt limit, an unsecured liabilities to unencumbered pool value ratio,
as well as restrictions on Security Capital's ability to incur indebtedness and
effect consolidations, mergers (other than a consolidation or merger in which
Security Capital is the surviving entity) and sales of assets. The agreement
provides that so long as no event of default has occurred and is continuing,
Security Capital may pay cash dividends in an aggregate amount not to exceed 50%
of cash flow available for distribution and pay cash dividends to the holders of
the Series B Preferred Shares. As of June 30, 1998, there was $123 million
outstanding under this line of credit and Security Capital and SC Realty were in
compliance with all financial covenants.
Homestead
Homestead's secured revolving line of credit facility with Commerzbank AG
("CAG") was renewed on April 24, 1998, for a one-year term, with an increase in
total borrowing capacity to $150 million, subject to collateral requirements.
Borrowings bear interest at the Eurodollar rate plus 1.5% to 2.5% per annum,
depending upon the percentage leverage of borrowings outstanding to the amount
of qualifying collateral. Alternatively, borrowings bear interest at a base rate
defined as the higher of prime rate plus a margin of 0.5% to 1.5% or the Federal
Funds rate plus a margin of 1% to 2%, with the margin dependent on the
percentage leverage of borrowings outstanding to the amount of qualifying
collateral. Additionally, the line calls for a commitment fee of 0.375% of the
average unfunded balance. The line requires maintenance of certain financial
covenants, specifically, aggregate indebtedness of no more than 55% of gross
asset value, as defined, or indebtedness secured by a lien of no more than 50%
of gross asset value, as defined. Homestead must also maintain a minimum debt
service coverage ratio of earnings before interest, income taxes, depreciation,
amortization and gains or losses on sales of assets to cash debt service, as
defined, of no less than 1.1 to 1 for the first quarter of 1998 (which Homestead
was in compliance with), no less than
26
<PAGE>
1.25 to 1 for the second quarter of 1998 and no less than 1.75 to 1 thereafter
on a quarterly basis, and not allow stockholders equity to be less than $325
million. The covenants also restrict payment of dividends without lender
approval. As of June 30, 1998, Homestead was in compliance with all such
covenants.
On April 24, 1998, Homestead also entered into a separate $50 million one-year
revolving line of credit facility with CAG of which $20 million is available for
borrowings on a secured basis and $30 million is available for borrowing on an
unsecured basis. The unsecured portion of the line is required to be
collateralized by September 30, 1998, or such unsecured borrowings must be
repaid. Borrowings will bear interest at the Eurodollar rate plus 2.75% per
annum or, alternatively, at a base rate defined as the higher of prime rate plus
1.75% or the federal funds rate plus 2.25%. Average unfunded balances bear a
commitment fee of 0.5%. Covenants are identical to those under the $150 million
credit facility.
On June 15, 1998, Homestead entered into an additional $200 million line of
credit facility with CAG which bears interest at the Eurodollar rate plus 1%
(1.25% after six months) or at a base rate of prime (prime plus 0.25% after six
months). The average unfunded balance bears a commitment fee of 0.25%. The line
expires February 23, 1999, and is secured by a subscription receivable from
Security Capital for $200 million of convertible subordinated debentures. If the
subscription is called, the proceeds must be used to first repay the lines of
credit to CAG and second to fund projects under development which secure the
other CAG credit facilities. The subscription agreement expires June 30, 1999,
or 2 weeks after termination of the $200 million credit agreement. The
subscription obligation is to be reduced or terminated to the extent Homestead
issues equity securities to any third party, or to Security Capital pursuant to
a separate offering, before June 30, 1999, and uses the proceeds to repay this
credit facility and uses any remaining proceeds to fund projects under
development which secure the other CAG credit facilities.
Capital resources in addition to those described above will be needed to fund
Homestead's planned developments. Homestead may seek additional credit
facilities and may issue long-term debt and additional equity securities.
However, there is no assurance that Homestead will be able to obtain such
financing as and when required or on acceptable terms.
Senior Unsecured Notes
On June 23, 1998 Security Capital issued $500,000,000 of Senior Unsecured Notes
in three tranches (i) 6.95% notes, with an original principal amount of
$200,000,000, net of original issue discount, due June 15, 2005; (ii) 7.15%
notes, with an original principal amount of $100,000,000, net of original issue
discount, due June 15, 2007; and (iii) 7.70% notes, with an original principal
amount of $200,000,000, due June 15, 2028. Interest is payable on all notes on
June 15 and December 15 of each year, commencing December 15, 1998.
All of the foregoing Notes are redeemable at any time at the option of Security
Capital, 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 (the Indenture) by and between Security
Capital and State Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, Security Capital can incur additional debt
only if, after giving effect to the debt being incurred, (i) the ratio of debt
to adjusted total assets, as defined in the Indenture, does not exceed 50%, and
(ii) the fixed charge coverage ratio, as defined in the Indenture, for the four
preceding fiscal quarters is not less than 1.5 to 1.0. In addition Security
Capital will not at any time permit its
27
<PAGE>
consolidated tangible net worth, as defined in the Indenture, be less than
$1.5 billion. At June 30, 1998, Security Capital was in compliance with all
debt covenants contained in the Indenture.
Derivative Financial Instruments
Security Capital utilizes derivative instruments in anticipation of future
financing transactions in order to manage well-defined interest rate risk.
Through hedging, Security Capital believes it can effectively manage the risk of
increases in interest rates on future debt issuances. In May 1998, in
anticipation of the June 1998 $500 million debt offering, Security Capital
entered into three forward treasury lock transactions with a total notional
amount of $375 million. Upon the closing of the debt offering, these contracts
were terminated on June 18, 1998, resulting in losses totaling $9.5 million.
Such loss will be amortized and included as a component of interest expense over
the term of the related notes. As of June 30, 1998, the Company had no hedging
contracts outstanding.
Mortgage Notes Payable
Homestead has $319.4 million of convertible mortgage notes which are
convertible, at the option of ARCHSTONE and ATLANTIC, into shares of Homestead
common stock. The conversion price is equal to one share of Homestead common
stock for every $11.50 of principal amount outstanding.
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement with
ATLANTIC and Merrill Lynch Mortgage Capital Inc. (MLMC) whereby the $98 million
of Homestead convertible mortgage notes held by ATLANTIC were modified to,
among other things, eliminate their convertibility feature in exchange for a
payment of $21.4 million from Homestead to ATLANTIC. Homestead funded the
payment with the proceeds received from the sale of $24 million of 7.5%
convertible subordinated debentures. Also pursuant to the mortgage loan purchase
agreement ATLANTIC sold such amended notes to MLMC for $98 million. On August 7,
1998, Homestead converted the $98 million of mortgage notes and the $24 million
of 7.5% convertible subordinated debentures into a $122 million mortgage of a
newly formed special purpose subsidiary of Homestead. The $122 million mortgage
note matures June 30, 1999, and provides for interest only monthly payments of
LIBOR plus 1.70% through September 30, 1998, LIBOR plus 2.0% through November
30, 1998, and LIBOR plus 2.25% thereafter, with options to extend.
The transaction results in an extinguishment of debt measured as the difference
between the $98 million carrying amount of the original mortgage notes to
ATLANTIC and the amount paid to extinguish the debt, including transaction
costs. Such loss on extinguishment of debt approximates $25 million and will
be recorded as an extraordinary item in the third quarter of 1998.
28
<PAGE>
2016 Convertible Debentures
At June 30, 1998, Security Capital had approximately $323 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 (compared to a June
30, 1998, NYSE closing price of $1,330 per share) at the option of the holder at
any time after September 18, 1998, 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. Security Capital 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.
29
<PAGE>
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 12, 1998, pursuant to an Exchange Agreement, dated as of May 7, 1998,
Security Capital issued 257,642 shares of a new class of Series B Cumulative
Convertible Redeemable Voting Preferred Stock, par value $.01 per share (the
Series B Preferred Shares), to Commerzbank Aktiengesellshaft, Grand Cayman
Branch (Commerzbank), in exchange for 139,000 Series A Preferred Shares and
3,293,288 Class B Common Shares held by Commerzbank. Also pursuant to the
Exchange Agreement, Security Capital paid a cash dividend to Commerzbank on all
the Series A Preferred Shares for the period from April 1, 1998, to May 12,
1998, of $1,216,250. In addition, Security Capital entered into a Registration
Rights Agreement with Commerzbank granting Commerzbank certain registration
rights with respect to the Class B Common Shares into which the Series B
Preferred Shares are convertible. The Series B Preferred Shares were issued to
Commerzbank under an exemption from the registration requirements provided by
Section 4(2) of the Securities Act of 1933, as amended. The exchange of the
Series A Preferred Shares and the Class B Common Shares for the Series B
Preferred Shares was structured as a tax free recapitalization.
The Series B Preferred Shares have a liquidation preference of $1,000 per share
for an aggregate preference of $257,642,000 plus any accrued and unpaid
dividends. The holder of the Series B Preferred Shares is entitled to voting
rights equal to the number of Class B Common Shares into which the Series B
Preferred Shares are convertible, on any amendments of Security Capital's
charter or a merger of Security Capital, a sale of substantially all its assets
or liquidation or dissolution, and one-half of such number of Class B Common
Shares on all other matters submitted to a vote of the common shareholders. Each
Series B Preferred Share is convertible, at the option of the holder at any
time, into 25.641026 Class B Common Shares (a conversion price of $39.00 per
share). The conversion price and the number of Class B shares into which the
Series B Preferred Shares are convertible are subject to certain adjustments.
The Series B Preferred Shares are initially convertible into a total of
6,606,205 Class B Common Shares. The holder of the Series B 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 7.0% of the liquidation
preference per annum (equivalent to $70.00 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 B Preferred Shares
are redeemable, at the option of Security Capital, after May 12, 2003, at a
redemption price equal to $1,000 per share plus any accrued and unpaid
dividends.
The exchange of the Series B Preferred Shares, which are initially convertible
into 6,606,205 Class B Common Shares, for the Series A Preferred Shares, which
were convertible into 5,294,800 Class B Common Shares, and the 3,293,288 Class B
Common Shares resulted in 1,981,883 fewer Class B Common Shares outstanding on a
fully converted basis immediately after the exchange.
The exchange of the Series B Preferred Shares for the Series A Preferred Shares
and 3,293,288 Class B Common Shares was based on the fair value of these
securities at the date of the Exchange Agreement. For financial accounting
purposes, the difference between the fair value of the Series B Preferred Shares
issued ($257,642,000) less the sum of (a) the carrying value of the Series A
Preferred Shares ($139,000,000) and (b) the fair value of the Class B Shares
($98,799,000) was recorded as a dividend ($19,843,000) in Security Capital's
second quarter financial statements.
30
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Security Capital held the annual meeting of shareholders on May 21, 1998. On the
record date of April 6, 1998, there were 1,708,499 Class A Shares outstanding
and 39,516,783 Class B Shares outstanding. Each Class A Share is entitled to one
vote and each Class B Share is entitled to 1/200th of a vote. 1,232,530 Class A
Shares were voted and 32,848,297 Class B Shares were voted for a total possible
number of votes of 1,396,771.
The shareholders of Security Capital elected the following Class II Directors to
serve three-year terms expiring in 2001 by the following votes:
1,394,322 votes for the election of Mr. Cyrus F. Freidheim, Jr. (2,449 votes
against; and,
1,395,119 votes for the election of Mr. H. Laurance Fuller (1,652 votes
against); and,
1,395,122 votes for the election of Mr. Ray L. Hunt (1,649 votes against).
In addition, shareholders approved the 1998 Long-Term Incentive Plan, which was
adopted by the Board of Directors on March 25, 1998, with 1,063,947 votes in
favor, 289,881 votes against, 38,498 votes withheld and 4,445 votes abstaining.
31
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated June 18, 1998, from Security Capital to State
Street Bank and Trust company, as Trustee (incorporated by
reference to Exhibit 4.1 to Security Capital's registration
statement on Form S-4 (File No. 333-61401), (the "Security
Capital S-4"))
4.2 Form of 6.95% Exchange Notes due 2005 (incorporated by reference
to Exhibit 4.2 to the Security Capital S-4)
4.3 Form of 7.15% Exchange Notes due 2007 (incorporated by reference
to Exhibit 4.3 to the Security Capital S-4)
4.4 Form of 7.70% Exchange Notes due 2028 (incorporated by reference
to Exhibit 4.4 to the Security Capital S-4)
10.1 Credit Agreement, dated as of June 5, 1998, among Security
Capital and Chase Bank of Texas, National Association and Wells
Fargo Bank, National Association, as agents for the financial
institutions identified therein (incorporated by reference to
Exhibit 10.1 to the Security Capital S-4)
10.2 Registration Rights Agreement, dated June 23, 1998, among
Security Capital and J.P. Morgan Securities Inc., Goldman, Sachs
& Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated and
Chase Securities Inc. (incorporated by reference to Exhibit 10.2
to the Security Capital S-4)
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
15 Letter from Arthur Andersen LLP, dated August 14, 1998, regarding
unaudited financial information
27 Financial data schedule
(b) Reports on Form 8-K
None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Security Capital Group Incorporated
/s/ Paul E. Szurek
-----------------------------------------
Paul E. Szurek, Chief Financial Officer
(Principal Financial Officer)
/s/ James C. Swaim
-----------------------------------------
James C. Swaim, Vice President
(Principal Accounting Officer)
Date: August 14, 1998
33
<PAGE>
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- ----------------------------------------------
1998 1997 1997 1996 1995(1) 1994 1993
------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $59,696 $ (4,721) $ 38,241 $ (9,693) $(21,274) $11,849 $ 8,333
Add:
Interest Expense 30,091 57,248 104,434 117,224 103,804 53,789 3,786
------- -------- -------- -------- -------- ------- -------
Earnings as Adjusted $89,787 $ 52,527 $142,675 $107,531 $ 82,530 $65,638 $12,119
======= ======== ======== ======== ======== ======= =======
Fixed Charges:
Interest Expense $30,091 $ 57,248 $104,434 $117,224 $103,804 $53,789 $ 3,786
Capitalized Interest 14,157 52,450 69,883 11,448 4,404 3,184 98
------- -------- -------- -------- -------- ------- -------
Total Fixed Charges $44,248 $109,698 $174,317 $128,672 $108,208 $56,973 $ 3,884
======= ======== ======== ======== ======== ======= =======
Ratio of Earnings to Fixed Charges 2.0 0.5 0.8 0.8 0.8 1.2 3.1
======= ======== ======== ======== ======== ======= =======
</TABLE>
(1) Excludes a one time non-cash expense item ($158.4 million) incurred
in acquiring the Services Division from a related party.
<PAGE>
Exhibit 12.2
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------ -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $59,696 $ (4,721) $ 38,241 $ (9,693) $(21,274) $11,849 $ 8,333
Add:
Interest Expense 30,091 57,248 104,434 117,224 103,804 53,789 3,786
------- -------- -------- -------- -------- ------- -------
Earnings as Adjusted $89,787 $ 52,527 $142,675 $107,531 $ 82,530 $65,638 $12,119
======= ======== ======== ======== ======== ======= =======
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $30,091 $ 57,248 $104,434 $117,224 $103,804 $53,789 $ 3,786
Capitalized Interest 14,157 52,450 69,883 11,448 4,404 3,184 98
------- -------- -------- -------- -------- ------- -------
44,248 109,698 174,317 128,672 108,208 56,973 3,884
Preferred Share Dividends (1)(2) 7,708(3) 14,658 15,416 12,352 -- -- --
------- -------- -------- -------- -------- ------- -------
Combined Fixed Charges and
Preferred Share Dividends $51,956 $124,356 $189,733 $141,024 $108,208 $56,973 $ 3,884
======= ======== ======== ======== ======== ======= =======
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 1.7 0.4 0.8 0.8 0.8 1.2 3.1
======= ======== ======== ======== ======== ======= =======
</TABLE>
(1) The Preferred dividends have been increased to show a pretax basis.
(2) Security Capital had no preferred dividends prior to 1996.
(3) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
<PAGE>
Exhibit 15
August 14, 1998
Board of Directors and Shareholders
of Security Capital Group Incorporated:
We are aware that Security Capital Group Incorporated has incorporated by
reference in its Registration Statement Nos. 333-38521, 333-38523, 333-38525,
333-38527, 333-38531, 333-38533, 333-38537, 333-38539, 333-48167, 333-61395 and
333-61401 its Form 10-Q for the quarter ended June 30, 1998, which includes our
report dated August 14, 1998 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act of
1933 (the "Act"), that report is not considered a part of the registration
statements prepared or certified by our firm or a report prepared or certified
by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Form 10-Q for the six months ended June 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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